Contracts are designed to enforce accountabilities and reduce the risks of business relationships. But they can also introduce vulnerabilities to your organization, whether due to unfavorable languages and clauses, missed obligations or other scenarios that can arise during the contract management lifecycle.
Outdated, manual methods of managing contracts can further increase contractual risk, while online contract management using dedicated contract management software can not only help to improve the efficiency of contract-related processes but also help to reduce some inherent challenges. Here are four ways online contract management can help to mitigate contractual risk.
1. Draft better contracts
From penalties for missed milestones and non-compliance to unfavorable liability terms, the clauses within contracts can be a minefield of hazards. On the flip side, there may be language and terms that have been proven to dramatically improve your organization’s upside. The trick is wading through the tens of thousands of contracts in your portfolio to determine which contracts have led to the most favorable outcomes for your business in the past - and which have not performed as expected - so that you can leverage that wording as you draft future agreements.
While this might be a challenge to do manually, your contract management software can help to automate the task of auditing past contracts for performance so that you may carry the best terms forward. Some areas you may want to look at can include pricing, delivery terms, and the language around penalties and risk mitigation. Once you’ve determined the appropriate key performance indicators, you can set up automated reports that will help you to identify terms and other factors that can help optimize contract performance, whether in relation to a specific type of contract or more generally across business lines. Once you’ve used that historical data to determine what works (and what doesn’t), you may incorporate those into new agreements moving forward. Furthermore, as you improve and evolve your agreements into the strongest possible versions, you can store blank copies of the most recent wording for easy access - no more remembering which version is the most up to date. Text-based search tools can also help you quickly and efficiently zero in on specific wording or types of contracts within your archive.
2. Flag obligations at the outset
Contracts typically contain numerous key dates and milestones that must be strictly adhered to in order to reduce risk. Whether it’s a missed delivery date or an agreement that renews automatically if you fail to give notice, a failure to abide by the timelines set out within your agreements can be costly. But if you’re managing a high volume of contracts, keeping track of all those dates can seem like its own full-time job. Contract management software can relieve the burden of staying on top of all your time-sensitive contract-related obligations by allowing you to set up automatic notifications that will remind you (or other relevant users) of important dates and action items. Set these up from the outset and your software will do the remembering for you.
3. Track specific risks
Not all contracts are equally risky - while some contracts may require little attention throughout their lifecycle, contracts above a particular dollar threshold or with unusual requirements or non-standard terms may require closer attention. The trick is having a system in place to easily keep track of more onerous and risky agreements. Unlike spreadsheets or the dusty old filing cabinet approach, online contract management does not treat all agreements equally. You can use metadata, alerts and other tools to precisely identify riskier agreements and set up notifications and automated reports to help you keep as close an eye as is required.
4. Reduce security risks
The content within your contracts can include confidential terms, private customer data, pricing and other highly-sensitive information. And whether due to accidental leakage, malicious breaches or other scenarios, a failure to keep this data secure can represent a significant contractual risk. (In fact, it’s not uncommon for contracts or industry compliance guidelines to explicitly outline the obligations of all parties around security and data protection. There are often penalties associated with any breaches, sometimes to the tune of millions of dollars - or more.) Online contract management is a great way to improve the security of your sensitive documents. To keep your contracts secure online, it’s important to first consider security features of your solution that are associated with document transmission and storage: contracts should be encrypted, and, if they are stored in an off-premises (cloud) facility, you should also ensure that it is ISO 27001 certified and has physical protective measures in place. It is also important to use access control measures such as multi-factor authentication, which requires a code sent to a registered phone number in order to log in, and permission settings, which allow an administrator to determine who is allowed to access which documents and perform specific actions. Lastly, audit trail reporting logs each and every click registered in the system, allowing you to see who has accessed a contract and when, as well as any changes that are made.