No company can completely eliminate risk from their business, but they can manage it. Contract risk is a major danger for companies, but it often goes overlooked. By not paying attention to the risk that contracts can carry, companies can lose out on revenue, become inefficient and put themselves in danger of noncompliance with a client or partner.
Good contract risk management seeks to reduce risk and give companies better control over their contracts. With these features in place, companies can control what contract language is used across the enterprise, recognize underperforming contracts and see when a contract’s terms are not being met, allowing them to take informed actions.
Contract Risk Defined
Generally, contract risk is defined in three ways:
- “Maverick contracting” in which contracts are executed that violate company controls put in place to ensure regulatory or commercial compliance.
- The probability of facing losses due to a buyer or supplier not meeting a contract’s terms.
- The probability of loss coming from a contract not performing up to expectations.
Examples of Contract Risk
A contract can put your company at risk in a variety of ways. Without the proper tools in place to ensure that your contracts are not putting your company in unnecessary danger, you’ll need to be aware of what types of risk are common. See some of the most regular contract risk examples below:
- Lack of Contract Visibility
Contract visibility allows your company to quickly find, retrieve, analyze and track contracts that your company handles or has handled in the past. Despite contracts’ ability to benefit business, many companies still do not have systems that allow them to have adequate contract visibility.
The average Fortune 2000 company handles somewhere between 20,000 to 40,000 contracts at any given time. If contracts are stored traditionally, such as being kept in filing cabinets, shared drives, desks or in a folder on an email, you cannot search your contracts quickly. It is difficult to retrieve relevant contracts in a traditional filing system, and next to impossible to extract data from contracts to track obligations, renewals and expiries.
If you leave the contracts in a repository that cannot be searched quickly, you’ll have a massive amount of unstructured data that can have negative consequences on your company. For example, a technology firm lost $1.5 million in revenue recognition after a statement of work (SOW) expired that they were tracking manually. Without software that organizes your contracts, you’ll forget important rebates, discounts, renewal dates and expiration dates.
To guard against these kinds of mistakes, consider an enterprise contract management system, as it can be an ideal solution. With the software, all of your contracts will be digitized and then organized into a cloud-based repository. After the new system is in place, you’ll have increased contract visibility.
When you use a contract management system, you can view your contracts at any time and from anywhere. The advanced search options give you access to contract information like pricing, obligations and rebate information present in your contracts. Additionally, any agreements set to expire will be tracked automatically, and the software will send you alerts to ensure that contracts don’t expire without your knowledge.
A system that gives you greater contract visibility will transform your contracts from risks to strategic assets.
- Inconsistent Standards
In any organization, you want consistent protocols to reduce contract risks. Without proper standards, you won’t have a way to carefully track the entire lifecycle, compliance requirements, potential discounts and commitments. If you miss these parts of a contract, your targets for compliance records, business relationships and revenue will be negatively impacted.
For a real-world example of this, consider the case of a multi-billion-dollar telecommunications company. Before using the Icertis Contract Management (ICM) platform, the company did not use a central storage location, no system for contract management and no standardized templates.
Without these key components of a standardized system, the company was creating hundreds of contracts in multiple languages manually. Since they did not have any sort of automated system to manage their contracts, staff could not keep track of their supplier service level agreements (SLAs). This inability to track SLAs impacted their operational performance and put them at risk.
Like this firm, if your company doesn’t use a standardized system, you can face a variety of negative consequences:
- Wasting time on creating contracts that aren’t assisted by templates or standardized terms
- Spreading NDAs, RFxs and templates across multiple drives and desktops, which makes it difficult to find information
- Losing consistency in formerly standard templates
- Risking your contracts’ security by sending them through email
- Confusing members of your team about where the final version of a contract is or its execution
- Slowing processes and decreasing revenue
- Increasing the chance of noncompliance
With automated contract management, the telecom company was able to enforce their SLAs and capture data to review their status. They also experienced a reduction of their contract cycle time, generated rules for their contract selection, standardized their company’s templates and clauses and identified at-risk SLAs, among other benefits.
Your company can experience these same benefits if you use an enterprise contract management system. Establishing consistent standards and maintaining them with a centralized system will reduce your risk while providing you with many improvements throughout your organization.
- Uncertain Compliance
If you don’t know if a contract is complying with pre-negotiated terms or conditions, you are opening yourself to a significant amount of risk.
By creating rule-based connections between contracts, you can make it easier for the customer and yourself to engage in compliance-related activities. With the relationships between contracts established, you can better enforce terms along with roll-ups of financials and SLAs.
For commercial contract compliance, you get the most out of your contracts by better enforcing commercial terms. A contract management system like the Icertis platform can capture the terms of rebates, incentives, products, services, discounts and prices in a more structured manner. You can then use that data with an enterprise system to help you enforce terms to give a contract better performance.
