Risk management in contracts

WHY YOUR CONTRACTS NEED YOUR ATTENTION

The contracts dictate how we do business. They define our relationship with our customers, vendors and all other partners. They outline the terms and conditions – price, service levels, performance parameters, and the business and regulatory obligations.

The contracts are the blueprint for the business transactions and they are generally complex in nature. The changing market dynamics, globalization, new regulations, cost pressures, the need to maximize financial performance, and many such factors have further increased the volume and the complexities of the contracts. Unless we diligently control the contract generation, and regularly monitor and manage the performance of the contracts, the contracts expose us to legal, financial, statutory, and reputational risks.

A number of market studies show that most businesses don’t focus on managing their contracts well. They manage their contracts manually using spreadsheets, file cabinets, shared drives, or a document management system. Their legal teams depend on Email and MS offices for drafting, reviewing, and negotiations the contracts. And businesses fail to see the inherent flaws of this approach. It not only increases the business risks but also poses the following challenges:

  • Ad-hoc and Inconsistent Contract Processes:
  • The way contracts are managed, doesn’t allow businesses to have a formalized and standard process for the generation and execution of the contracts. Even if the business has documented and formalized the process, there is no easy way to ensure compliance to the process. This leads to weak accountability towards the business commitments.
  • Delayed and expensive Processes:
  • The legal teams have Emails and MS office as the only technologies available for drafting, review, negotiations, and approvals. Each of these activities are performed and tracked manually. While this makes the contracting more expensive, it also doesn’t allow legal team to meet the business expectations of speedy execution of contracts.
  • Lack of Compliance Management:
  • For efficient compliance management, the business requires an easy access to the contract terms and a periodic review of the transactions against the terms and obligations of the contracts. The current process of managing the contracts not only makes it difficult to have an easy and always-on access to the contracts, it almost makes it impossible to monitor the business performance against the terms and obligations of the contracts. This may lead to revenue leakage, missed opportunities, and obligation non-compliance.
  • Higher Risk Exposure:
  • With the weak accountability of the highly manual processes and a lack of proactive performance monitoring, businesses have almost zero visibility into their risk exposure. They also fail to proactively manage these risks and put the right mitigation plans in place. This may lead to greater financial, reputational, legal, and other losses in future for the business. To deal with these challenges, a paradigm shift is required. The business needs to understand the importance and complexities of the contracts. The contracts must not be considered just as the documents for the legal audit purposes. They must become the roadmap and the blueprint for the business transactions. And to achieve this we must leverage the technology to generate, monitor, and manage contracts. The contract lifecycle management processes and Solution – that streamlines and automates the contract request, drafting, negotiation, approval, execution, storage, management, compliance, and analysis of contracts must be implemented.

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