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5 Contract management risks: How they can destroy your business
Olga Mack |
October 24, 2023 |

 9,576 total views

Five Contract Management Risks and How They Can Destroy Your Business

It’s never a good idea to wait until a crisis makes you realize how faulty your contract management is. Indeed, with business comes many inherent risks. However, with a smart contract management system, you can proactively determine and mitigate the risks and sustain your business reputation. 

Organizations must address and eliminate contract lifecycle risks through comprehensive risk assessment processes. By proactively weighing the contract risks, businesses can ensure that their contractual obligations are being met without any hindrances.

Thanks to the efficient tools available in the market- businesses can effectively alleviate contract management risks. So, read on to unleash your business from contract chaos with the help of streamlined contract management processes. 

 

What are Contract Management Risks? 

Contract management risks refer to the potential challenges, uncertainties, and obstacles associated with contract management procedures. Poor contract management may destroy your business by any means, from financial to operational risks. Here are some prominent types of risks in contract management you need to pay attention to.

  • Financial Risks
  • Legal Risks
  • Security Risks
  • Compliance Risks

 

Contract Management Risks Causes

An array of internal and external factors may affect your contract management lifecycle. Internal factors may include a lack of proper contract administration, inadequate communication & coordination among stakeholders, and insufficient contract management expertise. 

External factors may involve changes in market conditions, regulatory requirements, technology, and potential disputes or legal challenges from parties outside the organization. 

 

How Poor Contract Management Destroys your Business 

Poor contract management costs you way more than you could have invested in a tool to help you streamline your ways. According to the Association for Contract & Commercial Management (IACCM), your company may lose 9% of annual revenue due to ineffective contract management practices

risks of poor contract management

Professionals keep procrastinating until seemingly minor pitfalls such as missing deadlines, disputes, legal challenges, increased costs, and decreased efficiency pile up into a substantial threat.

 

Five Contract Management Risks

Below we have broken down the risks of poor contract management and what areas they affect.

1. Data Security Risks

Excessive data access to unreliable employees may lead to the mishandling of sensitive information. For instance, some employees may leave the company with your trade secrets or leak sensitive customer data or future merger or acquisition plans to your competitors or other entities. 

Moreover, other cyber incidents such as phishing, accidental leaks, backdoors, or physical breaches may also cause significant damage to data security.

2. Missed Contract Renewals and Expirations

Overlooked licensing agreements may lead to various negative consequences, such as loss of contractual relationships, breach of contracts, financial losses, and reputation damage. Some licensing agreements allow you to avail an intellectual property for a certain period. 

If you keep using the product past its expiration, it may lead your business to liabilities. Similarly, if a contract allows auto-renewals, you might unknowingly keep paying for products you are no longer using. 

3. Non-compliance with Regulations

Non-compliance with regulations may result in costly lawsuits, termination or non-renewal of contracts, missed opportunities, and loss of licenses and permits. Despite employing considerable resources to prevent rogue spending, businesses often overlook the obligatory regulations. 

avoiding risks in contract management

For instance, BMW had to pay a fine of 10M Euros as they failed to meet the recall regulations and couldn’t notify the government regarding a product recall. 

4. Inefficient Approval Workflow

The risk associated with inefficient approval processes includes; loss of revenue, delays in contractual execution, and increased costs. An inefficient workflow causes delays and frustration, eventually resulting in deal cancellations. 

For example, if a contract manager fails to respond timely to a high-priority email, it may destroy time-critical deals. Even if there are no tight deadlines- slow approvals may still hinder the workflow, eventually causing business loss. 

5. Poor Reporting

Inadequate monitoring and reporting fail to provide critical information such as overall risk profile, problematic operations, upcoming revenue opportunities, etc. Hence, if your reports fail to provide all the data based on key performance indicators, they won’t be able to outline all the potential problems that may cause a disaster later on.

 

How to Rectify Contract Management Risks

By harnessing the power of the following practices, companies may efficiently diminish contract management security risks. 

 

Secure Sensitive Contract Information

Inside threats, such as excessive access to employees, can be eliminated through multi-layered access controls and data security training. However, to deal with external threats, you need to employ a combination of methods such as; data masking, encryption, and user behavior analytics. 

 

Monitor Expirations and Renewals

An automated contract management system sends notifications to the concerned staff regarding expiry dates and renewals. It saves employees time, and they have all-inclusive information at their disposal. 

 

Ensure Compliance with Regulations

You can bid farewell to all the messy paperwork and misplaced files with a dynamic repository. An agile contract management system allows you to set up approval workflows, conduct regular audits, and establish goals and metrics. All these tools empower businesses to manage contracts with ease. 

 

Streamline the Contract Approval Process

With contract management software tools, you can pick pre-set templates. Coupling them with automated workflows, e-signatures, and approval routing- you can create, sign and manage more approvals in less time. 

 

Track Contract Performance and Identify Risks

Real-time analytics and customizable reports enable you to improve reporting and monitoring. With tailored KPI-driven reports, you can map out the plan of action to deal with upcoming hazards beforehand.

 

How to Assess Contract Management Risks

Contract management risk assessment is an essential component of any contract management strategy. Below we have provided a checklist that will help you simplify things. 

  • Evaluate the scope and obligations of your projects to determine the strategies to manage them. You must recognize all the obligations and know if you have adequate capital and resources to manage them. 
  • Review the schedule of your deliverables and potential penalties in case you miss the deadline. Set automated alerts to notify your staff about critical dates and schedules. 
contract management risks assessment process
  • Evaluate the amendments made over time to minimize and halt new risks introduced throughout the process. 
  • Determine geo-specific obligations of your vendors and customers and report on your contacts by organization and location. Remember, different regions may have specific regulations you might be unaccustomed to. 
  • Analyze the financial terms, such as pricing, payment schedules, and other monetary aspects, to ensure that the conditions are fair to all stakeholders.
  • Evaluate compliance with regulations to ensure that all your contracts adhere to applicable industry and government directives. 

 

Why Conduct a Periodic Contract Management Risk Assessment?

Periodic contract management risk assessment safeguards your company from multiple legal, operational, and financial threats that keep emerging from time to time. You can schedule a risk assessment for your new or pre-existing contracts to avoid any potential harm. With precautions- you may halt many potential lawsuits, financial losses, and reputation damage. 

 

Final Thoughts

An ineffective contract management system can make your business go bankrupt in the blink of an eye. Ever-changing business dynamics demand state-of-the-art solutions. Hence your reliance on outdated processes and systems only weakens your contract lifecycle and eventually destroys your business. 

By maximizing the power of an all-inclusive contract management tool, you can efficiently identify, prevent and mitigate contract management risks. A contract management platform provides all the resources at your fingertips. Contract automation empowers you to manage tasks that used to consume your precious time and money dealing with audits, lawsuits, and unfruitful negotiations.

 

Author: Olga Mack

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