Anyone who works with corporate contracts will tell you that managing such agreements is really about managing risks. With that, the majority of corporate revenues are typically tied into agreements with customers and vendors, and the effective mitigation of contract risk plays a major role in a company’s ability to realize the full value of business agreements. Proactive contract risk management also enables businesses to limit costs, penalties, and other fallout when things don’t go as planned.
But risk landscapes are constantly changing – for better and for worse. While some innovations can help businesses identify and contain potential threats faster and more effectively, other forces, such as shifting regulations, require greater diligence than ever before.
Here are four key trends that are currently driving the state of contract risk management.
1. Security is more important than ever
From personally identifiable customer information to trade secrets, contracts commonly contain highly sensitive data – and sometimes provisions and penalties for failing to adequately protect this confidential information. Meanwhile, research around the scope of breaches worldwide shows that the risk of data loss, whether due to malicious or unintentional causes, continues to grow.
To reduce the risk of data loss – and the possibility of a resulting contractual breach and other negative effects, businesses must make security a top consideration in their approach to contract management. Storing contracts on insecure and open-access collaboration platforms won’t cut it. From secure logins and access controls to encryption and state-of-the-art cloud protection, it’s more important than ever to ensure that security best practices are employed throughout the contract lifecycle.
2. Compliance requirements put businesses on the hook
From GDPR data privacy laws to the rules set out in the Federal Acquisition Regulation (FAR), private and public businesses face an ever-growing volume of mandatory standards that guide their everyday operations.
Contracts are crucial compliance tools, both because they dictate how your employees, vendors, and other parties handle compliance-related obligations, and because your agreements can be part of a document review in the event of an audit. To reduce contractual risk related to compliance infractions, it’s important to review your standard contracts on a regular basis to ensure they meet the most up-to-date compliance requirements. It's also important to ensure that your full contract portfolio is contained within an organized, secure contract repository so that your agreements can be easily retrieved and referenced as needed for compliance-related purposes.
3. Outsourcing and the rise of the gig economy
Gig workers and other forces are rapidly changing traditional corporate structures, with businesses increasingly relying on external parties for key roles throughout the operational and supply chains. This rise in outsourcing is being seen across industries and job functions. But while outsourcing can help businesses to contain costs, the reliance on external vendors can also increase contractual risk, if not appropriately and proactively addressed.
Whether it’s explicitly holding third-party vendors accountable for compliance standards or taking steps to contain the impact of changes to vendors’ external costs, organizations must consider issues beyond their direct control and consider those that could impact their vendors – then take steps to mitigate external risks within their contracts. This should include the incorporation of contract terms that explicitly identify vendor obligations, such as IT security and insurance requirements. Vendor contracts should also detail performance expectations, with clearly stated outcome expectations.
Dispersing contractual risk between partners need not be adversarial; it can be an exercise in collaboration and uncovering mutual benefit. For example, within the medical device sector, some manufacturers are negotiating experimental risk-sharing agreements with hospitals where the manufacturer returns some of a device’s cost if it fails to meet performance goals, but the hospital pays more for a device that over delivers.
Reducing contract risk via risk-transfer or risk-sharing agreements requires careful consideration and exploration of previous contracts to identify optimal opportunities and terms. The first step should include the discovery of past contracts, reviewing both high-performing contracts and those that under delivered or yielded other undesired results. Such post-contract review can help identify terms and scenarios that can be brought forward and applied to new contracts to reduce similar risks moving forward.
4. Technology can help to reduce some contract-related risks more efficiently
Whether it’s keeping massive volumes of agreements organized and secure, staying on top of important contract-related milestones, or enabling more efficient access to specific agreements,technology is making it easier than ever for contract managers and other personnel to reduce contract-related risks. Dedicated contract management software provides innovative tools that can provide better visibility into contracts, restrict a user’s access to only specific contracts, and reduce risks of penalties related to missed contract milestones and other common problems.
Even better, AI-based innovations can make getting started on reducing a host of contract-related risks easier and faster than ever, automating such tasks as tagging and categorizing your documents.
For tips on understanding the health of your contract portfolio and improving operational oversight, download An Introductory Guide to Contract Risk Assessment.
Some of this content was previously published on the ContractWorks blog.