Contracts are the lifeblood of business relationships, but they also come with inherent risks. From compliance issues to legal disputes and financial implications, managing contract risk is crucial for organizations seeking to safeguard their interests and ensure successful contract outcomes. Contract risk management is one of the most critical aspects of any business. Failing to manage contract risks can lead to legal disputes, financial losses, and damaged reputation. This is where Contract Lifecycle Management (CLM) plays a pivotal role. In this blog, we will explore how CLM can help navigate contract risk and drive better contract management practices. The best way to mitigate these risks is by adopting a comprehensive contract lifecycle management (CLM) system. In this blog, we will discuss the various risks associated with contracts and how CLM can help mitigate them. 

Contract Risk Management with CLM Solutions

The first step in managing contract risks is to identify them. Some of the common risks include: 

1. Non-Compliance 

According to a study by the International Association for Contract and Commercial Management (IACCM), organizations lose an average of 9.2% of their annual revenue due to poor contract management practices, including non-compliance. 

Contract non-compliance risks refer to the failure to comply with laws, regulations, and contractual obligations. Non-compliance with data privacy regulations, such as GDPR and CCPA, can result in significant fines and legal penalties. 

In 2019, a global pharmaceutical company agreed to pay $1.4 billion in fines and penalties for non-compliance with federal and state healthcare laws, including violations related to contracts with healthcare providers. 

In 2020, a major technology company was sued for breach of contract by a supplier, alleging that the company had failed to comply with contractual obligations related to payment and delivery.  

How CLM Solution can help navigate the contract risk of non-compliance? 

A Contract Lifecycle Management (CLM) solution offers you a personalized and efficient approach to navigate the risk of non-compliance, providing your organization with powerful tools and capabilities to ensure adherence to contractual and regulatory obligations.  

With automated compliance checks, timely alerts, and notifications for crucial obligations, CLM solutions like Aavenir Contractflow help you stay on top of compliance requirements and reduce the risk of oversights or missed deadlines. It helps you mitigate contract compliance risk by integrating regulatory requirements into templates and workflows. With features like risk assessment, fallback clauses, and insightful contract analytics, you gain the ability to proactively identify compliance gaps and make informed decisions.    

Leverage the power of CLM to maintain a culture of compliance, minimize risks, and safeguard your organization's reputation and financial well-being. 

2. Poor Contract Drafting 

Poor contract drafting is another significant risk that organizations face. Vague or incomplete contract language can lead to misunderstandings, misinterpretations, and disagreements between parties. This can result in delays, disputes, and even legal actions.

Here are a few examples of how poor contract drafting can create risks: 

• Contracts that contain ambiguous terms or unclear language can create confusion regarding the rights and obligations of each party. This ambiguity leaves room for different interpretations, increasing the likelihood of disputes. 
• Contracts that lack specificity or fail to address key details can lead to misunderstandings. 
• Contracts that do not clearly define the scope of work or deliverables can result in disagreements over expectations.  
• Failing to include essential clauses in a contract, such as termination clauses, dispute resolution mechanisms, or intellectual property rights, can expose both parties to significant risks.  

In 2019, the popular social media platform Facebook faced significant backlash and legal challenges due to a data privacy scandal involving Cambridge Analytica, a political consulting firm. The contract between Facebook and Cambridge Analytica did not have stringent restrictions or explicit consent requirements for data usage, allowing for the misuse of personal information. The incident highlighted the compliance risks associated with inadequate contract language and insufficient data protection measures. 

Contract authoring can be a time-consuming process. According to a survey by the International Association for Contract and Commercial Management (IACCM), organizations reported spending an average of 20 to 40 hours on contract authoring for medium to high complexity contracts. 

How CLM solutions help navigate the contract risk of poor drafting? 

CLM solutions mitigate the risk of poor contract drafting through standardized templates, automated workflows, and collaborative review processes. By providing ready-made contract templates and clause libraries, CLM solutions ensure consistency and accuracy in contract drafting. Automated workflows streamline the drafting process, reducing errors and omissions.

Collaborative review and approval features allow multiple stakeholders to provide input, catching any potential issues before finalizing the contract. With CLM solutions, organizations can enhance contract drafting efficiency and effectiveness, minimizing the risk of poor contract drafting and its associated consequences. 

3. Missed Deadlines

Failure to meet contract deadlines can have significant consequences for businesses. When contractual obligations are not fulfilled within the agreed-upon timeframes, it can lead to financial penalties, strained relationships with partners or clients, and damage to the company's reputation. 

• Financial Penalties: Many contracts include provisions that impose penalties or liquidated damages for missed deadlines. 
• Breach of Trust and Damaged Relationships: When one party fails to meet the agreed-upon deadlines, it can erode trust and damage relationships with the other party involved 
• Reputational Damage: In today's interconnected world, news of missed deadlines can spread quickly, potentially harming a company's reputation. Negative experiences shared by customers or partners can tarnish the perception of a business and make it more challenging to attract new clients or maintain existing ones. 

How CLM Solutions help navigate the contract risk of missed deadlines? 

A CLM solution mitigates the risk of missed contract deadlines by automating reminders and notifications, facilitating task management, ensuring document tracking and version control, automating workflow processes, providing reporting and analytics, and enabling integration and collaboration. It automates reminders and alerts for approaching deadlines, streamlines task assignment and tracking, maintains the latest contract versions, automates approval workflows, generates reports for monitoring timelines, and integrates with other business systems for seamless collaboration.

These features enhance visibility, control, and efficiency in managing contracts, significantly reducing the risk of missed deadlines and associated penalties. 

Closing Note 

In conclusion, effective contract risk management is crucial for organizations to protect their interests and ensure successful contract outcomes. Contract Lifecycle Management (CLM) solutions offer powerful tools and capabilities to mitigate risks associated with non-compliance, poor contract drafting, and missed deadlines.

By leveraging CLM solutions, organizations can navigate the risk of non-compliance by ensuring adherence to contractual and regulatory obligations through automated compliance checks, timely alerts, and insightful contract analytics. CLM solutions also address the risk of poor contract drafting by providing standardized templates, automated workflows, and collaborative review processes, enhancing drafting efficiency and accuracy.

In addition, CLM solutions mitigate the risk of missed deadlines through automated reminders, task management, document tracking, and reporting features, ensuring contracts are managed efficiently and reducing the likelihood of financial penalties, damaged relationships, and reputational damage. Adopting a comprehensive CLM system empowers organizations to proactively manage contract risk, safeguard their reputation and financial well-being, and drive better contract management practices.