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3 Common Contract Mistakes That Drive Risk in Enterprises

By: Simon Patteson, Vice President UK & Nordics, Icertis

Every business unit in every organisation faces compliance challenges that lead to potential risks. These challenges have grown in frequency as the global economy has become increasingly turbulent.

Contracts are at the heart of every business relationship and transaction – defining the rules organisations must abide by while governing every dollar in and out of the business. It’s common for contracts to be viewed as legal documents, only to be referenced when something goes wrong. In reality, they are the blueprint for how suppliers, customers, and partners create value together.

With complete visibility and control over these strategic assets, organisations can quickly surface and control risk by committing suppliers to sustainability goals or identifying customers that run afoul of Know Your Customer (KYC) regulations.

However, transforming contracts into value levers can be hamstrung by these common mistakes.

  • Organizations lack control of contract language before a contract is signed

Businesses make the first common contract mistake before the contract is even signed. Namely, they have no ability to control what language goes into contracts across the enterprise.

Using consistent contract language pre-approved by the appropriate teams helps companies improve compliance while accelerating deals. For example, companies must have standard GDPR UK language in their contracts to ensure data laws are followed.

However, standardising contract language is impossible for many companies because they don’t have a central location where contract templates and clauses are managed and accessed. A company may have a keen sense of what its contracts should include to stay compliant. But without a centralised template library, and with old contract templates saved on desktops and in email folders, contract managers will struggle to get everyone on the same page.

In these situations, legal and finance departments often spend an enormous amount of time and effort reviewing widely variable contract language—and even then, there is a significant risk of something slipping through.

The impact of faster contracting is administrative cost savings and taking advantage of business opportunities faster (receive revenue earlier, take advantage of discounts).

  •  Organizations lose sight of contracts after they are signed

The next common compliance mistake occurs after a contract is signed. Simply put – companies don’t know where the contract is stored, making it impossible to keep track of what they’ve committed to, let alone comply with their obligations.

For organizations focused on ESG, this common mistake becomes more costly.

A company may commit to regularly reporting on its labor or environmental practices in a customer contract. Yet if those contractual commitments are not tracked, companies can quickly miss milestones; depending on the contract language, missed ESG reports may result in fines or even termination.

With the right contracting system, organisations can extract obligations from a contract and assign them owners across the company – with dashboards that monitor the overall health of obligation management at the contract and organisational level. Advanced obligation management allows companies to drive compliance and reduce risk by ensuring the intent of every clause is realised.

  • Organizations don’t view contract risk on an enterprise scale

The third common mistake businesses make is that they don’t step back to analyse contract risk at an enterprise scale. Contract owners may only track contract risk individually, resulting in leaders having minimal insight into how the risk adds up. Many small risks can add to huge problems if contracts aren’t properly managed.

The early days of COVID-19 provided a stark example of how minimum visibility into contracts can impact a business. As different regions experienced shutdowns, companies struggled to get an enterprise view of how their value chain would be affected. A similar dynamic occurred with the sanctions against Russian imports and exports. Many companies needed a deeper understanding of their business relationships with Russia or with Russian-related entities and how those relationships impact them from regulatory, reputational, and operational standpoints.

Conversely, companies that centralise and digitise their contracts can take a global view of their contracts to quickly understand and manage their risk exposure. Going back to the COVID example, one British-based professional services company was able to leverage its contract intelligence system to look across contracts and understand what its commitments were to customers and how they could shift resources and delivery plans to ensure business continuity.

“Contract intelligence was instrumental in helping our organisation be as calm as it could be as the contingency plan started getting underway,” the head of contract risk management noted.

Conclusion

As the world grows increasingly volatile, businesses ignore their contracts at their peril.

Modern contract intelligence technology allows organizations to dynamically control their contracts from creation to execution while providing greater insight that mitigates risk. Centralised control of all contracts and the language within them, robust obligation management, and enterprise risk management are all critical to the organization’s success and its ability to succeed in today’s business climate.