Contracts are essential to modern enterprises, but they are not without risks. From financial obligations to legal compliance, businesses face various challenges at different stages of the contract lifecycle. According to the World Commerce & Contracting (WWC), more than 90% of businesses find contracts either "hard" or "impossible" to understand, further complicating the management of these risks. As the complexity of contracts grows, so does the potential for missteps that could lead to financial losses, legal disputes, and operational inefficiencies.

It is important to proactively identify risks and have measures in place to mitigate them. An advanced Contract Lifecycle Management with an in-built Risk Analyzer provides strategic advantages to enterprises. The AI CLM software enables organizations to detect and mitigate contract risks, helping them avoid value leakages, compliance violations, and operational setbacks. Here, we explore the different types of contract risks and offer practical tips on how to mitigate them using advanced CLM solutions.‍

^{Financial Risk}

Working within a rapidly shifting ecosystem and ever-changing networks, modern enterprises may lose track in terms of managing and monitoring obligations, leading to value leakages affecting financial outcomes. Poor contract management can lead to revenue leakage, bill overpayments, missed negotiation opportunities during the renewal process, and insufficient monitoring of performance obligations.

Mitigation Tip: AI-powered CLM solution enables enterprises for an efficient risk analysis towards tracking financial obligations, alerting stakeholders to upcoming contract renewals and ensuring accurate financial monitoring. The risk analyzer tool extracts relevant data to ensure visibility of specific contract end dates, renewals of contracts and allows near accurate monitoring of financial aspects leading to reduced risks across the lifecycle of contracts involved.

^{Legal Risk}

Ineffective contract management leads to inadequate visibility into contractual obligations and can result in breaches of contract, legal disputes, and regulatory non-compliance. Managing mountains of contracts, various contract types, terms, agreements, clauses, etc. through emails, desktops lack visibility into company’s obligations and create high risks of contract breaches for legal teams. Is it possible to manage a contract that you cannot, see? Exactly this is where the problem surfaces amongst the legal teams. As contracts differ from owner to owner, the chances of missing key dates and commitments are very high due to these variances. The risk of added work cycles and longer TATs are common in this scenario.  

Mitigation Tip: Centralizing contracts and using standardized clauses reduce legal risks. An  AI-powered CLM solution provides centralized repository for contracts, user-friendly clause libraries and workflow features to ensure consistency and compliance in the legal contracting processes. Risk analyzer is an inherent part of the solution that provides dedicated collaboration platform for contract reviews like SimpliContract’s  AI-enabled redline feature and Microsoft editor tool.

^{Performance and Delivery Risk}

In many contracts, especially service-level agreements (SLAs), the ability to meet deadlines, deliverables, and performance metrics is critical. If a party fails to perform as promised, it can lead to missed deadlines, budget overruns, or compromised service quality. This type of risk is common when there’s a lack of proper tracking mechanisms and accountability within contract management processes.

Mitigation Tip: AI-powered CLM solutions help enterprises monitor performance against contract obligations by automating the tracking of deadlines and deliverables. A risk analyzer can proactively flag any deviations from expected performance, allowing teams to intervene before issues escalate. By ensuring timely delivery and adherence to SLAs, companies can avoid penalties and preserve relationships with partners and clients.

^{Contract Visibility Risk}

Contracts that are stored in unsearchable places like USBs, local drives lead to visibility problems. Lack of visibility into contracts’ terms, agreements, clauses etc. leads to high potential risks for teams across departments in an enterprise. Identifying risks is a big challenge today in organizations not having integrated risk analysis tool in their CLM system. Some examples for visibility risks are-

1. Lack of visibility into changes occurred in an IP clause for legal head in an enterprise

2. Lack of visibility into unfavorable payment terms and conditions for a finance head in a company

3. Lack of visibility when contract owners change, and new people take over.

Mitigation Tip: Contract visibility means relevant data is available before concerned parties, stakeholders to decide ‘What-Next?’ Digitization of contracts and putting them in a searchable, centralized repository resolves the visibility problem in an organization. Doing this, you can easily track your contracts’ metadata whenever required. Integrating a risk analyzer in your CLM system enhances visibility into contractual terms, agreements, clauses, contract types, unfavorable payment terms, changes in an IP clause, etc.