For compliance related to sourcing, you can use a contract management system to automatically compare purchase orders to pre-approved contract language to find issues with your billing. If you’re concerned about the sell-side, you can automatically integrate your incentive and rebate information into your financial systems. Additionally, workflows can make sure you engage in a review process to assess compliance before you post to financial systems.
To achieve better compliance, you’ll want to pay close attention to your management of obligations and commitments. Use a system that can identify, capture, assign and track tasks given to business owners so you can keep a better eye on a contract’s status and success. This sort of compliance tracking can be applied to even the most complex commitments. With our ICM system, you can create obligations that use the characteristics of the contract to show business owners what they are responsible for.
Another area you’ll want to make sure you have complete compliance in is your supply chain. The sourcing process revolves around contracts. With the ICM platform, you can combine information from the sourcing and contract processes to get a clear view of the entire lifecycle of the sourcing process. Pre-built analytics use this data to gauge contract performance. From these analytics, you can better track compliance and governance in your supply chain.
- Lengthy Contract Lifecycle
Contract delays place a company in danger of lost revenue and risk. With contract lifecycle management software, you can receive insight into the cycle times of your contracts, helping to identify where problems are occurring.
Contract lifecycle management software can help you track your, or your client’s, compliance with contract commitments. These commitments can be auto-generated and assigned to business owners to help keep them on schedule.
Additionally, to identify and manage risk surrounding a lengthy contract lifecycle, you can use a configurable risk model. Using this model, you can track risk through different categories, like performance, financial, third party and contractual. With this information, a user can quickly access internal or external data to proactively monitor risk, increase exposure to stakeholders and find your risk scores.
Good Contract Risk Management Strategies
To develop your contract risk management strategy, you’ll need first to determine where you have a significant amount of risk. Next, you’ll want to find a system that can help to reduce your risk and make it easier for you to monitor contracts in the future.
- Conduct a Contract Risk Assessment
To address your contract risk, you first need to assess it. Try using a free risk evaluation to discover how much risk your company is currently taking on.
A risk assessment will allow users to configure models that can track risks associated with categories like contractual, financial, third party and performance. In an assessment, you can use internal and external data to answer questions that will inform the type of contract risk you need to guard against.
- Contract Risk Checklist
With any assessment, you go through a checklist to determine whether you have a significant risk in your contracts. In this checklist, you’ll answer questions such as:
- Where does your supply chain operate?
- Do you write most of your contracts on paper?
- Are your contracts stored in a searchable electronic repository?
- Do your contracts enforce the pricing and terms listed on purchase orders automatically?
- Are your contract operations done manually?
- Do you usually spend two or more weeks finalizing contracts?
- Can your systems link the contract value chain from buy-side to sell-side?
Your answers to these questions will help you understand what risks you are exposing your company to, and it will also help a contract management software provider know how to help you.
- Invest in Contract Management Software
After you’ve taken an evaluation and gone through a risk checklist, you’ll most likely see that you need to take steps to reduce risk in your contracts. A good contract risk management strategy will use a contract management software that you can configure to the needs of your business.
With high-quality contract management software, you will receive many benefits that reduce risk. While you look for a system, ensure that it includes features like the following:
- Personalized dashboards: As every user is going to have unique needs for the contract management software, you’ll want users to be able to customize their dashboard to fit their current needs quickly. As contract risk management can occur at several stages, a versatile platform is crucial.
- Risk assessment: You should be able to program any system to evaluate the risk of contracts in a wide variety of categories. Your users should be able to take internal and external data to determine risk and be proactive in monitoring the risk contracts generate.
- User permissions: If your contracts aren’t properly protected or can’t reach the right parties, you are putting your organization and clients in danger. Good contract management should include a Role-Based Access Control system that determines who gets access to contract data based on geographies, departments, access permissions and users. This system will protect sensitive data from prying eyes or those who would take advantage of it.
- Native mobile application: With contracts needing to be changed or signed quickly, you’ll want to go with a management system that integrates well with your phone. Choose a system that lets you approve, create, edit or reject contracts from any devices that you use on the go. Features on mobile devices like push notifications, contract search and approval, dashboard views, note updates and other relevant tasks will assist your contract management significantly by making it more accessible.
- Portfolio monitoring: An organization must be able to keep track of their portfolio of contracts that are interdependent. Without that monitoring, you will suffer from a reduction of contract visibility. Contract management software will offer you a flexible, contextual and intuitive interface to view contracts. Additionally, you can get a holistic view of all of your contracts, allowing you to manage them more effectively.
Start Using Contract Management Software From Icertis Today
If you’re interested in the benefits and reduction of risk that contract management software can provide you, consider giving a little more of your time to see what Icertis can do for you.
At Icertis, we’ve worked with many clients in a variety of industries. Our wide range of experience means we can deliver a specialized solution that will assist your company.