What Are the Best Contract Risk Mitigation Strategies?
The phrase “the only constant is change” has never been truer when it comes to a modern business philosophy. While organizations are used to planning, strategizing, and executing change, the acceleration and frequency mean today’s business world is fraught with exposure to new risks. As companies expand operations around the world, the rate of change means each new deal (no matter how attractive) deserves expert analysis, extensive review, and the proper modern tools to mitigate risk exposure.
Creating enforceable, valid agreements depend on the executive management team establishing effective contract risk mitigation strategies. When aligning the contract management and risk mitigation strategy with the organization’s wider goals, General Counsels (GCs), Corporate Counsels (CCs), and executives like Chief Legal Officers (CLOs), other in-house legal resources need to expand their roles within the business. The changing organizational structure of enterprises means that 93% of GCs are now part of executive management (and taking over as CEOs of large corporations). A big part of this is due to these resources knowing how to identify, evaluate, and mitigate risk.
Overcoming Challenges with Contract Risk Mitigation Strategies
Strategically mitigating most risks remains possible during the different stages of contract lifecycle management (CLM). The primary goal of a contract risk mitigation strategy is to enable the organization’s business goals, which a deficient CLM process will struggle to achieve. Often, this will lead to exposing the company to unnecessary and avoidable risks.
Key challenges to your contract risk mitigation attempts are:
- Difficulty with tracking all the contracts and related changes throughout the company’s operations
- Slow and delayed approval processes that lead to outdated information and problems with version control
- Lack of visibility into and tracking of contract obligations resulting in missed dates, deadlines, and other commitments
- Failure to understand the scope of regulatory compliance requirements that inflates costs
Below, we cover four of the best contract risk mitigation strategies available for today’s companies.
4 Contract Risk Mitigation Strategies to Improve Your CLM and Reduce Exposure
There’s no way to eliminate all of the risk inherent in an agreement. A contract risk mitigation strategies are a way to identify, evaluate, and mitigate exposure across the entire organization. Whether the company is entering into a new supplier, vendor, or other business agreement, the aim of your contract risk management strategy is to reduce exposure to an acceptable level.
Reducing the time, cost, and complexity of the hazards you identify in the agreement should be the priority of your in-house counsel, subject matter experts (SMEs), and any other professional resources. Additionally, in-house counsel should develop strategies that:
- Avoid any risks with a high probability of occurring and will lead to unacceptable financial losses as well as those with unacceptable consequences
- Transfer risks appropriately when it’s a lower probability using outsourcing, liability insurance, or risk-sharing clauses
- Accept only the risks that would not be financially feasible to mitigate under the terms of the agreement
- Limit all other risks by regulating exposure and include business interventions to create an acceptable boundary of risk between the parties
When it comes to specific agreements, consider these four contract risk mitigation strategies.
1. Standardize and Incorporate Effective Clauses
While the exact language and wording in the contract matter, the aim of the final document is for all parties to act within the spirit of the agreement. To prevent parties from contravening these stipulations and ensure they comply with the intent of the agreement, incorporating effective and valid contract clauses should be a priority. If resources have to draft new agreements, a library of approved clauses will help speed up the process without ambiguous language creating any confusion or misunderstanding. It also eliminates the risk of using old or outdated language that is no longer approved by legal.
A standardized clause library that spans all different types of agreements is an excellent way to mitigate contract risk. Although the exact clauses required will vary based on the primary subject of the agreement including the scope, complexity, and type of contract, you should build a standard clause library that contains:
- Indemnifications, limitations of liability, and disclaimers
- Confidentiality terms, termination triggers, and exclusions for situations such as force majeure
- Jurisdictions, dispute resolutions, and damages in the event of breaches
Any additional terms and conditions relating to compliance (both technical and quality) or regulatory frameworks should also have legally approved, standard language available in your clause library.
Contract management software from Contract Logix makes it very easy to build preapproved clause and template libraries that can be used to assemble contracts based on your business rules. This not only frees up legal resources, it also mitigates risk and ensures compliance.
2. Create a Rigorous Compliance Framework
Part of your contract risk mitigation strategy is building a comprehensive compliance framework to ensure conformance with the terms of the agreement and any wider regulatory concerns. A failure to stipulate the requirements, laws, and quality standards involved could end up with your organization assuming additional risk.
Compliance requirements are a unique set of risks that will need special attention. Some compliance requirements may involve security and data privacy, some could be for regulatory reasons, and others might be necessary for your own business rules.
To ensure you build a robust compliance framework, consider these elements:
- Create a repository for different types of agreements and include examples for reference
- Define the different goals and metrics by which you can measure compliance for any of the KPIs
- Assign the roles and responsibilities explicitly within the terms of the agreement
- Include planning and auditing for compliance over the lifetime of the contract
- Implement proper alerts to ensure you meet contract obligations on time
Contract Logix’s data-driven contract management software helps increase compliance across all of these elements in the framework. You can centralize all your agreements and documents in a dynamic and searchable repository, implement roles-based and feature-based permissions to increase security while ensuring appropriate access to information, maintain a complete audit trail of all agreements, generate real-time reports on performance, and create automated alerts and tasks.
3. Collaborate Frequently with Detailed Reviews
During the draft and negotiation stages, having detailed reviews for each change will help identify any new risk exposure early. Your strategy should include regular reviews, updates to the legal language in your clauses when required, and describe the ways to accept, transfer, or limit risks when it becomes unavoidable.
Reviews should cover the entire agreement. However, you can divide responsibilities for each reviewer according to the following categories:
- SME reviews for technical and operational accuracy
- Formal legal reviews prior and post-approval and execution
- General information and qualification reviews for internal due diligence
Using Contract Logix’s Collaboration Room technology, the internal and third party review process is concurrent and frictionless. You get complete visibility into all changes, redlines, messages, and comments. In addition, all activity associated with the review, negotiation, and approval of an agreement is captured automatically.
4. Embrace New Technologies to Speed Up CLM Processes
As contract and risk management is a labor-intensive discipline that requires keen attention to details, more organizations are looking for technology to assist. Contract management software enables teams to maintain a contract template library, manage all clauses effectively, draft new contracts quickly, and integrate with other Line of Business (LOB) applications.
You can also track all the changes to the document, conduct collaborative reviews, and use electronic signatures to approve the contract. Using an efficient, easy to configure cloud-CLM solution ensures that you conduct all your contracting tasks in a safe, secure, and always-available environment. You can also generate analytics to identify where process bottlenecks are holding up approvals, reduce the burden on in-house counsel, and implement changes to your contract risk mitigation strategy quickly.
Mitigate Your Contract Risks Strategically with ContractLogix
ContractLogix provides you with a complete, end-to-end CLM solution including vendor onboarding, evaluations, collaboration, and final approval in a single, easy-to-use, cloud environment. For organizations that need to increase the efficiency of their CLM, identify and mitigate risks, and align the contracting strategy with the business’ wider goals, consider all the benefits that cloud contract management has to offer. Contract Logix has been helping organizations be successful with their contract risk mitigation strategies for over 15 years.
To see ContractLogix in action and find out more about how we can help you establish an effective contract risk mitigation strategy, schedule a demo today.