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Tips for Managing Contract Risk in a CLM System

Corridor Company contract risk

Creating and managing contracts is the key to business success but is rarely anyone's favorite part of the business process. You may well dread contract development because of the complex negotiations required but also because of the risks these vital documents can contain.

Human error may lead to the most common contract mistakes. You may underestimate your business costs, forget to include vital protections and inadvertently let contracts expire or automatically renew. Many of these common risks can be limited or eliminated by the use of quality contract management software that works to fortify your contract lifecycle management. In fact, your company will find it harder to effectively compete without using the CLM software.

Internal Communication Problems
In some companies, you may have two separate departments negotiating with (or buying from) the same supplier. Consider this disturbing scenario: These two departments operate independently, and no central department at the firm catches the redundant effort. As a result, they may be negotiating different terms with the same company instead of using their combined purchasing power to negotiate a better contract.

With contract management software, all company departments can be in the loop when it comes to supplier contracts, which means they can work together. You and other authorized staff members can access all current contracts as well as those in progress. This software prevents your company's departments from working at cross-purposes.

Missing Milestones
Companies often concentrate their efforts on negotiating contracts but forget to properly manage them. Once the deal is done, you may simply file it and forget it. Studies have shown that a majority of supply contracts, approximately 60%, automatically renew because buyers neglect to cancel them, even if they've found the contract to be less than optimal. If you cancel after the renewal date, chances are you will pay penalties as a result.

You may have hundreds of current contracts, and many may automatically renew unless you consistently track them. Contract management software can do this automatically. CLM systems will alert you to upcoming renewal dates and other milestones that require your attention. This software means you will not be stuck with sub-optimal contract terms any longer than necessary.

Inefficient Contract Storage
Companies that have not embraced contract management software are often caught somewhere between print copies and emailed documents. The former can end up filed in cabinets, never to be looked at again until disaster strikes. The latter can produce a messy “old mail” storage system that requires frustrating search of your email server when issues arise. Neither of these systems gives your contracts the security that they need. You should be able to immediately call up the latest version of any contract your company is party to. Contract management software provides this capability, which means you have the documentation to back up any of your assertions in seconds. Also, you save an enormous amount of time when you eliminate these inefficient contract searches.

Failure to Meet Reporting Standards
Failure to meet compliance requirements is certainly a big risk in contract management. In fact, regular reporting on compliance is often a contractual obligation – one that is often forgotten. This is especially true for ongoing compliance with staffing, health and safety, environmental, and financial rules. Each industry also has its share of local, state, and federal regulations to meet. Otherwise, the company risks huge fines and often the loss of investor confidence.

The right contract management software helps make certain that your contract compliance meets the letter of the law. Contractual obligations are easy for authorized employees to access, and your contract managers can easily set up reporting tasks that recur regularly. This helps managers keep the organization in compliance with the contract and the relevant regulations. Every authorized employee is fully informed.

Human Error
Even contract experts make mistakes. Business users may forget to include language that protects your company's business. They may send a contract with incorrect pricing or warranty information. One department may have information that another does not. When you invest in contract management software, you can have a dozen eyes on each draft so that nothing gets into the contract that is detrimental to your company. This type of quality assurance allows members of your staff to safely contribute to the contract without sidestepping the safeguards your legal team has put in place. Rookie mistakes will not creep into the final draft. Also, these programs eliminate the danger of lost documents. The process becomes far more transparent and safer for your company.

While you may never create the perfect contract, you can create superior contracts that offer you and your business partners mutual profitability with minimal risk. In a CLM system, you benefit by keeping control of the entire process from contract formulation to expiration. The only efficient way to manage this contract lifecycle is by using the latest technology, which includes contract management software. You can then minimize risk by making all documents easy to access, revise and review. Storage is simple and information easy to pull up at a moment's notice. Mistakes due to human error are reduced and compliance is made easy. Your team members receive reminders of important contract milestones and pending auto-renewals. If you want your company to stay competitive, give some consideration to the latest software offerings.