The Legal and Financial Risks of Poor Contract Management
Although keeping contracts organized is highly important, many legal departments may still be making worrisome contract management mistakes. Some examples of poor contract management practices include:
Storing contracts in scattered locations, such as various computers, hard drives, and filing cabinets
Retaining multiple versions of contracts, without a system for organizing them
Not having a standard protocol for naming contracts
Only using paper contracts, which are more vulnerable to being lost or damaged
Having an inefficient contract execution process
According to an exclusive survey of in-house lawyers and corporate legal professionals, commissioned by ContractWorks, 25% of respondents store contracts in desk drawers and filing cabinets, and 35% of respondents store them across multiple locations, including various inboxes and computers.
Storing contacts in scattered locations can reduce visibility into these agreements, making it hard to keep track of contractual obligations. According to Faye Moran, former Head of Legal Operations (interim) at Booking.com, not having a contract management system and clause-level data “can be critical.”
“Without clarity, you don’t know what’s been agreed to or why it was agreed to. If it all blows up two years later, Legal has to try and unpick it all. Better systems and information might prevent some of that.”
- Faye Moran, former Head of Legal Operations (interim) at Booking.com
What Happens When Your Contract Management Process Falls Short?
There are a host of risks that can come from inadequately tracking and managing contracts once they’ve been signed, including significant legal and financial dangers. Below, we outline some of the top risks associated with not properly managing post-signature contracts.
Missing Crucial Milestones
It’s crucial to be aware of when your contracts automatically renew or terminate, since failing to track these dates can result in additional costs. If a company doesn’t realize that a contract is about to auto-renew, for instance, it could get locked into paying for a service that it no longer needs.
Auto-renewal clauses are a pervasive issue, as they can be found in software agreements, insurance policies, vendor contracts, leases, and many other kinds of agreements. And indeed, missing contract renewals are a common problem for organizations. In ContractWorks’ survey, 46% of respondents said their organization missed at least one automatic renewal in the past year, with 26% missing at least four.
Not paying attention to contract expiration dates can also impact a company’s bottom line, as failing to renew a contract can result in lost business. What’s more, if a company doesn’t realize that a contract has expired and continues to produce goods according to the agreement, it could find itself with a costly surplus on its hands.
Finally, contract renewal and termination dates present excellent opportunities to renegotiate your agreements and secure more favorable terms. Keeping track of these milestones will ensure that you have plenty of time to renegotiate your contracts before they renew or expire.
Losing Contracts: Regulatory & Deal Trouble
Contracts can get lost for many reasons. Perhaps the person who had the contract left the company, or the agreement only existed in a now-deleted email. Paper contracts are especially vulnerable, as they run the risk of being physically damaged or accidentally tossed into the recycling bin.
According to one figure from the Journal of Contract Management, 71% of companies couldn't locate at least 10% of their contracts. But losing track of a contract can create major problems, particularly when it comes to satisfying regulators during an investigation. And if you can’t produce a vital contract during a merger or acquisition, it’s possible the deal could be slowed down or even scuttled altogether.
Regulatory Non-Compliant Contracts
While some employees may be tempted to use old templates to craft new contracts, a contract may not be legally compliant or enforceable if a template isn’t up-to-date with the latest regulatory requirements.
“Legal could have totally updated and changed the template because of different regulations — like privacy and things like that — and so if they're using the wrong one, you're starting in the wrong place to begin with."
- Bart Mooney, Director of Global Legal Operations, Contracts Management and Innovation at Ingram Micro
In addition to compliance concerns, a company may have decided to update its contract templates for business reasons. By using an older template, an employee could be excluding the company’s new preferred contract language.
Breaching a Contract
While contracts receive plenty of attention during negotiations, monitoring a contract after it has been signed can sometimes prove difficult. In fact, in the survey commissioned by ContractWorks, 72% of respondents said their team does not focus enough on managing post-signature contract obligations.
But not monitoring the terms of your contracts comes with legal risks, as breaching a contract — even accidentally — could result in possible litigation.
“Accidental or intentional breaches are all treated the same. So, if you just forgot about something, yeah, you could find yourself in court."
- Sterling Miller, CEO of Hilgers Graben and former General Counsel of Marketo, Sabre, and Travelocity
It’s crucial to know exactly who has access to a contract, particularly if it contains sensitive information, like trade secrets. Allowing widespread internal access to your contracts makes it more likely that sensitive information could leak from them, potentially hurting your company’s reputation or bottom line.
Maintaining tight control over who can access employee documents, such as employment agreements or stock option grants, is also important. If an employee’s confidential information is exposed, staff morale or trust in the organization could be impacted.
In a worst-case scenario, having employee information compromised can lead to litigation. In 2015, Sony Pictures Entertainment decided to pay up to $8 million to end a lawsuit from staff members who said their personal information was stolen in a hack, according to Reuters.
Frustration with the Legal Department
Fairly or not, contract hold-ups can also lead to frustration with the legal department. Law departments seeking to build a reputation for accelerating business will want to look for ways to speed up the signing portion of the contract process.
For more on these legal and financial risks, and some simple, effective solutions to help you solve them, download A General Counsel's Guide to Contract Execution, Storage, and Renewal.