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The Ultimate Guide to Contract Risk Management

The Ultimate Guide to Contract Risk Management

Summize
November 22, 2021

This is the ultimate guide to contract risk management, where you’ll find out everything about:

• What contract risk management is and why it’s important

• How contract risk management is different from contract management

• The types of contract risk and the contract risk management process

• How legal tech can improve your existing contract risk management process

What is Contract Risk Management?

Contracts are at the heart of every business. They are the documents that define how your business will mitigate risk and increase growth. And in most cases, they are complex documents, full of legal jargon and potential risk. But the dynamics that govern their purpose are simple; one party wants the maximum revenue return and the other the smallest expense, and both want the minimum risk associated with the contract.

The purpose of contract risk management is to define the maximum value of the contract through compliance tracking by identifying, managing, and minimising the potential risks throughout the contract lifecycle.

Why is Contract Risk Management Important?

Every business will sign contracts. They are crucial assets for every business as they help to define and govern the rights and duties of any new relationship or agreement. As a company grows, so does the complexity of its processes and the number of contracts that need management.

However, contracts differ between companies and sectors, meaning that they can’t be treated in the same way. Managing contract risk throughout the lifecycle is a crucial part of the contract management process. By identifying and minimising risks, the process can help protect your business and helps to maximise returns.

The Difference Between Contract Management and Contract Risk Management

Contract risk management and contract management are similar but separate processes. Often, contract risk management will have a multitude of crossover tasks when compared to the contract management framework.

Contracts are agreements that bind two or more parties to a set of terms and conditions, and if any contract is going to be a success, it must be effectively managed from start to finish. Contracts, however, can be lengthy documents full of associated risk. And so, this is where contract risk management will feature.

Contract risk management is the process that allows businesses to realise the maximum value of their contracts, whilst continuously identifying, tracking, and minimising risk throughout the contract lifecycle.

Contract management is the process of managing the contracts from start to finish. The process involves the creation, analysis, and execution of contracts to ensure compliance, and the maximum operational and financial performance of the agreement.

Types of Contract Risks

As we go about our daily lives, we are willingly entering new agreements – these agreements occur when we pay for a bus ticket or our morning coffee. Although the duration of these non-written contracts is short, it’s an annoyance when the obligations are not met, and businesses are no different.

Risk is inherited in every contract, and in most cases, it can be avoided if managed and minimised effectively. When looking to manage the risk, it is crucial to understand the different types. To make this easier, we’ve broken down the four most common contractual risks that are associated with a standard contract.

• Financial risk

Associated with the loss of money, financial risks can be categorised into credit, liquidity, asset-backed, and equity risk. Financial risk can be caused as a direct result of a variety of factors, including a missed payment, contract termination, or a missed delivery date.

• Legal risk

A company may be presented with legal action if they are in breach of their contract terms, with the counterparty able to pursue legal action as a result. There are several distinct types of legal risks which include compliance, dispute, and regulatory risks. Legal risks could occur from a multitude of scenarios such as improper or unused confidentiality disclosures or missing contract obligations.

• Brand risk

Brand risk is associated with the public and customer opinion of your business as a direct result of financial, legal, and security issues. A brand must seek to mitigate brand risk as it can have a profound negative impact on the brand's reputation, which can result in financial losses.

• Security risk

Contracts often hold vast sums of classified and sensitive information about the involved parties, which makes security risks one of the most severe consequences that your business could face. Due to the sensitivity, security risks often comprise financial, legal, and brand risks in one.

The Contract Risk Management Process

Contracts act as your company’s first line of defence when any legal issues arise. They are the documents that define companies’ transactions. But whilst every contract comes with inherent risk, legal teams can mitigate this risk by using the terms and conditions and by implementing an effective contract risk management process. To make this easier, we’ve broken down the most common steps you may come across in a standard contract.

Negation

The negation stage is the most crucial stage for the contract risk management process as it’s

the pre-signature stage. This step allows the involved parties to agree on a set of legally binding terms before entering a new agreement. When two or more parties negotiate, both seek to obtain the best terms, whilst minimising the financial and legal risk.

Review

The review stage provides the parties with the opportunity to fully understand the terms and conditions, potential risks, key dates, and other crucial information they are agreeing to before anything is signed.

Auditing

The auditing stage is one of the most crucial for the successful delivery of the contract. This stage enforces the regular review of a contract to ensure that the terms are still relevant and provides an opportunity to spot any potential compliance obligations and risks.

How Does Legal Technology Help with Contract Risk Management?

Effective contract risk management will result in reduced financial and operational risk and increased profits for the business. Poor contract risk management, however, presents the business with increased costs and lost revenue, and the possibility of the counterparty taking legal action.

Legal software like Summize can change the way that legal teams interact with their contracts. By automating low-value work such as contract review and management, it allows legal teams to reduce their time spent on tedious contractual tasks, allowing for more time to be focused on higher-value activity.

By using Summize as part of your contract review and management process, legal teams can understand their contracts at a glance with instant summaries and automatic insights. With an interactive dashboard, Summize breaks down the key information from your contracts, making the process quicker and easier. Important dates are highlighted, areas of concern are instantly red-flagged, enriched summaries are created, and notifications are set for important dates.

And that’s Summize’s Ultimate Guide to Contract Risk Management!

Did you find it useful? Or perhaps there’s something we missed? Get in touch with us at [email protected] to let us know.

