3 Ways Your Contract Management Strategy Can Put You at Risk
Risk & Compliance
Most businesses wisely invest a great deal of time and effort negotiating contracts they believe will best mitigate their contractual risks. According to benchmarking data from the International Association of Contract and Commercial Management, the investment of time and resources for negotiating and reviewing simple contracts averages $5000, while high-complexity agreements, which can involve extensive back and forth negotiations, cost $40,000 on the low end and $200,000 on the high end.
While this may seem like a steep up-front investment, it’s a smart one. From delayed deliveries that can slow or even derail important projects to compliance violations and resulting fines, important business arrangements can be rife with risk – and the legally-binding framework of a contract is an important tool for proactively reducing risk exposure.
But contract-related risks don’t only arise from your contracts themselves. How a contract is managed throughout each stage of its lifecycle also plays a tremendous role in its performance, and in the risks you may face as a result of entering into the deal. Fortunately, many problems that can arise from bad contract management can be prevented via a contract management strategy that incorporates established best practices for managing business agreements.
Here are three key ways your contract management strategy might be putting you at risk – and three ways to correct the problem.
1. Before You Draft and Negotiate: You’re Not Considering Past History
You don’t need a psychic to foretell problems you might encounter in the course of executing an agreement. Your previous agreements can provide some important clues about the vulnerability of new deals and strategies for proactively mitigating risks – but only if you know how to use them as a tool for strengthening your future agreements.
Within business, it’s not uncommon to file away contracts when they are done and forget about them altogether. But taking some time to conduct a post-mortem assessment of contract performance can help you to identify terms and conditions that helped to improve the contract results, as well as contract inclusions that did not help to further your best interests. The first step is determining at the conclusion of the contract term whether the specific agreement delivered the results expected, over delivered, or did not provide the benefit expected (the performance indicators used to measure success will be dependent on the specifics of the individual agreement). Then spend some time qualitatively assessing the reasons for that performance as it relates to the terms contained within the contract.
While analyzing one agreement in isolation may offer limited insight, comparing several similar types of agreements can help you to spot trends and commonalities that can help you to strengthen the language of your contracts over time. As you adapt your wording, incorporate the new language into your standard contract templates – and implement a clear archiving system for outdated documents to ensure that the most up-to-date versions are being used.
2. After a Contract is Signed: You Don’t Formally Transition Ownership
It’s common within many organizations – especially larger ones – that the business units responsible for negotiating contracts are not the same as those who will be charged with executing it. But there are many knowledge gaps that can arise if the transition of ownership isn’t handled systemically.
For those who have been intimately involved in drafting and negotiating an agreement, it can be easy to forget that others don’t have the same familiarity. They may not have hunches about potential vulnerabilities that can arise during negotiations with the other party or even have thorough knowledge of what exactly their team is obliged to do under the terms of the agreement. Fortunately these gaps are easily remedied through the establishment of a formal handover process. Once an agreement is signed, taking the time to thoroughly review the contract terms, formalize who is responsible for each and every obligation, and develop a plan for monitoring performance and flagging issues is key to ensuring the contract is fulfilled as intended.
3. During the Contract Term: You Don’t Know How to Recognize a Problem
The earlier you can spot a contract breach or potential breach, the better. When a contract looks like it might go off the rails, time is of the essence because it can allow you to either course correct and get the agreement back on track or try to contain your losses. But often you can only spot early warnings of a breach if you are looking for them.
It’s helpful to clearly define the markers of contract success at the outset – and to have (and stick to) a monitoring plan to keep tabs on performance. Before you get to work on implementing a contract, determine the specific milestones and other measures that will best help you to assess performance during the contract period. Then ensure these are measured on a regular basis (tools such as automated reminders and reporting can help) in order to verify that everything is working as it’s supposed to.
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