^{Security Risk}

Contracts contain sensitive information. Data breaches, ransomware attacks, unauthorized access control within the CLM system, third party vendor risks, regulatory non-compliance, no clue about version control, can lead to significant security issues.  The Legacy CLM process may include a lot of paper documents, email attachments, file folders on desktops or excel sheets that are prone to risks. Improper data storage and its unauthorized access creates confidential business information leakage that might lead to legal problems, damaging the brand's image and its credibility in the market.

Mitigation Tip: The very first step to reduce risks is to automate the entire system. By moving to a modern AI-enabled CLM software platform it is easy to leverage AI-automation capabilities and considerably mitigate those risks by protecting critical business data. AI-enabled risk analyzers employ encryption, access controls, and audit trails to protect sensitive data and ensure only authorized personnel can access or modify contracts.

In case you already have a CLM solution, enquire and confirm about your CLM-provider's SOC type-2 certification status as well see their CAIQ (Consensus Assessment Initiative Questionnaire) or Cloud Controls Matrix. These reports delve deep into security aspects, vulnerabilities and that’d help in taking required risk mitigation steps.

^{Compliance Risk}

Organizations who fail to comply with contractual terms, internal policies or industry regulations, might lead to penalties and adversely affect their credibility and reputation. Risks related to compliance could be:

• Failure to prove to auditors, regulatory officials on authoring & managing of contracts in bulk

• Contracts are legally valid or not in the country they are doing business

• Any changes in compliance regulations or legislations are impacting contracts

• Meeting regulatory, compliance standards and reporting requirements

Mitigation Tip: Risk analyzers help ensure compliance by tracking regulatory requirements and providing alerts for necessary audits and reviews. For example, AI-powered CLM with inbuilt risk analyzer tool can detect any deviation from regulatory compliance standards, monitor if ISO or HIPAA standards are maintained. The risk analyzer tool can help companies to ensure that suppliers are complying with regulatory requirements regarding contractual obligations.

^{Operational Risk}

An inefficient contract management process leads to risks like delayed operations, and several bottlenecks for stakeholders concerned. Operation teams and legal teams may face risks of untested scenarios, unfamiliar risk profiles, strained resources, ambiguous business commitments, poorly defined contracts, global variabilities, etc. Teams are left to assume things due to ambiguity and that leads to operational risks, inefficient resource management.

Mitigation Tip: Automating workflows and standardizing processes through risk analyzers streamline operations and reduce the likelihood of delays. Operational risks can be mitigated using real time data for enhanced decision process. Tracking of metadata, obligations give required visibility on risk probabilities. With this expanded contract visibility, organizations can take proactive actions to mitigate risks.

^{Brand Risk}  

Risks may emerge from inadequate contract management that have potential side effects on the company's reputation, financial performance, to name a few. Contracts that do not comply with regulatory standards or compliances lead to legal actions or fine imposition against the company concerned, and this may spread negative comments in the market. Negative publicity leads to harm to the brand’s image and reputation. For instance, contracts' non-compliance with data privacy regulations such as CCPA and GDPR may lead to substantial fines leading to damage of the brand name.

Mitigation Tip: Proactive risk management and monitoring through risk analyzers help identify potential issues early, allowing for timely intervention. An advanced AI-powered CLM solution has an inbuilt risk analyzer tool that helps enhance the risk management process such as risk assessment, monitoring and the overall risk mitigation in an enterprise’s contracting journey.

Wrapping Thoughts

Contracts are complex, and the risks associated with them can have far-reaching implications across the organization. The unforeseen contract risks can significantly affect business outcomes if not managed properly. An advanced AI-powered CLM solution helps mitigate these risks by offering real-time insights, centralized visibility, and automated tracking across the contract lifecycle. With a built-in risk analyzer, organizations can stay ahead of potential pitfalls, ensuring that contracts are managed efficiently and in alignment with business objectives.

At SimpliContract, we are committed to helping businesses safeguard their operations through advanced contract management tools. Our AI-enabled CLM platform empowers organizations to reduce risks, enhance compliance, and drive operational efficiency. Whether you are managing hundreds or thousands of contracts, SimpliContract provides the visibility and control that your need to succeed in today’s competitive market. Reach us for a demo.

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