When it comes to Contract Lifecycle Management, risk mitigation is always one of the most significant overall objectives. While the purpose of the agreement itself is to define a commercial relationship and set out the respective responsibilities and obligations of all parties, much of the content of the legally binding document will be designed to reduce the risk of dispute, delays, litigation, and elevated costs. The reason for this is clear – risk incurred through contracting is highly detrimental to businesses of all types, both in short-term legal costs, and the longer term cost of reputational damage. Though contracts are essential, they are fraught with legal hazards.
This being the case, it is vital to have an effective risk mitigation strategy with regards to commercial contracts, and the very best opportunity to take a pro-active, preventative stance on such hazards is in the earliest stages of the Contract Lifecycle Management process. This means the pre-negotiation and negotiation phases.
The early steps
The most effective and important risk mitigation is completed far in advance of contract activation, and well ahead of the point at which the language of specific clauses is hammered out to the satisfaction of all parties. It takes the form of planning and preparation. There are seven crucial early steps that should be taken.
- Understand the need for the contract - It sounds very basic, but do you really understand the need for the contract in a way that goes beyond the fact that you require a particular service, or that a particular service is required of your business? In the planning and
- preparation stage, before detailed conversations are even had with the other party, it is vital to drill down and identify the facts behind the need for the contract.
- What is needed from the relationship that this contract will establish?
- What impact will that relationship have on your business?
- What is the likelihood of action being required of any department in your business as a result of this relationship being established?
- Is your business prepared and equipped to take that action, in order to properly maintain the relationship, and meet all the requirements and obligations of this contract?
- Understand the risk landscape - The risk landscape in which all contracting parties – including your business – operates is constantly shifting, influenced by market fluctuation, economic volatility, and political machinations across international territories. Risk can take any form, at any level; from public health issues and cyber threats, to seasonal change and regulation overhauls. It is vital, in the contract preparation and planning stage, to complete comprehensive risk assessments for the entire known period of the contract, not just the point at which the contract is activated. For example, a contract signed in 2019 would need to consider the current risk landscape, as well as the likely impact of Brexit. Likewise, a contract signed in 2020, or 2021, will not only need to consider the risks posed by the Coronavirus pandemic, but also the impacts of the transition from LIBOR to SOFR.
- Undertake accurate and thorough third party due diligence -
- The third party with which you are about to enter negotiations may be both the most qualified, and the best choice made after putting a requirement out to tender, but it is essential to develop a thorough understanding of their risk profile, and the way in which it intersects and impacts the risk profile of your business. This third party due diligence is central to your early stage risk mitigation strategies, and must go well beyond simply having an understanding of the business operations of the other party. This preparation should include, as a minimum:
- Comprehensive background checks of businesses and individuals in terms of security, assets, Politically Exposed Persons, Ultimate Beneficial Owners, compliance histories, and past and current associations
- Examination of cyber security measures
- Assessment of territory-based legislation and regulatory requirements
Once this information is gathered it must be analysed in relation to both your own day-to-day operation and the context of the proposed contract. The findings of this analysis should then be used to inform decision-making going forward – around the advisability of proceeding with the contract, the negotiation process, and consequential actions needed within your own business to further mitigate risk.
- Analyse past data - To make fully informed decisions about contract negotiations and the future of the new contractual relationship, you first need to analyse past data. This should include:
- Any data around past contractual dealings with the other party
- Data that details the performance of similar contracts – whether those contracts are active or inactive.
In analysing the data that specifically concerns the performance of similar contracts, it is possible to identify risks and levels of risk that have not previously been identified through any of the other preparation and planning processes. These may involve otherwise unforeseen risks that are triggered by circumstances or conditions that are not immediately apparent.
- Understand past mistakes - While the analysis and review of data is essential in these early stages of planning and preparation, it is again vital to go beyond the initial information; to drill down for more comprehensive perspectives. A fundamental part of this process is to fully develop an understanding of past mistakes made by your business operation with regard to the establishment of contracts, and also in your own Contract Lifecycle Management procedures. Mistakes identified should be taken as ‘teachable moments’ that inform a more pro-active approach going forward. By effectively performing a thorough and objective post-mortem on past performance issues and negotiation mis-steps, it is possible to accumulate a bank of learning that is invaluable to both risk mitigation policies, and future commercial success.
- Establish ‘red lines’ - Having undertaken all necessary reviews, analysis, and due diligence, it is time to structure the approach you intend to take in the negotiation phase of this contract lifecycle. This involves the agreement and establishment of your ‘red lines,’ internally, within your business. Your ‘red lines’ pertain to the risk tolerance of your business. The objective of contract negotiations is to reach an agreement, which inevitably means compromise on the part of both parties. It is therefore essential to have already determined how far you are willing to move, in terms of compromise, in order to avoid being legally bound to a contract that exposes your business to levels of risk that are considered excessive by management and stakeholders.In terms of the proposed contract in question, your ‘red lines’ will determined by all of the data you have reviewed and analysed as part of this planning and preparation stage, along with all of the third party due diligence you have completed. Having these ‘red lines’ clearly set out for the contract negotiation team, and communicated to all involved with absolute clarity, means that your commercial interests are protected during the negotiation phase.
- Identify contract templates - Once the data and decision-making aspects of planning and preparation are completed, a much clearer view of the objectives, preferred structure, and boundaries of the proposed contract can be held. At this point, you can use all of this information to identify the most appropriate contract template – ensuring that the correct pre-approved clauses and language are included, with decisions already made as to the potential for flexibility within that template. This document is then the starting point for the commencement of the formal contract negotiation phase.
These seven crucial steps of planning and preparation are the key to heading into the formal negotiation phase with your own position clearly defined, and the parameters of potential flexibility thoroughly mapped out.
Act early with Contract Management Software to mitigate risk
The full completion of this early work serves to ensure that there are as few surprises as possible in the stages of Contract Lifecycle Management that follow. While risk cannot be entirely eliminated, it is possible to minimise it to the extent that your business is better able to manage any issues that do arise during negotiation, and throughout the contract lifecycle.
Contract Management Software packages, such as Symfact, are designed to enable businesses to undertake and complete all stages of Contract Lifecycle Management, including those vital early stages of preparation and planning. The platform-based design enables permission-based access from any internet-connected location. Combined with a centralised contract repository and customised reporting features, this means that authorised personnel can conduct all necessary data analysis and review from any web-enabled device, even while working remotely. These crucial risk mitigation and due diligence processes can therefore continue, even if other aspects of business operation are temporarily disrupted. Once the initial data analysis tasks are complete and decisions have been made, the centralised repository design of Contract Management Software supports a library of contract templates, including the clauses and language drafted and pre-approved by your own business.
This range of features means that Contract Management Software provides an end-to-end Contract Lifecycle Management solution, beginning with the most important element – the crucial early steps for effective risk mitigation. Contact Symfact today to arrange your software demonstration.