Every organization typically deals with hundreds of contracts every day, especially law firms. Contracts move through various stages throughout their lifecycle, from initiation to termination. Each stage contains various tasks. Attorneys and stakeholders review, approve, and complete tasks. But the most important factor that usually slips through the cracks during contract management procedure is ‘risk analysis’.
Risks are hard to identify, harder to compute, and hardest to abolish. Keep shutting eyes to these risks and one will not only lose the benefits but also put their firm in jeopardy.
what are contract risks?
We are aware contracts are the mutual understanding between two or more parties. A contract risk has a propensity to affect the day-to-day operations and outcomes of the organization. It can cause collateral damages to a business.
Contract risk is the involved parties’ inability to fulfill or neglect the terms of the agreement, causing potential damages.
types of contract risk?
A contract risk can be identified as the following:
- Financial risk: Financial risks are the risks associated with loss of money. From the contract management point of view, these risks are caused by missing a date or undergoing loss in business, etc. These risks are in the form of loss of assets, equity, or liquid loss.
- Legal risks: During the contract lifecycle, if any of the involved parties fails to fulfill terms and conditions or breach any agreement, it is known as a legal risk. It can also arise due to a lack of usage of the right legal clauses.
- Security risk: Security risk is the most common risk during contract management. It occurs when contracts are stored in some insecure locations causing important information to slip out and either be held for ransom or used by the opposition to cause severe damage to the organization.
- Brand risk: Brand risk is associated with the image of the brand concerning public opinions, such as unsatisfied clients or negative public opinion. Brand risk further leads to financial, legal, and security risks. It plays an important role in the functioning of the firm.
how To identify the risks?
The foundation of contract management is to identify the risks associated with it. There is a lot to consider when it comes to contractual risk. Identifying risks is important to prevent these risks beforehand.
Steps to identifying risks:
- Identify which contract has more value. Bigger contracts have higher risks.
- Identify parts of contracts that introduce risks: Before execution, workflow or timeframe, and after execution, storage, and contract management.
- Make sure you have available resources for management, therefore avoiding risk occurrence from within.
- Geographical risks should also be considered. For example, risks arise due to parties being in different countries.
Identifying these risks is an important job and one should consider as many factors as possible. These are just some most common factors out of a huge list.
how to eliminate risks?
Contract management is not an easy task let alone a simple one. If something goes wrong during the process it can put the firm in financial danger and put its reputation at risk as well. Therefore risks are identified before they arise. But what are the steps to follow further? Risk identification without further elimination is nothing just a road to nowhere paved with attorney’s naiveté.
Once risks are identified, the main question is ‘How do I eliminate these risks?’
- Risk elimination is a challenging task. Prepare yourself and the team to evaluate and eliminate risks. Make sure to have all the resources and the knowledge of what is being dealt with.
- Take expert opinion. Discuss it with people of the organization from various sectors. Different people from different sectors have their forte and will be able to provide opinions accordingly.
- Evaluate the depth of the risk. Ensure to have a grasp and command over the risk and first learn about it inside out, so that it will be easier to find solutions for elimination.
- Know the worth of the project. Consider if the project is worth tackling the risk associated with it. If not, reject the project. One should understand how big the project is and the result and profit it will provide to the firm.
- Choose secure firms. Try to build a contract with more stable companies, so that less risk arises. The better a company is financially and with a more solid base, there will be fewer chances of the risk occurring.
- Outsource. Try outsourcing, to bring in better risk management. Allocate different tasks to different companies that specialize in that particular genre. This will help in better risk assessment and removal.
- Take away the power. Aim to save the firm from risk and its consequences, either by removal or by making risk benign. Consider looking for solutions to make risks harmless. It is a much simpler process and will save you a lot of headaches.
- Plan and plot beforehand! Before drafting a contract, make sure to strategize and plan properly and ensure that everything goes according to the scheme.
- Learn about the risk and the firm’s capability. Make sure to know how much risk the firm is willing to accept. One should know their firm’s worth and capability and they should know if their firm will be able to handle the risk.
- Software for contract management to rescue! Use good let alone, the best contract management software that offers desired features under the budget.
- Consider starting a team. Establish a risk management team in the firm. Hire experts from every sector and arm them with every tool and resource. The team will further prevent risks before they occur and help save the company from severe losses.
- Review and optimize. Review the contracts thoroughly and make the best use of the resources to make the contract risk-free even after execution.
why risk mitigation is important?
- To avoid contractual obligations
- To prevent leak of crucial details
- To get rid of existing hurdles
- To raise the firm’s reputation
- To ensure that the firm is growing without consequences
- To provide better customer service
- To increase effectiveness and ensure more profits
why contract management software is important?
Business is getting more complex day-to-day and so are the agreements they come into. It takes an attorney a lot of time to perform the contract management process manually. This is where contract management software enters! This software keeps track of and updates contracts and related information from time to time without much manual work. Therefore, contract management is done within a few minutes with just some clicks.
Contract management software is AI-embedded applications that are smart enough to evaluate and provide better risk analysis and assessment. This software not only helps manage several contracts and draft documents with all key information but also helps in risk analysis and elimination. As more organizations are turning towards digital platforms, adopting contract management software is one of the best options for modern law firms.
Few contract management software that can help:
Contract management is an important part of every business activity. Given the competition, it’s critical to understand that contract risks should be identified at an early stage before it is too late. No organization can afford to undergo the risks and their consequences along with the huge losses. Whether it is a small firm or a big business, contracts are a part of their everyday operation.
Businesses have started to adopt contract management software to make managing contracts easier and make risk evaluation more accurate. The software is always a better option in our opinion! Manually you can miss out on many factors, which again, your firm cannot afford.
We know this is a huge responsibility. We’ve laid down all the facts you need to know about risk management and analysis. The choice is yours to make. Be smart! Choose wisely!