Minimize Contract Risk by Improving Your Contract Management
Legal contracts are foundational for companies of any size and industry. By codifying the exact relationship between a business and its customers, contracts place weight behind the promises that both parties make to each other and provide a framework for handling disagreements.
Unfortunately, far too many companies are failing to live up to the best practices and standards of contractual risk management. The International Association for Contract & Commercial Management, for example, estimates that companies lose nine percent of their total revenue every year via poor contract management.
From a complex contracting landscape to scarce investments in good contracting processes, the potential issues that you'll face are significant. The following article will give you an overview of the challenges of contract management and what you need to do to make your processes more efficient and productive.
The Complex Contracting Landscape
As businesses globalize and grow, drawing up contracts becomes an increasingly challenging activity. In general, the more people involved in a contract, the less likely it is that the terms of the contract will be fulfilled to every party's satisfaction, due to the simple fact that different people have different points of view.
Identifying the internal stakeholders involved in your contract will be crucial in order to create better business relationships and keep your customers around for longer. Depending on the organization, some or all of these sectors may be seen as owners of the contract process. The most important categories of stakeholder include:
Legal department: These stakeholders are concerned with managing liabilities and legal risks, both black swan events, and day-to-day events. They also care about aspects such as archiving and storage capabilities and the signing process itself.
Business commercial: These stakeholders are concerned with commercial terminologies, such as your volume of business. Like the three categories below me, your ability to meet your contractual commitments is highly valued by these stakeholders.
Business operations: These stakeholders are concerned with your ability to follow up on your deliverables, as well as the presence of an archive and storage capabilities.
Negotiation teams: These stakeholders are concerned primarily with the speed at which the deal gets done and the quality of the commercial terms chosen.
Financial terms: These stakeholders are concerned with the financial health of the organization, such as making matching payments to and from the contract.
The variety of potential stakeholders in play is only one of the problems when drawing up a new contract. Since there are so many contract types, it becomes difficult to do a consistent risk analysis when you include contracts such as outsourcing, sale-of-goods, sale-of-services, master supply, commodity purchase, finance and employment contracts.
What's more, operating in several jurisdictions can make contracts more complex than expected. This complexity doesn't affect just big global companies; for example, even smaller companies have supply chain outsourcing agreements with partners in places such as the Asia-Pacific region.
Finally, regulatory requirements such as anti-bribery and corruption, consumer fairness, data protection and intellectual property are often written into contracts. Accommodating these stipulations poses problems, such as updating existing contracts to include new clauses.
How to Improve Contract Negotiations
There are a number of common issues that befall parties during the contract negotiation process:
Many legal teams lack practical, realistic insights and are too focused on the minutiae of the contract.
Purchasing teams may lack the ability to clearly explain what their goals are for the contract.
Commercial/business teams often fail to see the value of formal contracts and are content to keep doing business without them.
In order to improve this situation, you need to create a better understanding of what contracts are for, why they're important and the potential risks that they present. In particular, your legal team should be focusing on the truly important terminology such as business risk. Meanwhile, you can focus on embedding good contract practice into a company's culture.
Investing in Good Contracting Processes and Systems
In order to leverage the power of good contracting processes and systems, you'll need to dedicate your team's resources to vetting and implementing a single system of truth for your company’s contracts. To achieve this you will need to convince key stakeholders that the allocation of additional budget and time is necessary to make the change successful.
First, you need to establish the understanding that a single unexpected event can pose major damage to an organization. Perhaps the clearest illustration of this fact is the recent Equifax data breach affecting 143 million people, which could cost the company hundreds of millions of dollars.
Then you need to prioritize the risk identification process so that you and your team have a clear picture of the risks that you face as a business and their potential consequences. Once this process is complete, you should make use of a robust contract management system in order to minimize the risks that you've previously identified. Contract management systems come with a variety of benefits, such as:
Having a single, unified system in which all of your contracts can be tracked and audited
Creating customized fields for marking and tracking high-risk contracts
Using software with built-in electronic signature capabilities in order to ensure that all required parties have signed an agreement
Setting automatic alerts for any changes made to a contract
As with all new business initiatives, making a change or improvement to existing contracting processes takes an initial investment of resources. However, once the changes are realized, the end result is an improved process that reduces cost, minimizes risk, and saves time, allowing you and your team to focus more on legal matters and less on contract management.