What You Need to Know About Contract Risk: Part 2

Contract Risk Management

As well as direct risk occurring within contracts, indirect risk can also occur. This can be somewhat mitigated by implementing the right kind of contract management ecosystem. This lowers risks associated with policies, practices, processes, people, and technology. So how is indirect risk visible within contracts? It usually shows as the absence of something essential or inadequate elements. Here is an overview of critical areas that are most susceptible to indirect risk.


Contract Management and Organisational Support

When it comes to the creation, implementation, management, termination, and renewal of contracts, many different parts of an organization are usually involved. They may contribute centrally—I.e., different parts of the organization feed into the agreement. Or, are distributed across it and look after their own interests. Bringing in new business is always important, depending on the type of organization, growth rate, and age. This might be the focus, rather than merely managing what is already there. With a new organization or one that lacks maturity, risk often follows.


Contract Management and Lack of Awareness

A contract is not dissimilar to a form of transport. If it is not routinely checked or maintained, it will not operate correctly. In some businesses, a dedicated contract team might exist. For others, the task might be managed by legal or procurement teams. The latter could be because there is simply no need to have a dedicated team for this purpose or that the organization cannot see the benefits or purpose of having such a team. With this comes a problem, in that risk dramatically increases with a lack of awareness.


Contract Management Policies

Awareness and action are not the same things. Company activities require their needs backed by several different things. Policies should exist that explain both the ownership and purpose of activities, and strategies should exist that need to be followed closely. Documentation should exist that describes how to complete different activities correctly, while all actions should be categorized as being either optional or mandatory. Performance measuring criteria are useful, particularly for underperformance, and the appropriate consequences can be provided and issued. Compliance should exist for everything, including all policies set out. All of this is relevant to contract management but is equally valid for risk mitigation, such as separating duties for procurement purposes. The performance of all activities, regardless of whether full or part-time, should be covered by policies. This ensures that organizational requirements always remain more important than business departments or units’ desires and needs. After all, risk affects an entire organization, not just its separate parts.


Effects of Poor Resourcing on Contract Management

For a business function to deliver the right outcomes, it is essential for proper resourcing to be in place. This can include things such as ensuring the right level of funding, staff, training, buildings, and technology, amongst other things. If a business cannot operate properly, this will have consequences. Staff will be unable to function at their best, and instead, simply be ignored. Other consequences include being ridiculed or working against or around others, which isn’t healthy in business. Equally, a contract management function that isn’t adequately resourced will suffer. For example, processes may become unsustainable, or staff may overly focus on contracts with the highest risk, maybe even adopting the attitude ‘something is better than nothing.’ The result? Morale becomes eroded, and staff may wish to leave, resulting in high turnover. Paying lip service to good contract management only heightens risk, rather than actually eliminating it.


Why a Contract Management Ecosystem is Important

Everything vital to a contract always has to be present and available. All procedures must be followed closely, documentation must be updated appropriately, and if possible, a road test should be conducted to ensure everything works the way it should do.

Not having the right contract management ecosystem in place can be a source of risk. Suppose activities are too inconsistent, informal, or simply lack the right level of documentation. In that case, staff will simply do what they think needs doing, rather than follow a tried and trusted process.

Technology is essential for contract management. Without using it, important deadlines can be surpassed, undesirable contracts can auto-renew, and desirable contracts can terminate or revert to default conditions. In other words, without using automated software, staff can quickly fail to do what is required.

If a contract lacks ownership, then problems can quickly occur with potentially terrible consequences. Or, if the person dealing with the contracts lacks the right expertise, other issues can happen.

Oppositely, with the right people, technology, and training, a robust contract management ecosystem can be designed and implemented. This way, the identification of contract risk becomes more straightforward and better managed.


The Most Important Things to Remember About Contract Risk

  1. Contracts need to be designed in the right way to minimize, prevent, or eliminate any type of risk.
  2. Manually checking contracts for risks can be much work, demanding great effort from legal teams and contract specialists.
  3. If legal staff aren’t available to check a contract, someone with the right attributes should complete the job. Particularly, someone with a good grasp of English, a strong memory, and tenacity, amongst other things.
  4. When contracts are viewed, they should be seen from the provider’s viewpoint. This provides insight as to where risks exist.
  5. Someone new to contract review would benefit from being mentored by someone more experienced.