The Ultimate Guide to Contract Risk Management

By
Summize
November 22, 2021

This is the ultimate guide to contract risk management, where you’ll find out everything about:

• What contract risk management is and why it’s important

• How contract risk management is different from contract management

• The types of contract risk and the contract risk management process

• How legal tech can improve your existing contract risk management process

What is Contract Risk Management?

Contracts are at the heart of every business. They are the documents that define how your business will mitigate risk and increase growth. And in most cases, they are complex documents, full of legal jargon and potential risk. But the dynamics that govern their purpose are simple; one party wants the maximum revenue return and the other the smallest expense, and both want the minimum risk associated with the contract.

The purpose of contract risk management is to define the maximum value of the contract through compliance tracking by identifying, managing, and minimising the potential risks throughout the contract lifecycle.

Why is Contract Risk Management Important?

Every business will sign contracts. They are crucial assets for every business as they help to define and govern the rights and duties of any new relationship or agreement. As a company grows, so does the complexity of its processes and the number of contracts that need management.

However, contracts differ between companies and sectors, meaning that they can’t be treated in the same way. Managing contract risk throughout the lifecycle is a crucial part of the contract management process. By identifying and minimising risks, the process can help protect your business and helps to maximise returns.

The Difference Between Contract Management and Contract Risk Management

Contract risk management and contract management are similar but separate processes. Often, contract risk management will have a multitude of crossover tasks when compared to the contract management framework.

Contracts are agreements that bind two or more parties to a set of terms and conditions, and if any contract is going to be a success, it must be effectively managed from start to finish. Contracts, however, can be lengthy documents full of associated risk. And so, this is where contract risk management will feature.

Contract risk management is the process that allows businesses to realise the maximum value of their contracts, whilst continuously identifying, tracking, and minimising risk throughout the contract lifecycle.

Contract management is the process of managing the contracts from start to finish. The process involves the creation, analysis, and execution of contracts to ensure compliance, and the maximum operational and financial performance of the agreement.

Types of Contract Risks

As we go about our daily lives, we are willingly entering new agreements – these agreements occur when we pay for a bus ticket or our morning coffee. Although the duration of these non-written contracts is short, it’s an annoyance when the obligations are not met, and businesses are no different.

Risk is inherited in every contract, and in most cases, it can be avoided if managed and minimised effectively. When looking to manage the risk, it is crucial to understand the different types. To make this easier, we’ve broken down the four most common contractual risks that are associated with a standard contract.

• Financial risk

Associated with the loss of money, financial risks can be categorised into credit, liquidity, asset-backed, and equity risk. Financial risk can be caused as a direct result of a variety of factors, including a missed payment, contract termination, or a missed delivery date.

• Legal risk

A company may be presented with legal action if they are in breach of their contract terms, with the counterparty able to pursue legal action as a result. There are several distinct types of legal risks which include compliance, dispute, and regulatory risks. Legal risks could occur from a multitude of scenarios such as improper or unused confidentiality disclosures or missing contract obligations.

• Brand risk

Brand risk is associated with the public and customer opinion of your business as a direct result of financial, legal, and security issues. A brand must seek to mitigate brand risk as it can have a profound negative impact on the brand's reputation, which can result in financial losses.

• Security risk

Contracts often hold vast sums of classified and sensitive information about the involved parties, which makes security risks one of the most severe consequences that your business could face. Due to the sensitivity, security risks often comprise financial, legal, and brand risks in one.

The Contract Risk Management Process

Contracts act as your company’s first line of defence when any legal issues arise. They are the documents that define companies’ transactions. But whilst every contract comes with inherent risk, legal teams can mitigate this risk by using the terms and conditions and by implementing an effective contract risk management process. To make this easier, we’ve broken down the most common steps you may come across in a standard contract.

Negation

The negation stage is the most crucial stage for the contract risk management process as it’s

the pre-signature stage. This step allows the involved parties to agree on a set of legally binding terms before entering a new agreement. When two or more parties negotiate, both seek to obtain the best terms, whilst minimising the financial and legal risk.

Review

The review stage provides the parties with the opportunity to fully understand the terms and conditions, potential risks, key dates, and other crucial information they are agreeing to before anything is signed.

Auditing

The auditing stage is one of the most crucial for the successful delivery of the contract. This stage enforces the regular review of a contract to ensure that the terms are still relevant and provides an opportunity to spot any potential compliance obligations and risks.

How Does Legal Technology Help with Contract Risk Management?

Effective contract risk management will result in reduced financial and operational risk and increased profits for the business. Poor contract risk management, however, presents the business with increased costs and lost revenue, and the possibility of the counterparty taking legal action.

Legal software like Summize can change the way that legal teams interact with their contracts. By automating low-value work such as contract review and management, it allows legal teams to reduce their time spent on tedious contractual tasks, allowing for more time to be focused on higher-value activity.

By using Summize as part of your contract review and management process, legal teams can understand their contracts at a glance with instant summaries and automatic insights. With an interactive dashboard, Summize breaks down the key information from your contracts, making the process quicker and easier. Important dates are highlighted, areas of concern are instantly red-flagged, enriched summaries are created, and notifications are set for important dates.

And that’s Summize’s Ultimate Guide to Contract Risk Management!

Did you find it useful? Or perhaps there’s something we missed? Get in touch with us at [email protected] to let us know.

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