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How to Eliminate Contract Risk with Contract Management

How to Eliminate Contract Risk with Contract Management

September 12, 2018 Angelica Perrone Contract Management   Risk and Compliance  

Are Your Contracts Putting Your Company at Risk?

“Read the fine print.”

We’ve all been told that reading the fine print in any contract is important, as it often contains terms and conditions that could prove costly down the line, but how many of us actually closely examine the fine print – even in our own contracts?

If your company continues to use a cut and paste approach to drafting and executing contracts, your company could be in serious risk. Not only can the fine print potentially be costing your organization money, but in the event of a dispute, surprises hidden in your contracts could land you in some serious financial and legal hot water. Especially if you are not continually monitoring them throughout their entire lifecycle.

These issues start the minute a contract is generated and signed. Once a contract is in place, there is generally very little you can do to address problems, and you have to finish the contract under the existing terms until it expires or comes up for renegotiation. Otherwise, you risk having to pay costly fees for terminating the agreement – if it’s even possible. Without control over who is drafting and approving contracts and what language is being used, it is difficult to identify and address potential issues before they create substantial risk. This is where a contract lifecycle management platform can keep you compliant and risk free.

What’s Hiding in Your Contracts?

Right now, you’re probably thinking, “Our legal team drafts and approves all of our contracts. They know what they are doing, and they are working for our best interests. They would never expose us to risk like that.”

While it’s true that your legal department is on your side, without an adequate contract management process, there’s a strong likelihood that your contracts do, however inadvertently, create risk. Your contracts can contain clauses and language that creates several types of risk, including:

  • Unapproved terms. When you rely on manual contract drafting and workflows, your contracts can reach the execution stage without the proper approvals, which allows for contracts that contain old or outdated terms, or even noncompliant terms. For instance, if the sales department creates contracts using a template cobbled together from older contracts, without involving legal for contract review, those rogue contracts can create significant risk for your company.
  • Transfer of liability. One of the key purposes of contracts is to limit your company’s exposure to liability, yet the fine print of your contracts may contain language that limits that liability transfer.
  • Compliance issues. Compliance regulations are constantly evolving and changing, and unless your contracting templates and processes keep up with these changes, you could face severe penalties and other sanctions as a result of noncompliance. This means re-papering and re-negotiating existing agreements to meet new regulations in your industry.
  • Weak enforceability. Contract terms are only effective if they can be enforced. Without language that allows for them to be enforced, the contract is effectively meaningless.

Other potential risks include unmitigated counterparty risk, potential intellectual property leakage, ambiguity or uncertainty in the terms, price/cost risk and missing document references. Not all of these problems are equally bad, but any of them can contribute to risk and losses to your company. It is vital for your company to always carefully review each clause to make sure they are in your favor.

Where Contract Risks Hide

Avoiding these issues is difficult when contracting is done manually. Think about how many contracts your organization has and the multiple amendments and related documents associated with each of them. You will quickly realize that knowing exactly what is contained in every single one is all but impossible without some type of organizational system. In fact, contract analysis and risk mitigation is an arduous process, one that requires hundreds of hours to look at every contract individually to locate specific information. Add in the fact that manual analysis can be biased, with your analysts looking at contracts from specific viewpoints and with limited information, and it’s easy to see how potential problems could slip through the cracks. Not to mention, such poor visibility into existing contracts makes risk analysis error prone, and often isn’t even conducted until there is a problem, when it may already be too late to develop an appropriate response.

Avoiding the Dangers of Contract Risk

Contracts aren’t documents that should just be signed and filed away. Contracts form the backbone of your business, and thus need to be managed and leveraged to create the maximum value for your organization. In fact, a key to good contract management is to carefully analyze them for risk before they are even executed. Identifying and addressing the potential pitfalls of the contract reduces the potential for loss, while also providing insight into contract performance as a whole. The end result is a more strategic – and profitable – enterprise.

Contract analysis has historically been challenging, as it had to be done manually. This usually meant either surface level assessments, or analysis only after something went wrong. In short, contract analysis has largely been reactive, and reserved as a response to problem – and even then, it’s been a subjective process, with individuals charged with determining what constitutes risk and its severity.

However, thanks to Exari’s patented Universal Contract Model™ (UCM) and advanced risk scoring algorithm, that process has become easier, more accurate and proactive. By using Exari’s UCM to model the data first, companies can easily analyze their entire contract portfolio later. Exari’s risk scoring algorithm breaks down any contract into 8 different segments, analyzing more than 20 specific data points to determine the overall risk and assigned a risk rating score between 0-100. All contracting decisions can be made based on the same standards, and you have insight into your organization’s overall risk profile.

Managing your contracts becomes much simpler with a contract management platform. More than just a storage repository, contract management not only provides document automation, but it also allows full visibility into all of your company’s contracts, as well as the ability to analyze them and identify potential problems before they cost your company money. Contract management eliminates the risk of rogue contracting, allowing your teams to use templates to draft ironclad contracts that limit exposure to risk; thanks to AI-driven risk analysis and scoring, Exari Contracts gives you the upper hand in document generation and contracting to allow you to be proactive in addressing and mitigating risk. Nothing is overlooked and you can rest easy knowing that the fine print isn’t hiding anything that will come back to harm you in the future.

angelica

Angelica Perrone is Exari’s Marketing Manager. Reach out on Twitter @ExariAngelica.