How to Utilize CLM Software for Contract Risk Assessment

All contracts are inherently risky. It’s in the best interests of your business to minimize that risk, if at all possible. 

How can your organization reduce contract risk? The key is to regularly engage in contract risk assessment – which can be made easier via the use of cloud-based contract lifecycle management software, commonly referred to as CLM software. 

Key Takeaways

  • All contracts are open to financial, legal, operational, and compliance risks
  • To mitigate contract risk, it’s important to assess risk probability, consequence, and thresholds
  • Cloud-based CLM software can perform detailed and real-time contract risk assessments
  • CLM software also standardizes contract terms and language, ensures regulatory and business process compliance, and tracks contractual obligations

Identifying Common Contract Risks

Contract risk falls into four general categories: financial, legal, operational, and compliance risks. You need to identify all instances of each risk in your contracts.

Financial Risks

There is always the risk that the other party to a contract will not properly fulfill its obligations. They may fail to deliver products and services on time, or at all. They may fail to make timely payments. They may deliver products of an unacceptable quality. In any given contract, this could result in significant financial loss. There is also the possibility that your organization fails to meet certain contractual obligations which could result in financial consequences.

Legal Risks

If your company doesn’t fulfill its legally binding contractual obligations you may be subject to legal risk. In addition, if a contract is poorly written, you could find your company the subject of litigation from parties outside of the contract. 

Operational Risks

A contract that does not adhere to your company’s internal standards could cause operational difficulties in trying to adhere to the nonstandard terms. You might be unprepared for contractual obligations that were the result of unusual terms or language. 

Compliance Risks

A contract that was poorly conceived or written might not fully comply with applicable government and industry regulations. Compliance risks can also arise due to failures in following your business processes. Noncompliance can lead to legal action, fines, and damage to your company’s reputation. 

How to Assess Contract Risk

Once you’ve identified your contract risks, you need to assess how each risk can impact your organization in terms of probability, consequence, and threshold. When the contract risk has been properly assessed, you can then work toward mitigating that risk.

A risk matrix assessing probability (likelihood) vs. consequence (impact)

Assessing Risk Probability

The first thing you need to assess is how likely it is that a given risk factor might occur. A risk with low probability of occurrence may require less attention than one that is more likely to happen.

Assessing Risk Consequence

Equally important is the potential impact if a given risk does occur. That impact could be to your bottom line, your operational efficiency, or to your public reputation. The larger the potential impact, the more important it is to address a given risk.

Assessing Risk Thresholds

Finally, assess how much risk your company is willing to assume on any given contract. That risk threshold might be absolute, or it may be relative to the potential upside of the contract. That is, you may be willing to assume more risk if the contract brings a potentially large reward. Assessing your organization’s tolerance to risk is an important part of the process.

How Cloud-Based CLM Software Helps with Contract Risk Assessment

Assessing all of these risks is a challenge that is made easier by the use of cloud-based contract lifestyle management (CLM) software. CLM software automates and manages all aspects of the contract process, from request and intake to creation, negotiation, execution, and obligation management. It also is designed to assess and manage the risks inherent in all stages of the process. 

Cloud-based CLM software starts by basing all new contracts on templates that include your pre-approved terms and standardized language all contained within clause and template libraries. Then, through the use of automation, you ensure compliance to your own business rules while increasing the speed of those processes. Automated alerts and notifications also allow you avoid missed dates and obligations.  In addition, you can harness all of the data in your contracts to produce real-time reports and analytics that can be used to deliver the business actionable insights about potential risks in your contracts. The result is that your organization will sign fewer high-risk contracts, reducing the risk factor of your entire portfolio.

Centralizes All Contracts and Data

CLM software  digitizes all your formerly paper contracts and stores them in the cloud. All contracts are accessible via the Internet. Access is limited to authorized staff only, which increases data security and privacy. This centralization also makes it easier to perform more detailed reporting and analysis as well as advanced searching of contracts since all of your contract data is harnessed and accessible.

Standardizes Contract Terms and Language

One of the key ways to reduce contract risk is to not let individual staff or departments create their own contracts from scratch. Instead, cloud-based CLM software gives you the ability to assemble contracts based on pre approved clause and template libraries and auto populate key data points using merge fields. This ensures that all contracts throughout your entire organization are fully standardized and accurate, with no risky or unapproved terms attached. 

Ensures Regulatory and Internal Compliance

Enforcing standardized terms and language ensures that new contracts comply with all applicable laws and regulations. This significantly reduces your compliance risk. And through the use of automated workflows, you can ensure your business rules and processes are always followed for key CLM activities such as approvals and signatures. Another way this helps mitigate risk is that it removes process bottlenecks so you can finalize business faster.

Assesses Risk Probability and Consequence

By capturing and storing all contract data digitally, cloud-based CLM software can help you easily analyze that data to assess the risk factors for each individual contract. You can analyze each contract and assign risk scores based on probability and consequence. You can then compare these scores to the company’s assigned risk thresholds, and contracts that exceed those thresholds can be flagged for inspection. 

Tracks Key Dates and Obligations

Once a contract is executed, cloud-based CLM software continues to minimize risk by automatically tracking key contract dates and obligations. You’re alerted in real time when contract terms are due – both on your end and for the other contracted party. This minimizes the risk of missing deadlines such as the termination notice for an unwanted contract autorenewal. 

Analyzes Contract Performance

Finally, cloud-based CLM software makes it much faster and easier to conduct an overall contract risk assessment by enabling detailed reporting and analysis of all the contracts in your portfolio. You can look at your contract data in real-time and share those reports and dashboards with key stakeholders to evaluate and optimize the performance of your contracts and processes by benchmarking and tracking KPIs to help identify, assess, and mitigate risk.

Based on these analyses, you can make necessary changes to your contract templates and procedures, as well as your risk assessment thresholds. You’ll know whether your contracts are meeting company standards, complying with industry regulations, and adhering to legal requirements. 

Let Contract Logix Help Automate Your Contract Risk Assessment

Contract Logix offers cloud-based CLM software that helps automate and streamline your organization’s contract risk assessment – and reduce your overall risk factor. Our CLM software automates the entire contract process for your organization while providing data-driven insights to optimize your business. 

Contact Contract Logix today to learn more about CLM software for contract risk assessment.