The 5 Scariest Questions Your CEO Could Ask About Your Contracts, Pt. 2
Welcome back for installment two of The 5 Scariest Questions Your CEO Could Ask About Your Contracts, based off our recent webinar of the same name. In Part 1, we detailed the first three situations in which not knowing your contracts inside and out could make you shake in your boots: 1) an M&A event 2) a rogue vendor and 3) an MFN clause. Let’s dive into the rest.
The Data Breach
“Why is the Times calling me for a comment on a data breach of one of our biggest vendors? They would’ve told us about that, right?”
This unpleasant question will make you scramble for a complete picture of your relationship with the vendor. You’ll need to find out if your contracts impose on them meaty and timely disclosure requirements so as to determine if their apparent non-disclosure puts them in breach.
Seeing as your business’ and clients’ sensitive information may be compromised by a breach of a vendor, you will also need to have an immediate and comprehensive understanding of your disclosure obligations to all of your customers. Which events require you to disclose what, to whom, and within what timeframe? Did you make promises to customers that have already – albeit unknowingly – been broken?
Companies often believe that implementing comprehensive cyber security protocol internally is enough to protect themselves from the many liabilities that stem from a hack or data breach, forgetting the exposure caused by third party vendors.
The Risk Riddle
“What are the 10 riskiest contracts and what are we doing to manage that risk?”
This is a riddle indeed, as it may seem easy enough to answer but it turns out you need more than just an educated guess to answer with certainty. Your CEO probably does not want a vague, opinion-based, “it depends,” which doesn’t instill a high degree of confidence and, frankly, looks lazy. So how would you go about reassuring the CEO that their risk and legal experts have a handle on the riskiest contracts ?
To start, you’d need an accurate, high-quality, objective way to measure contractual risk across your contract portfolio. You may intellectually and instinctively know which vendor or customer relationships wave red flags (that Caracas-based company, perhaps?), but your contract language may tell a different story. If you do not have a way to assess risk embedded in contract language, there’s a good chance those high-risk contracts are not receiving the attention they require. And if you can’t articulate risk measurements when asked by the CEO, you’re essentially neglecting your responsibility as a legal or compliance officer to be on top of your risk. In other words, this little question may in fact be the scariest of them all, as it exposes not only your business risk, but your own weakness.
So what to do? Here are a few general rules to follow:
- Deal with early termination risk ahead of time; due diligence is too late
- The devil is in the details in strategic contract relationships – keep an eye on gaps
- Beware the MFN – it amplifies bad pricing unless very carefully managed
- Don’t wait for a crisis to manage risk; be proactive
But how, you ask? You’re right, it’s probably impossible to remember the precise details of every pricing and disclosure clause, to monitor every vendor and partner, and to monitor all your risk.
The one tried-and-true way to gain control and visibility over your contract portfolio is to invest in contract management software that organizes and reports on contract data so the answers to your CEO’s scariest questions are just a few clicks away.
The best software on the market today is the Hub™, an out-of-the-box solution that allows users to store, organize, access and report on the content of and risk in all of their contracts in one central place.
Answer the CEO with Speed and Certainty
Imagine your boss were to ask you one of the five scariest questions this afternoon. Let’s take the one about the most favored nation clauses. You know you have to identify the worst pricing you’ve ever granted along with any price variation and discounts included in the agreement. With the Hub, it’s as easy as opening Exari Hub to the main dashboard:
You can then search for all the contracts with Most Favored Nation clauses, adding filters (such as geography, value, etc.) as you require. With the Hub, what may have been a desperate hunt for contract data becomes a simple click and search.
Special thanks to Jamie Wodetzki, whose webinar inspired and informed much of these blog posts!