Contracts are central to any business transaction. A survey by PwC estimates that a typical Fortune 1000 company manages 20,000 to 40,000 contracts. An enterprise-wide contract management system becomes critical for companies to manage such high contract loads. It also offsets risks like having an unstructured data repository that is difficult to access, missing out on rebates and contract renewal deadlines, losing revenue, and not being able to track contract compliances.
Modern contract management solutions are designed to make risk management easier and effective and protect the commercial interests of companies.
Sources of Risk in Enterprise Contracts
Contracts can be a storehouse of several risks, especially in the case of oversights. Right from the contract origin to reviews to the signing stage, many risk zones can emerge and can continue to spill over. Some primary risk sources include:
- Contract Creation: Incorrect language, contract formatting, templates – that does not cover every risk probability for an organization – can lead to future financial and compliance risks.
- Term Risk: When a contract is authored offline, there are chances of missing out on important clauses. The risk of using unapproved terms being executed in a contract is a recipe for financial and reputational losses.
- De-centralized Repository: With an unstructured repository, companies cannot find, retrieve, analyze, and track their contracts in a quick time, thus posing contractual risks.
- Non-standard Contracts: With poor contract standards, companies cannot track the entire lifecycle, compliance requirements, rebates, and commitments. This impacts revenue and business relationships. Also, with poor templates, contracts cannot maintain standard terms and conditions while creating different versions.
- Non-governance: This can cause a loss of revenue and risks for companies due to missed deadlines and overlooked compliance clauses.
- Missed Milestones: Without a CLM, for instance, there is no instant access to records on whether a vendor has fulfilled all deliverables.
Types of Hidden Risks in Enterprise Contracts
A contract can encounter a range of risks during its operational life. Data breaches, compliance issues, and IT failures are some of the risks that contracts have been exposed to, causing a threat to the financial strength of a company. Here are the top five types of risks:
Third-Party Contract Risk: Risks involved in using third-party contracts include non-standard clauses and lack of a clause library to match with a third-party template.
Authoring Risk: Not having consistent or standardized terms while authoring a contract exposes it to risks and increases chances of non-compliance. With offline contract authoring, there is a chance of losing track due to frequent versioning.
Operational Risk: Risks arising out of human error, intentional frauds, or not having complete insight into the contracting process leads to operational risks. It is often caused due to a lack of monitoring of the terms and conditions of contracts. To offset operational risks, contracts should define the performance obligations for both parties. For example, contract terminations, contract renewals, and milestones. Also, the insufficient velocity of contract negotiation, creation, and approval slows contract turnaround time and translates into lost revenue.
Financial Risk: Negotiating a contract without end-to-end access and visibility into the entire contracting process can put an organization at financial risk or result in signing a contract with unfavorable terms. Also, revenue leakage, caused due to unauthorized discounts or overpayments, can occur. This is a major risk as it directly hits the company’s bottom lines.
Compliance Risk: There are various stages in a contract lifecycle, and each can pose risks: be it regulatory compliance, commercial compliance, or clause compliance. While authoring, there is a risk of clause compliance. While negotiating, poor contract visibility leads to risks related to negotiating terms and pricing. Regulatory compliances are usually included in contract documents, which expose companies to risks of compliance failure when managed traditionally. Non-compliance costs companies more than 2X that of meeting contract compliance requirements.
Zycus Contract Management to Improve Processes and Mitigate Risks
Zycus Contract Lifecycle Management has been helping companies identify and manage risks by providing 360-degree visibility into contracts and keeping track of compliance clauses in real-time. Let’s look at how Zycus achieves contract compliance with Artificial Intelligence. Some of the ways Zycus AI-driven personas take over your contracts so your risk and legal teams can rest assured:
Simplifies Regulatory Compliance: Zycus’s AI-powered Merlin helps companies address compliance complexities:
- Ensures all mandatory and new regulatory compliances are covered.
- Identifies compliance gaps, modifies existing contracts, and updates stakeholders.
- Streamlines clause-level tracking for environmental, state, federal, and international regulations.
Ensures Clause Compliance: Zycus’s predictive AI capabilities packed in Merlin Protector adds accuracy to clause usage:
- Identifies clause deviation from defined standards.
- Adds important clauses and updates stakeholder if a clause is missing.
- Suggests context-based clause additions.
Safeguards Against Operational Compliance: The Explorer and Protector personas of Zycus AI is a powerful combination that:
- Tracks if each party is meeting its contractual obligation, identifies potential issues and opportunities to mitigate them.
- Links smart clauses with external triggers to give complete control over compliance changes. This prevents organizations from operational contingencies and ensures maximum compliance.
- Post the sign-off stage, it ensures maximum value return through compliance.
Monitors Commercial Compliance Risks: Financial performance is the most important aspect of any contract, and Zycus AI ensures timely remediation of any commercial risks:
- Analyzes risks associated with financial factors like payments, currency exchange rates, and price variations.
- Enables real-time monitoring of on-going commercials through milestones tracking.
- Ensure better returns, with its timely remedial actions.
As organizations grow, so do their contracts. This makes it critical for them to move to advanced contract lifecycle management to manage contracts, minimize risks, and avoid compliance oversights.