How to Improve Contract Risk Management with CLM

As a business’ portfolio expands, there is a spike in the volume of contracts. These contracts are the only legally binding document for every sale and purchase. Legal teams do not just use contracts but also involve several business functions, including Sales, Procurement, IT, and others. As contracts are becoming more complex and voluminous in nature, they contain numerous legal jargon and potential risks.  

Enterprise businesses manage an average of 30k contracts a year. It becomes almost impossible to monitor these contracts, their terms and conditions, and their business implications. Although business operations can never be “risk-free,” a contract lifecycle management solution will proactively prevent these risks at every stage of the contract journey.  

Before uncovering the “how” behind it, let’s understand what contract risk management essentially is.  

Understanding Contract Risk Management  

Contract risk management involves identifying, assessing, and mitigating potential risks associated with contracts to safeguard the interests of a business. These risks can span financial, legal, operational, and reputational domains. By proactively addressing these risks, businesses can minimize the likelihood of disputes, breaches, and other negative outcomes.  

So, how is it different from contract management?   

Contract management focuses on overseeing the entire lifecycle of a contract, from contract request to negotiation. Contract risk management, on the other hand, goes a step further. It centers on identifying and addressing potential risks within these contracts to prevent negative consequences. 

Types of Contract Risks  

Effective contract risk management requires understanding the various risks that contracts can pose. Here are four major categories: 

Financial Risks 

Financial risks pertain to the potential monetary losses or impacts on cash flow that can arise from contracts. These risks might include payment disputes, unexpected cost escalations, or non-compliance penalties. 

Legal Risks 

Legal risks are associated with breaches of legal obligations, non-compliance with regulatory standards, or failure to meet contractual terms. Poorly managed contracts can lead to litigation, fines, and damage to a company's legal standing. 

Brand Risks 

Brand risks emerge when contracts involve parties or actions that could tarnish a company's reputation. This might include partnerships with unethical entities or engagements that contradict a company's values. 

Security Risks 

Security risks encompass any threats to the security of data, intellectual property, or proprietary information shared within contracts. Inadequate handling of security risks can lead to data breaches, leaks, or misuse of sensitive information. 

That said, not all risks might arise from contracts. However, the best practice would be to anticipate these risks from the grassroots level – learning from past experiences and drafting jargon-free contract clauses while chalking out a robust contract management strategy.  

Contract risk management can significantly minimize the various contract risks with the help of effective contract reviews and evaluations. After all, businesses do not want to lose their credibility or revenue.     

The Contract Risk Management Process 

An effective contract risk management process involves the following steps: 

Risk Identification

Identifying potential risks associated with a contract requires thoroughly reviewing the terms, obligations, and parties involved while drafting a contract. Risks can stem from various sources, such as vague language, unclear deliverables, regulatory non-compliance, or financial uncertainties. Leveraging the expertise of legal, financial, and subject matter experts can aid in uncovering these potential risks.    

Risk Assessment

Evaluating the severity and likelihood of each identified risk helps prioritize risks based on their potential impact.  

Risk Mitigation

Mitigation strategies can include negotiating contract terms, introducing clauses that address identified risks, or creating contingency plans to manage potential adverse outcomes. The goal is to reduce the impact of risks or eliminate them entirely.  

Monitoring and Review

Monitor the contract's performance and the evolving business environment to identify emerging risks. Changes in regulations, market conditions, or business priorities can introduce new risks or alter the significance of existing ones. Regular reviews ensure that risk mitigation strategies remain relevant. 

Data-Driven Insights

Leverage CLM software to gain data-driven insights into contract performance, risk patterns, and historical data. This data helps organizations make informed decisions and refine their risk management strategies over time.  

Collaboration

Foster collaboration among legal, finance, procurement, and other relevant departments to ensure a holistic approach to risk management. 

Leveraging CLM for Improved Contract Risk Management 

Contract Lifecycle Management (CLM) software is a catalyst for eliminating risks in contract management. Here are a few ways in which CLM can contribute to reduced risks in your contracts: 

Pre-existing Templates

Contract templates from enterprise playbooks can include predefined risk-related clauses and provisions that address common risks associated with certain types of contracts. By considering these risks upfront, organizations can tailor the template to minimize potential pitfalls. 

Centralized Repository

CLM provides a central repository for all contracts, making it easier to track, review, and analyze terms, obligations, and potential risks. 

Automated Alerts

CLM systems can be configured to send automated alerts for contract milestones, renewals, and compliance deadlines, reducing the risk of missing critical events. 

Risk Scoring

Pre-configured risk templates within CLM software can help identify common risk factors and streamline the risk assessment process. 

Version Control

CLM ensures that all stakeholders are working with the most current version of the contract, reducing the risk of errors from outdated information. 

Real-time Insights

CLM offers data analytics capabilities, allowing organizations to identify trends, patterns, and potential risks within their contract portfolio.  

Avoid Contractual Risks with SimpliContract CLM 

Failure to meet contractual obligations directly impacts the bottom line and improves your contract risk management with a robust contract lifecycle management platform. SimpliContract’s end-to-end CLM platform offers risk scoring, version control, automated alerts feature, and more. Avoid potential contract risks and streamline contract management across the enterprise with our AI-powered solution.  

Discover how SimpliContract can help you experience risk-free contracting!