Contract management is a critical business function, yet it often doesn't get the attention it deserves. When not handled with care, contracts can introduce legal, financial, and operational risks, potentially disrupting business growth. These risks, though common, are avoidable with the right strategies.
This blog explores seven common contract management risks and provides actionable strategies to mitigate them.
One of the most prevalent issues in contract management is the absence of a centralized repository. Contracts stored across emails, shared drives, and even physical filing cabinets lead to inefficiencies and missed deadlines. Inconsistent access means team members may be working with outdated versions or missing key clauses entirely.
Invest in a cloud-based Contract Lifecycle Management (CLM) system that centralizes all your contracts. With a centralized platform, contracts are accessible to authorized personnel, ensuring real-time updates and easy collaboration. Systems like these also allow for setting up automated alerts for key deadlines, reducing the risk of missed renewals.
Missed renewal or termination deadlines can automatically roll over contracts, often to the detriment of the organization. These mistakes can lead to unintentional commitments, financial losses, or weakened negotiating positions.
Use automated reminder systems for critical dates such as renewals, reviews, and terminations. Calendar integrations, deadline trackers, and CLM software with in-built alerts can ensure no date goes unnoticed. By actively monitoring these milestones, you can prepare in advance and avoid being caught off guard.
Legal regulations vary across industries and geographies, and failure to comply with these requirements can result in penalties, lawsuits, and reputational damage. Keeping track of changing laws and regulations adds another layer of complexity.
Ensure your contracts undergo legal review and regular audits to check for compliance with industry standards and regulatory changes. Stay updated with local laws through legal teams or third-party compliance tools that offer real-time alerts on any changes in the regulatory landscape.
Inconsistent or vague contract language often leads to disputes, misunderstandings, or contract terminations. Poorly drafted contracts increase the risk of legal liabilities and reduce operational efficiency as more time is spent negotiating and clarifying terms.
Establish a library of standard clauses and templates that can be customized based on the contract type or business need. Standardizing contract creation reduces room for error and ensures consistency. Involving legal teams to review these templates periodically will further minimize the risk of ambiguity and liability.
Also read: Red Flag Clauses: What Legal Counsel Needs to Look for in Contracts?
Without proper version control and audit trails, tracking changes made to contracts can become a nightmare. Multiple versions of the same contract circulating within the team can lead to confusion and unintentional acceptance of unfavourable terms.
Implement a CLM system that includes version control and audit trails, ensuring that every change made is logged, time-stamped, and traceable. Having an audit trail not only keeps track of revisions but also provides transparency and accountability within the contract negotiation process.
Contracts involve multiple departments—legal, procurement, finance, and operations. Poor communication or collaboration between these departments can lead to misunderstandings, delays, and even contract breaches.
Encourage cross-departmental collaboration through integrated contract management systems that allow stakeholders to provide input and feedback in real-time. These platforms enable simultaneous contract reviews, making it easier for everyone to stay on the same page. Regular meetings and clear lines of communication should also be established to avoid silos and breakdowns in communication.
Contracts inherently carry risks, from financial penalties to service failures. Failing to identify and assess these risks beforehand can lead to costly mistakes and unforeseen liabilities.
Before entering into any contract, conduct a thorough risk assessment that evaluates potential financial, legal, and operational risks. Make sure to include protective clauses like force majeure, limitation of liability, and indemnification. A proactive approach to risk management not only safeguards your organization but also strengthens your negotiating position.
Also read: Risk Mitigation in Contracts With AI
While contract management risks are inevitable, they are manageable with the right processes and tools. A centralized contract management system, standardized templates, and proactive tracking of milestones and compliance can significantly reduce your organization's exposure to risk. By adopting these strategies, businesses can enhance operational efficiency, minimize liabilities, and improve overall contract performance.
The ROI of proper contract management is clear: organizations with mature contract management practices see 40% fewer compliance issues and realize cost savings of up to 15% of their annual contract value. (Source: Internal)
As the saying goes, "An ounce of prevention is worth a pound of cure"—and that couldn't be truer for contract management.
