Sourcing and Procurement

Risk mitigation in contractual agreements: Proactive approaches for businesses

Contractual relationships are the backbone of any modern business. From employee contracts to vendor agreements, no business can survive without effective contract management. These contractual relationships come with inherent risks, making contract risk assessment and risk mitigation strategies an integral part of contract management if you want to avoid costly penalties for non-compliance. Effectively identifying different types of risks and implementing the right risk management software can help safeguard your business against potential pitfalls.

Identifying contract risks

Contract risks are any potential variables, issues, or uncertainties that can arise within a contractual relationship and result in non-compliance of one or more contract terms. The different types of contract risks include:

• Performance risk – failure to meet the obligations under contract by either party.
• Legal risk – non-compliance with relevant laws and regulations
• Financial risk – potential for financial losses
• Operational risk – failure to deliver goods or services per contract terms.
• Reputational risk – potential for damage to brand image or negative publicity

Contract risk management involves identifying potential risks and a thorough compliance risk assessment to make sure you have measures in place to mitigate these risks. This effectively safeguards your businesses while ensuring every contractual agreement aligns with your business objectives and risk tolerance.

Contract risk management strategies

When it comes to contract risk management and mitigation strategies, there is no “one size fits all” solution. It has to involve a combination of proactive and reactive strategies that can help you minimise the impact of potential risks. Here are some contract risk mitigation strategies that can help safeguard your business:

• Establishing risk appetite: This is often the first step when it comes to contract risk management and involves defining the level of risk you are willing to tolerate while meeting business objectives. Such risk appetite can guide your contract risk assessment efforts.
• Using risk assessment metrics: Risk assessment metrics can help you weigh the potential impact and likelihood of any risk, facilitating classification and prioritisation of different risks and implementation of relevant risk mitigation strategies.
• Automating contract data mining and identification: Leveraging enterprise contract management systems and their AI capabilities can help you identify key data fields within the contract and set up rules for contract management. As a result, you can automate contract analysis activities and focus on value-intensive activities.
• Implementing risk reduction actions: Risk reduction actions – like purchasing insurance, renegotiating contract terms, or transferring risks to third parties when possible – can aid in reducing your risk exposure in contractual agreements.

Understanding the risks your organisation may face can help you implement effective risk management strategies and support successful contract execution and overall success for your business.

Seven ways enterprise risk management systems can help mitigate contract risk

The primary purpose of contract risk management is to mitigate as many risks as possible while ensuring compliance with contract terms to safeguard your business. Non-compliance with contract terms, broken obligations, coverage lapse, or lack of governance can significantly harm your business. Risk management software can help you take manual processing out of contract management and automate contract risk assessment and mitigation to ensure effective contact risk management throughout the lifecycle of every contractual relationship.

Here are seven ways enterprise risk management systems can help mitigate contract risks:

• You can set up notifications and alerts to ensure you never miss any milestone or obligations – like performance delivery or contract renewal – no longer having to rely on manually tracking critical milestone dates.
• You can implement role-based security rules to regulate who can access contracts, thus ensuring confidentiality and data security or proprietary information.
• You can encrypt contract data to protect it from unauthorised access – especially from external malicious agents.
• You can use clause and template libraries to ensure you are assembling contracts using preapproved language (from legal experts), thus mitigating the risk of non-compliance due to wrong language.
• You can use contract management systems and tools to ensure contract version control, helping you track changes by users, avoid missing duplicates, or track any contract amendments and terminations.
• You can implement automated workflows to enforce business processes and avoid manual tracking of any contract lifecycle step or approval.
• You can use e-signatures to secure contract approvals more safely and faster, mitigating the risk of potential tampering or misplacing copies of approved contracts.

Thus, choosing the right enterprise risk management system can be the first step in ensuring effective contract risk assessment, management, and mitigation for modern businesses trying to navigate the ever-evolving regulatory and compliance landscape when it comes to contractual agreements.

How can Infosys BPM help?

Contract management solutions and mitigation have become integral parts of modern businesses as they help navigate the complex contractual agreements businesses need to survive. Enterprise risk management systems can help you leverage next-gen technology to improve contract compliance, assess and mitigate risks, and reduce cycle times for improved efficiency. With Infosys BPM contract management services, you can centralise and standardise your contract templates, improve response rates, track contract metrics to ensure 0% coverage lapse and improve contract visibility. Such improved controls can help implement effective risk mitigation strategies and ensure contract compliance at every level.