How to Mitigate Legal Risk: 4 Suggestions with Contract Management
May 19th, 2023
In 2016, Fyre Media’s upcoming Fyre Festival made headlines as the festival of choice for influencers and high rollers.
By the end of 2017, the festival was making headlines for very different reasons.
Musician Ja Rule invested in Billy McFarland’s attempt to create a music festival – an attempt that failed spectacularly due to unsound contractual promises made by McFarland.
Netflix and Hulu’s competing documentaries Fyre and Fyre Fraud (respectively) recount the festival’s advertising of musicians without signed contracts, caterers who didn’t deliver on their contractual obligations, a lack of contracts for transportation and infrastructure, and ticket holders who found themselves on the bad end of a contract gone wrong.
There are many reasons Fyre Festival failed as spectacularly as it did, but the fundamental issue was that Fyre Media didn’t manage its contracts correctly. Instead, they opened themselves up to unnecessary risks through poorly managed or non-existent contracts. This gamble led to significant reputational and financial damage for everybody involved – from Ja Rule to Kylie Jenner to Andy King.
Contract management is vital for every organization. Even giants like Uber, Wells Fargo, Volkswagen, and Johnson & Johnson have suffered major public losses due to poor contract management. In fact, research from the World Commerce and Contracting group shows that poor contract management can impact up to 9% of an organization’s bottom line! This guide outlines four ways contract management can help you mitigate legal risk, maximizing your chances for success and profitability.
- Contract management is foundational for organizations of every size in every industry.
- Contract management software helps you mitigate legal risks by improving visibility, enhancing workflows, increasing standardization, and monitoring compliance.
- Contract Logix can help you pursue success through full-featured contract management software.
😉 Bonus: Learn more about risk mitigation in our ultimate guide to minimizing risk.
1. Improved Visibility
Where are your contracts?
If you don’t use contract management software, they are likely either stored on paper in a filing cabinet or locked away in an analogous digital filing cabinet like Sharepoint, Drop Box or worse, someone’s hard drive. While these organization systems are not inherently bad, they can create extra difficulties for organizations that use them.
Creating a Centralized Repository
Contract management software provides a cloud-based repository where you can safely store all of your contracts and supporting documents. By aggregating this information in one place, you reveals trends, promoting visibility into your contracts. This mitigates your legal risk because increased visibility means that you and your stakeholders can make informed decisions based on your contracts while avoiding the pitfalls of overlooking a misplaced document or failing to recognize a pattern in your contracts. Technologies such as OCR and AI-based data extraction and natural language processing (NLP) make it automated to index and extract all of the language in your contracts so you can easily search for and report on it.
A manufacturing company may have several different contracts with suppliers for raw materials, equipment, and transportation services. Without contract management software, the company needs to organize and track each of these contracts independently. That means that as the company grows, the complexity of their contract management grows too. It then becomes easy to miss a deadline, mix up contract terms, or misplace a contract altogether.
Contract management software makes all of these “invisible” contracts visible without manually going through each of these contracts every time to verify a deadline or obligation. This visibility helps companies meet their legal obligations and mitigate legal risks.
2. Enhanced Workflows
While there are many cost- and time-saving measures companies can take, there’s no way around the reality that contracts take work. The drafting, negotiation, signing and execution, storage, and ongoing obligation and version management of contracts all require a level of human effort, and not even the most sophisticated contract management system can completely eliminate this labor.
That said, contract management software can greatly enhance the contract workflow through capabilities like automated email reminders, reusable templates, automated routing of contracts to the proper stakeholders for reviews, and collaboration.
These enhanced workflows save cost, but how do they relate to legal risk?
- Faster review and approval: A streamlined workflow means companies can move from drafting to signing more quickly than they could without specialized software. This reduces the risk of legal disputes and delays.
- Better communication: Contract management software enables a more collaborative approach to contract management, and this approach yields dividends in the form of improved communication. This helps ensure all parties are satisfied, reducing the risk of costly disputes or misunderstandings.
- Increased monitoring: Digital tools in contract management software enhance an organization’s monitoring capabilities. This allows companies to stay abreast of their legal obligations and mitigate legal risks by keeping tabs on their various contract activities.
3. Increased Standardization
A key feature of contract management software is the ability to create and reuse customized contract templates. By using consistent, standardized language across multiple contracts, companies mitigate the legal risks from misunderstanding or misinterpretation of the language in their contracts.
In healthcare, for example, organizations deal with a wide variety of operational contracts, including equipment acquisition, servicing agreements, and even physician agreements. If one contract uses slightly different language to describe a vendor’s obligations to repair defective equipment, this small discrepancy can snowball into a major legal dispute.
For example, if one contract states, “the vendor is responsible for defects and will provide a full replacement or refund for defective equipment,” while another contract states, “the vendor will make commercially reasonable efforts to replace or refund defective equipment,” the implications may differ significantly.
Contract management helps organizations manage these small differences by ensuring standardized language and mitigating their legal risk.
4. Compliance Monitoring
Every industry has unique regulatory requirements: healthcare has HIPAA, energy companies have the EPA, financial institutions have TILA-RESPA and FISMA, payment processors have PCI DSS, and ecommerce companies have CCPA.
Knowing what regulations your organization is subject to is a significant undertaking in and of itself, but tracking compliance is an even larger task. Thankfully, contract management software excels at monitoring regulatory compliance.
For example, a company may need to ensure that its vendors and partners comply with the California Consumer Privacy Act (CCPA), which requires giving California residents the option to opt out of the sale of their personal information. Without contract management software, organizations need to scan through their contracts for key milestones and deadlines. Contract management software enables companies to see this information for all their contracts at a glance.
Image Source: https://www.techaheadcorp.com/blog/ccpa-vs-gdpr/
How to Mitigate Legal Risk with Contract Logix
Contracts are too important to leave to chance, which is why Contract Logix is a vital tool for companies of every size in every industry.
Contract Logix’s data-driven contract management platform can help you improve your visibility, enhance your workflows, increase standardization, and monitor compliance across your entire contract lifecycle.
Request a demo today to learn more about how to mitigate legal risk by leveraging Contract Logix.
Looking for more contract management insights? Check out our latest blog post on “3 Ways Contract Management Software Can Improve Accountability in Higher Education Institutions“.
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