How to Improve Contract Management: 10 Solutions for Risk Mitigation
Do you know the 10 most important strategies for reducing contract risk? Every contract your company creates carries a certain amount of risk. After all, nothing ventured, nothing gained, right? The more contracts you sign, the more risk you incur – unless you employ an automated contract management software solution. Read on to learn how to reduce contract risk and streamline your organization’s contract management.
- The six most common types of contract risk are financial, operational, legal, compliance, security, and brand.
- An automated contract management software solution can mitigate all forms of contract risk.
- To reduce contract risk, standardize requests and intake, utilize clause and template libraries, and automate contract workflows.
- Also important: employing version control, establishing an audit trail, creating a centralized contract repository, and using role-based permissions.
- You should also employ e-signatures, automated deliverables notifications, and create detailed reports and analytics.
😉 PS: Learn how to minimize risk with effective contract management HERE.
What Are Some Common Contract Management Risks?
As your organization grows, you have to deal with an increasing number of contracts. More contracts mean increased contract risk, which can threaten your company’s ability to profitably conduct business.
What types of contract risks might you encounter? Here are six common types of contract risk:
- Financial risks. These are risks of monetary loss or non-optimization of profits. For example, missing a contract deadline could incur financial penalties that make a contract less profitable.
- Operational risks. These refer to the potential risks your company could experience when trying to conform to a contract’s terms, especially in nonstandard contracts.
- Legal risks. Legal risks occur when either your company or the other party involved breaches contract terms. They can also take place if the terms of a contract conflict with the laws of a particular country or state.
- Compliance risks. These risks arise from noncompliance with governmental and industry regulations. Noncompliance can result in corrective action, hefty financial penalties, and even criminal action.
- Security risks. These are risks of your organization’s key data being breached, stolen, damaged, or held for ransom in a cyberattack. Security risks can have financial, legal, and regulatory consequences, and even damage your brand’s reputation.
- Brand risks. These risks, along with other issues like relations with your employees, can influence how the public perceives your company and brand. Bad publicity can damage your brand and affect your company’s sales and profits both in the short and long term.
What Are the Most Effective Contract Management Software Solutions for Mitigating Risk?
Mitigating contract risk reduces your costs, minimizes compliance issues, and improves productivity. The following 10 solutions help you minimize contract risk and keep your business running smoothly.
1. Standardize Contract Request and Intake Process
Contract risk reduction starts by standardizing the contract creation process. This is most effectively accomplished by implementing a form-based process for all new contract requests and information intake. Instead of letting employees “freeform” contract requests, require that they fill in a standardized form when they want to request a new contract.
The form should include all the requirements you need to start the contract process, including fields for key contract information – goods or services contracted, deliverables and due dates, termination/renewal date, important obligations and commitments, and other essential terms and conditions. By using a form with pull-down lists for contract types and predefined fields for other key data, you’ll reduce the risk of starting a contract with incomplete information.
2. Utilize Clause and Template Libraries
Instead of starting each contract from scratch, base all new contracts on pre-designed contract templates. These templates should include consistent language and formatting to ensure all your contracts meet internal standards. Then utilize a library of pre-approved clauses that ensure each new contract adheres to pre-approved terms. These clause and template libraries reduce the risk of nonstandard language and unacceptable terms.
3. Automate Contract Workflows
You can take significant risks out of the contract process by automating the entire contract workflow, from inception to execution and everything in between. An automated workflow, based on established routing rules, ensures that all the right individuals review and approve each contract and that no unauthorized or unnecessary personnel are involved. It also speeds up the process significantly by keeping the contract flowing from one approval to the next.
According to a Deloitte and World Commerce & Contracting report, 68% of organizations consider automating and digitizing contract management as a medium to high priority. While buy-side and sell-side organizations have slightly different priorities for automation, most agree that standardizing contract data and automating the post-execution process are paramount.
4. Employ Version Control
When automating the contract workflow, it’s important to keep track of all changes made to each contract. This is accomplished by employing detailed version control, made easy by the automated process. All edits are automatically captured and noted in the process flow. This reduces the risk of unwanted, unnecessary, or inappropriate changes to the contract terms and language.
5. Establish a Detailed Audit Trail
An automated contract process also makes it easy to maintain a detailed audit trail. This is important when you want to evaluate contracts post-execution and if your firm is ever subject to an internal or external audit. This helps ensure compliance with the Sarbanes-Oxley Act and other industry and governmental regulations.
6. Centralize All Contracts in a Single Repository
More risk reduction occurs when all contracts are stored in a single digitized repository. When contracts are stored in multiple departments and locations throughout an organization, security is compromised, and the risk of non-standardized contracts increases. Eliminating contract silos helps ensure adherence to rules and that contracts are more easily secured.
7. Use Role-Based Permissions to Control User Access
For contract security, the best approach is to employ role-based permissions. This ensures that only authorized individuals can access specific contracts. Restricting access to a contract reduces potential breach points and ensures that proprietary information doesn’t leak.
8. Employ E-Signatures
You can mitigate additional risk when you require contract signatories to sign via electronic signatures. E-signatures not only speed up the execution process but are also more difficult to forge or hack.
9. Automate Deliverables Notifications
A significant risk in the contract process comes after execution when deadlines become due. When you automate notifications about upcoming deliverables, you reduce the likelihood of missing those deadlines – or having your contractual partners not deliver as contractually obligated.
10. Institute Detailed Reports and Analytics
The final way to reduce contract risk is to keep track of the entire process via detailed reports and analytics. Not only should you track the process of in-progress contracts – you should also evaluate the performance-to-expectations of all executed contracts. The more you know about your processes and the performance of your contracts, the better decisions you can make about future contracts.
Mitigate Contract Risk with Contract Logix’s Automated Contract Management Software Platform
All of these risk-management strategies are easy to implement if you choose the right contract management solution. Contract Logix’s cloud-based contract management platform automates and streamlines the entire contract process, mitigating all common types of contract risk.
With a centralized digital contract repository, template and clause libraries, e-signatures, and robust reporting and analytics, Contract Logix significantly reduces the risk of underperformance and noncompliance.
Contact Contract Logix to learn more about how to improve contract management & mitigating contract risk.
Looking for more articles about Contract Management? Check out our previous article “The Best Contract Management Software for Healthcare in 2023“.
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