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Contract risk management rolls allow you to evaluate the risk contained within a contract and take conscious steps to mitigate it.
Managing contract risk should be a top priority for your organization, not just the in-house legal team or contract manager.
Contract risk management ensures that your contracts provide certainty, hold parties accountable, and offer legal protection to all your agreements, without becoming a risk to the business itself!
However, to effectively manage contract risk, you need to be able to identify it. The most efficient way to do this is through contract lifecycle management (CLM) software, enabling you to optimize your processes.
These tools help to streamline your contract processes and maximize business efficiency by enabling you to create, store, and analyze your contracts in one place. But before we dive into common contract risks and how contract risk management software like Juro can help you manage this, let’s look at what exactly contract risk is.
What is contract risk?
In the broadest sense, contract risk describes instances where businesses become legally or financially vulnerable due to the contents or handling of a contract.
This definition is extremely broad, as contract risk can manifest itself in a number of different ways. These can be split into four main categories of risk:
- Financial risk. This is when a contract is susceptible to financial risk or harm beyond your accepted level of risk appetite.
- Legal risk. This is when a contract fails to comply with legal requirements or is broken in some way. Often, this type of risk results in legal action or the threat of it.
- Reputational risk. This occurs when a contract portrays a company badly or discusses it in a bad light. This usually occurs due to controversial or unreasonable terms in a contract.
- Security risk. This describes the failure to secure contracts and the data within them from one party. This is a significant contract risk, but it can be mitigated with the right contract management strategy.
While it isn’t possible to eliminate every single risk associated with contracts, contract risk management tools can help you minimize and mitigate many of the associated risks.
Common risks in contracts
There are a huge number of risks that come with contracting, especially when you’re still using manual processes to do so. If you lack the right tools or risk management software to minimize risk, you’ll have to face several challenges that could stand in the way of accelerating growth.
We’ve listed just a few of the most common contract risks below.
Lack of contract visibility
Contract visibility describes how effectively you can find, view, track, and extract the most important information from your contracts. This is important as not knowing what your contracts contain or where they are is a significant risk.
Lack of contract visibility can lead to lapsed deadlines, falling behind on contract milestones, failure to meet contractual obligations, or, in the worst case, lawsuits.
This is often a common problem, as businesses have yet to digitize their contracts and store them in a searchable way. Have you ever tried to sort through 1000+ files in a filing cabinet or worse… find a USB converter in 2024?!
By automating this process and storing contracts digitally you can put your contract metadata to work. Depending on what data you capture, contract metadata can be anything from who created the contract to who the named parties are, and when the commencement date is.
This data can uncover important information like deadlines or IP clauses that could expose your organization to unwanted risk. For example, in Juro, you can use these smartfields to activate date reminders. This can be done simply by clicking on the date and from there choosing when you'd like a reminder to be sent.
Contract risk management allows you to identify potential risks in just a few clicks, giving you greater control over your contracts.
Lack of standardization
Standardizing contracts can help teams scale their legal departments and reduce time to sign.
In-house counsel can create templates for frequently used contracts to ensure that they're all worded consistently and clearly. For example, the below contracts could be standardized:
- Master Service Agreements (MSAs). These outline the terms that govern the commercial relationship between a business and its client. Standardized MSAs can ensure that contract creators, like salespeople for example, don’t send out contracts with unapproved terms.
- Vendor agreements. These set out the terms and conditions of a purchase, which are often distributed at scale. This type of contract needs to be consistent otherwise the challenges that emerge can compound.
- Software as a Service (SaaS) agreements. SaaS agreements can be incredibly complex, with clauses from liability caps to data use provisions and indemnities. Too much customization can lead to too much risk, so it’s advisable to create a robust standardized agreement.
A platform like Juro enables you to have risk mitigation as part of your contract workflow, especially when it comes to standardizing contracts. Using Juro, you can create automated templates and enable your team to self-serve.
This means that everybody is effectively singing from the same hymn sheet and using the same standard template for ‘simple’ contracts. Without this automation, for example, you might have to send a template by email, conduct specialist training sessions, and dive into the existing templates being used for these contracts across the business. All of this work can be avoided using an automated template process.
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