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

• What contract risk management 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 a minor expense, and both want the minimum risk associated with the contract.

The purpose of contract risk management is to define the contract's maximum value 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 and they are crucial assets for every business. Contracts 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 crucial for the contract management process. By identifying and minimising risks, the process can help protect your business and 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 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 while continuously identifying, tracking, and minimising risk throughout the contract lifecycle.

Contract management is the process of managing contracts from start to finish. The process involves creating, analysing and executing contracts to ensure compliance and the agreement's maximum operational and financial performance.

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 in every contract. When managing risk, it is crucial to understand the different types. We’ve broken down the four most common contractual risks in a standard contract to make this easier to understand.

• Financial risk

Financial risks can be credit, liquidity, asset-backed, and equity risks. Financial risk can occur from various factors, including a missed payment, contract termination, or a missed delivery date.

• Legal risk

A company may have to face legal action if they breach 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 many scenarios such as improper or unused confidentiality disclosures or missing contract obligations.

• Brand risk

Brand risk is associated with your business' public and customer opinion 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 its reputation, resulting in financial losses.

• Security risk

Contracts often hold vast sums of classified and sensitive information about the involved parties, making security risks one of the most severe consequences 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 while every agreement comes with inherent risk, legal teams can mitigate this risk by using the terms and conditions and 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 while 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 agree 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.

The Benefits of Contract Risk Management

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

Legal software like Summize can change how legal teams interact with their contracts. Automating low-value work such as contract review and management, 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 intuitive insights.

Summize breaks down the critical information from your contracts with an interactive dashboard, making the process quicker and easier. Summize also highlights essential dates, areas of concern red-flagged, and summaries waiting for review. You will receive a notification near each important date in a contract when working with Summize.

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

About the author

Summize

Summize makes contract review, creation, and management easy for legal teams, wherever they work. Made up of tech experts and legal professionals, Summize is here to provide you with the best and most up to date information.
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