Identify & Reduce Contract Risks – Increase Contract Effectiveness

Your company may be at risk of significant financial loss and legal problems due to insufficient attention to contract management. Contracts are often involved when your company/organization purchases or sells goods and services, or enters into relationships with companies or individuals for a wide range of purposes. Most organizations can benefit from implementing better, consistent organization-wide practices and procedures for drafting, negotiating, signing, fulfilling and storing contracts. If you are not confident that your organization has a well designed and functioning contract management process, you can assess the effectiveness of your contract management processes and practices and identify ways to reduce risks by conducting a Contract Risk Survey.

Contract-Risk surveys gather information about practices and procedures for drafting, negotiating, signing, fulfilling and storing contracts across organizations. The objective is to use the information gathered by the survey to develop better consistency across the organization to maximize the efficiency of contracting practices and processes and minimize risks associated with any inadequate contracting controls.

The questions in Contract-Risk Assessment surveys are designed to gather information for analyzing how organizations manage contracts. The insight and information managers and other employees involved in the contract process provide is essential for filling in significant knowledge gaps and for calibrating contracting practices across business areas in order to develop successful and scalable company-wide practices.

Identifying Contract Risks

Contract Risk Surveys identify enterprise-wide and organizational unit specific contract-related risks. Some of the contract risks identified by the surveys include:

1. Risk to the organization’s assets, intellectual property, reputation, etc. due to poorly written/executed contracts

2. Risk of unauthorized employees signing contracts committing the organization financially and legally

3. Risk of contract non-compliance by suppliers and other entities

4. Risk of not monitoring/following up on terms and requirements

5. Risk of creating and signing contracts that are unfavorable to your organization

6. Risk of creating and/or signing contracts without advice/review by legal counsel

7. Risk of misplacing original signed contracts

8. Risk of having inefficient and inconsistent contract practices and procedures across the organization

9. Risk of not keeping contracts and terms confidential

Some of the many issues included in Contract Risk Assessment Surveys

1. Identification of current contract practices

2. Awareness of/compliance with contract practices and signing authority

3. Value of contracts by business units

4. Use of third party vs. in-house contracts and terms

5. Use of templates

6. In-house, external or no legal support for drafting and review of contracts

7. Practices for storing and preserving paper and electronic copies of contracts

Benefits of Contract Surveys

Contract-Risk Surveys provide several benefits that mitigate risks and increase performance across organizations:

1. Improve contract tracking and contract compliance resulting in reduced contract creation and contract management costs

2. Ensure suppliers and other outside parties are complying with your organization’s contracts

3. Provide legal staff with information for enhancing their support of the contract process

4. Avoid costly compliance litigation

5. Determine how well contract-relted practices and processes have been communicated and are being followed across the organization

6. Use the survey findings for risk mitigation and to design and implement a consistent, enhanced contract management process and practices

7. Reduce the risk of unauthorized creation and signing of contracts

8. Provide managers with useful information about how well they are creating and managing contracts

9. Ensure that paper and electronic contracts are stored securely

Conclusion

If your company/organization does not have a consistent process and practices in place for managing all of your contracts, or if any of the contract management issues mentioned in this article describe possible shortfalls in your contract management practices, conducting a cost-effective survey within your organization is a highly effective way to identify contract related risks. This is a key first step in managing contracts more effectively and reducing risks.