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3 Contract Negotiation Strategies to Reduce Contract Risk

Risk & Compliance

One thing most people can agree on is that contract negotiation is stressful, especially within business. That’s because there’s a lot riding on coming to a favorable agreement: successful negotiations can help boost company profitability and improve goodwill and collaboration between business partners. Successful contract negotiation is also key to reducing or mitigating many of the business risks that can arise when you work with other parties.

But reducing contractual risk requires planning and preparation, and oftentimes, a dedicated system such as CLM software. In contracts as in life, it won’t be possible to eliminate all risks altogether – but the more informed and prepared you are as you negotiate the terms that will make up your contract, the better you will be able to prioritize your needs and come to an agreement that will best protect your interests.

Here are three negotiation strategies that can help to reduce your contract risk.

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1. Understand the Current Risk Landscape

Before you can take steps to manage risks, you need to know exactly what those risks are. But while some risks may be fairly standard and consistent, others shift based on external factors, from changing regulatory requirements to emerging cyberthreats. In order to address shifting and emerging risks, it’s important to stay current on regulatory requirements to which your contract might be subject, from the Stark Law and anti-kickback statutes in healthcare to privacy laws such as GDPR. Keeping tabs on news via industry and regulatory blogs and websites can not only help to keep you apprised of current rules and laws; as these sources often report on others’ compliance infractions and penalties, they can provide important clues about regulatory trends and common lapses – helping you to pinpoint risky areas that may need close attention as you negotiate the terms of your contract. As you negotiate, remember that abiding by these rules is often in everyone's interest as many rules apply both to the primary business as well as any other business entity with which they are contracted.

2. But Also Understand Where You’ve Gone Wrong in the Past

It’s not just about ensuring that new and emerging legal risks are addressed – it’s important to approach contract negotiations with a deep understanding of how similar agreements have played out in the past, and which clauses and language have been most effective previously at reducing your risks and protecting your interests. While reading up on best practices can help to this effect, businesses have significant firsthand information at their disposal, in the form of previous contracts and their performance.

But there are a few prerequisites to efficiently leveraging this valuable and highly-actionable information. For starters, you’ll need to know where to look, which is why keeping and archiving all contracts within an accessible, searchable repository is important – after all, if your contracts are all over the place, you won’t easily be able to reference them in order to evaluate what has worked, and what hasn’t, in the past. A well-organized storage system that allows you to employ meta tags makes it easy to find similar agreements that have been used previously, allowing you to identify and assess methods of risk reduction that can be deployed for new agreements.

Instead of starting the process from scratch upon each new negotiation, it's also helpful to take some time to conduct a post-mortem analysis at the conclusion of each contract when the information is fresh. From a risk perspective, consider contracts that have underperformed or experienced breaches by conducting your analysis with an eye to the role contract clauses and language played in what transpired. Over time, these cumulative learnings can not only better help negotiators identify and address risks within specific contracts – they can also inform best practices and the development of standard contract templates that give you a clearer starting point in contract discussions.

3. Establish Your Red Lines – Before the Start of Negotiations

All of your research will likely yield a list of strategies and terms that, in a perfect world, you’d be able to include in your contracts across the board. The problem is that contract negotiations don’t exist in a vacuum. Negotiations are a give and take between two parties, with each trying to increase their upside and decrease their risks. While the ultimate goal of contract negotiations is to come to an agreement that meets everyone’s needs, sometimes you’ll have to give up on something you would like to include in the name of compromise. But in the heat of negotiations, it can be difficult to make such decisions with a cool head.

As you assess the potential risks of any contract during the planning phase, decide which risks you can live with (and potentially take steps internally to monitor and/or mitigate) and which are too potentially dangerous – in other words, your red lines. By deciding this at the outset, you reduce the chances of getting locked into a business deal that exceeds your risk tolerance or that won’t adequately protect you in the end, simply because you got carried away.

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