6 Types of Risks In Contract Management And How To Mitigate

The Most Common Types of Risks in Contract Management

1. Financial Risk

World Commerce & Contracting recently found that failures in contract management resulted in value leakage of 9% of annual revenue in organizations. Modern enterprises operate within dynamic and rapidly changing networks. And the need to effectively manage obligations within this shifting ecosystem is critical to financial outcomes.

Poor contract management leads to insufficient performance monitoring of contractual obligations, overpaying of bills, missed negotiation opportunities during renewals, and much more. 

Savvy legal teams mitigate these financial risks with a proven CLM solution. Advanced CLMs leverage AI to track performance obligations and trigger alerts. They also ensure visibility of contract end-dates, renewals, and integrate with ERPs (enterprise resource planning software) for accurate financial monitoring–reducing risk throughout the contract lifecycle.

2. Legal Risk

You can’t manage risks that you can’t see. And, if your legal team is working with an ineffective contract management process, they are navigating contract risks in the dark. With contracts managed through email and on desktops, legal teams have no visibility into the organization’s obligations and the risk of breach of contract.

To make matters worse, these contracts vary from owner to owner. These variances create redundancy and add work cycles, increasing the possibility of missing a key date or commitment. 

To mitigate this risk, organizations need to centralize all contracts with consistent standards and clauses. This reduces the strain on the teams involved in the contract lifecycle and conveys consistency to business partners.  

A CLM solution with a user-friendly clause library offers a simple path to reduced legal risk. More advanced solutions can also help establish clear expectations of roles and responsibilities in contract review using workflow features.

3. Security Risk

Data breaches, ransomware attacks, and natural disasters have become commonplace. It’s no longer a question of whether you should protect your data but how to reduce your security risk. One place to begin is where the data is most critical to business continuity. Another is where the data is most susceptible to breaches, resulting in privacy law violations.

If your contract management process includes desktop file folders, email attachments, Excel sheets, or paper documents, the first step to reduce risk is to automate. By moving to a SaaS (software as a service)solution, you can leverage proven contract risk management tools to secure critical business data. 

If you already have a SaaS CLM solution, reach out to your provider and request to see their Consensus Assessment Initiative Questionnaire (CAIQ) or Cloud Controls Matrix and their SOC Type 2 certification. Security-wise, CLM providers will have these reports to share, subject to an NDA. You can review these with your IT team to better understand any security vulnerabilities. Keep in mind, no process or system is entirely without risk–it’s about knowing the risks and reducing them in line with business goals.

4. Compliance Risk

With contracts as the official record of all business transactions, aligning with government and local regulations is a significant determinant of your risk profile. A legal team can do the work of avoiding financial, legal, and security risks. But that doesn’t protect them from the heavy fines and penalties associated with a compliance violation. 

A member of the legal team can manually review each document. Or, preferably, an automated CLM solution can help by monitoring and tracking compliance. Examples of compliance that an automated CLM can help monitor include HIPAA and ISO standards. Advanced AI can also help ensure suppliers maintain their contractual obligations in line with regulatory requirements.

5. Operational Risk

In collaboration with their legal teams, operations leaders face growing pressure to find solutions to complex and untested scenarios. They must find a way forward despite unfamiliar risk profiles, ambiguous business commitments, global variabilities, strained resources, and ill-defined regulatory expectations.

This ambiguity and complexity show up in ad-hoc, poorly defined contracts or contracts so complex that teams are left to make assumptions. The result is mounting operational risk, leading to bottlenecks, supply-chain shortages, and ineffective resource management. 

To address these risks, operations teams need accurate and real-time data to drive decisions.  When contracts are centralized and streamlined, the right point of contact can provide input on threat assessments to business continuity and give visibility to other team members on the risk exposure. The team can pivot from reactive to proactive management with expanded visibility into contracts and their obligations.

6. Brand Risk

Over 70% of CEOs say they have flagged human rights as a concern in their supply chain for the year ahead. While this operational risk can arise through many factors, including ineffective contract management, it is also a brand risk. As consumer preferences continue to shift toward socially responsible organizations, the allowances permitted in a contract can have substantial consequences for the modern company. 

A proven CLM solution monitors the supplier relationship to ensure it doesn’t exceed the organization’s risk tolerance. Going back to the earlier concern around inconsistency in contract clauses, integrated AI can help by assigning a risk score to contracts. AI searches out the clauses across your contract depository, comparing them to those with standards that reduce brand risk. An advanced CLM can then analyze the risk level, positioning the legal team to act. 

For example, if the contract administrator has four supplier renewals in the pipeline for review, the CLM can identify one as high-risk and needing prioritization.