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Zycus recognized as a ‘Strong Performer’ in The Forrester Wave™: Contract Lifecycle Management, Q2 2023  Read More

Mitigate contract risks lurking from Pre-award contract stages

Introduction

Contracts are a critical part of any organization’s business strategy and operations. However, they can also be the source of huge liability if not drafted properly with all the risks in consideration. Pre-award phase is critical from compliance and risk management standpoints. Risk evaluation at this phase of contracting must center around financial, operational, transactional, and regulatory aspects

Do you know what’s in your contract?

One of the biggest risks you face when entering a contract is not knowing what’s in it. It’s very easy to think that your lawyer has read all the fine print, but they may not have—and they may not have read it with an eye on how it affects you as an employee or customer.

When authoring contracts, legal is often exposed to the risks of making assumptions about business practices and trends that are outdated by the time they’re finished negotiating with clients. For example: “We’ll never need more than two people working on our project,” or “We’ll always want to use open-source software.” These assumptions can lead them down blind alleys where there are risks associated with them (like paying for something twice).

Several risks associated with the pre-award contract phases can be liability risks or business risks. Lets’ have a look at some of the most critical ones at various pre-award contract stages:

Contract risks and its mitigation during the authoring, review, negotiation, and execution phases:

The goal of contract risk management during pre-award phases your enterprise contracts is to identify, assess, prioritize and mitigate contract risks before they occur.

  • Financial, operational, and reputational risk by deviation from standard Clause and Template Libraries

Compliance to organizational objectives can be clearly gauged by checking the percentage deviation from standard legal clauses, incorrect language, missing out of important clauses—especially on the policy front. Using these deviations as a metric is useful to prevent value leakages in contracts.

Using unapproved clause and template libraries during contract drafting is the first step towards creating maximum deviation from standard clauses thereby reporting and computing contract risk score for every draft or template. Lack of attention at this stage can result in contracts with detrimental non-standard clauses which introduce financial and compliance risks. The risk of unapproved terms being executed in a contract is a recipe for financial and reputational losses. Measuring deviations at the onset itself is a helpful preventive step.

  • Inaccurate manual metadata extraction from the third-party or scanned legacy contracts.

In matters of mergers and acquisition, or using third party contract for closing a deal, manually extracting or transferring the legacy or third party papers into standard approved templates can be an exhaustive risk inclusion process. Risks can be – mismatched terms, incorrect language, expiry or renewal dates and more.

By suggesting alternative, missing, and fallback clauses with AI algorithms can be a helpful preventive measure. Once these algorithms are integrated into the system, the AI-powered contract management software can help you to identify gaps in the legacy/third party contract, and then suggest relevant, legally valid language that would close all the gaps. The software also ensures that all terms are correct and consistent with one another before they are signed off on by both parties.

Without an advanced AI engine infused contract management, the process of meta data extraction is a risky process leading to all types of risks – compliance, financial, operational.

  • Building risky contracts with ad-hoc business rules and workflows

Contract generation can be challenging, especially with multiple people involved at multiple stages right from contract request, reviewing & approving contracts to executing contracts. Not following the defined business rules and ad-hoc workflows lead to compliance risk which eventually percolate into financial and operational risk.

Depending on contract intake process, legal teams receive requests either in person or via e-mail. This leaves room for insufficient information, which may require the GC to communicate with the requester again to collect the necessary information — leading to delay and ample waste of time that could’ve been used in drafting the contract.

Contract review is an integral part of the contracting process. Before a contract is signed, the legal team needs to thoroughly examine it to ensure that everything stated in the agreement is clear to the parties and the organization is comfortable to continue with the terms and conditions. This step is vital as it the last opportunity to make any changes in the contract.

After a contract is reviewed, it must go through layers of approvals by multiple people in the organization — several paralegals and then finally the General Counsel or Chief Financial Officer, before it is executed and comes to life.

  • Poor visibility due to no contract version control management

Unable to track the correct version of the contract during the review and negotiation process is not just frustrating but risky too. Risk involved can be – tracking of redlined changes, comments, and discussions about a contract to meet audit requirements.

One of the major risks of not having an automated version management is poor visibility into a contract’s evolution to expedite future contract negotiations or identify how terms were clarified or changed to get an agreement signed.

Unable to compare documents to see if changes were made without proper redlining leads to lack of confidence in your company and other parties to your contracts because of transparency issues leading to reputational risks.

Compliance risk due to lack of sequential approvals

In a basic contract management system, professionals often over-engineer their processes. They may send out multiple email alerts that may not be as meaningful. Here’s where a Role-Based Security comes handy that regulates who has access to which contracts to review and approve. Users can get desensitized to all the email alerts and, at the same time, ignore the important ones which can eventually lead to significant delays and risks of missing the timely contract closures

Avoiding risks lurking in your contracts

Now that we have identified certain risks hidden in pre-award contracting, it’s time to understand how to avoid them and resolve them. An automated, integrated contract lifecycle management solution is a great way to ensure your contracts are compliant and secure from all risks.

  1. Pre-approved templates and smart clause libraries for hints and suggestions ensure that the contract language is accurate and includes all necessary clauses.
  2. With standardized templates, legal teams find it easy to quickly go through the contract documents and identify any deviations.
  3. Pre-configured workflows ensure contracts go to the right stakeholders for reviews, approvals and negotiations. Backed by alerts and triggers contracts are then quickly reviewed and no step or review is missed.
  4. The CLM system automatically saves all changes and all versions, ensuring there is an audit trail, increased visibility and accountability and that only the latest version is sent forward.
  5. Artificial Intelligence powered solutions help track any inconsistencies in contract performance through milestones and metrics tracking and highlight any non-compliance. This helps in quick remediation and maintaining the pace of contracts.

 Considering that compliance regulations are changing rapidly, and the compliance landscape is getting more complex by the day, a smart, digitized contract management solution has become a necessity. Now is the best time for companies to invest in smart AI powered CLM solutions to ensure maximum compliance and avoid sever organizational risks.

Author

Mr. Panchal is the Vice President at Zycus. An ardent promoter and practitioner of Theory of Constraints and CCPM, Digesh brings with him deep domain expertise from his long and rich personal experience in manufacturing. In his prior stint at Verdantis, he has led highly complex implementations of Master Data Management solutions for multiple master domains, across various industries and varied deployment models. As a forward-thinking leader with extensive experience in the design, development, testing, and rollout of cutting-edge B2B SaaS solutions, Digesh excels at driving the day-to-day operations of complex enterprises to produce turnarounds. At Zycus, Digesh is responsible for building a best-in-class AI-driven Enterprise CLM software and drive market traction.
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