Why And How to Create a Risk-Aware Contract Management Culture With a CLM Tool

Many businesses engage in high-risk, high-reward deals without fully understanding their potential consequences. In the modern world, contract risks must be handled proactively to avoid devastating impacts, meaning it’s time to switch to a new contract risk approach – risk-aware contract management culture. CLM tools can help you to do it.

Key Contract Risk Areas

What are the key areas of risks in terms of contracts?

Understanding the types of risks is essential for the proper management of their consequences. The key areas of contract risk include financial, legal, security, and brand risks. Most of the time, they are correlated.

For example, a brand risk can cause a financial risk, and a potential security issue may trigger legal trouble. These risks are inherent in any agreement and can’t be avoided. However, you can minimize their effects with proper contract management tools. 

What is the usual approach to contract risk management?

Typically, companies take a reactive approach to contract risks, and they wait to solve problems after they already occurred. However, if you want to minimize losses and ensure agreement success, this approach is no longer practical.

To efficiently reduce the consequences of loss, you must proactively manage and monitor your agreement risks. Proactive contract risk management entails understanding liabilities, designing solutions for losses, and implementing contract management tools.

Creating Awareness of Contract Risks With CLM Tools

What is the essence of the new proactive approach?

Creating a risk-aware contract management culture for your business is achieved by improving your employees’ and clients’ understanding of contract risk and their consequences, reviewing the risk level for individual contracts, and analyzing your portfolios for potential issues. When your network is aware of risks, they can account for them before they occur. Contract management tools give insight into risks and are essential to avoid financial, legal, security, and brand issues.

Primary benefits of creating a risk-aware contract management culture:

Easily spot agreements that need attention

Contract management tools allow you to see which projects need attention and where potential problems may occur in an agreement. Proper contract risk management gives you the insight needed to understand the performance of a deal, the reasons for its success or failure. With this insight, you can then review and fix any significant risks in the form, allowing you to prevent issues before they happen. 

Prevent Significant Losses

Contract management tools give you early knowledge of potential problems allowing for intervention before the issue becomes too severe to fix. Fixing issues after they already impacted your organization is a high-effort and expensive way to problem solve.

Additionally, agreement issues can cause high costs, future litigation, security complications, and reputational damage, all of which lower your company’s overall success.

Better Data for Making Decisions

Contract management tools give you access to higher quality data that can help you make better decisions. Data allows you to look at the success rate of similar agreements, the loss levels your company can afford, and the state of your current deals. Therefore, the ability to access risk information allows you to be more realistic with your decisions and account for your company’s needs, allowing you to make more beneficial deals with partners.

Increased Communication

Communication is vital for every team. Without proper communication, there’s no insurance that everyone’s on the same page, a significant lack of collaborative problem solving, and an increased chance of conflict.

Efficient contract risk management practices prompt your team to discuss difficulties and collaborate on preventing potential issues. Teams should focus on what’s suitable for the project and company, meaning departments will work together to improve company success and minimize risks. 

Simplified Budgeting

Managing risk with CLM tools allows for budgets to be more accurately calculated rather than relying on the project team’s guesswork. CLM tools incorporate risk management into your budgeting practices, so you can account for potential financial losses and determine whether or not your company can afford them. Ultimately, this leads to fewer costs over time and improves your financial planning practices.

How to Increase Contract Risk Compliance?

Moving to a proactive contract risk management culture is not a quick process. It takes time to educate your team on the types of risks, their consequences, and how to prevent them. However, contract risk management tools can help you speed up this process.

You can increase your business’s contract risk compliance by utilizing the tools that CLM or contract lifecycle management software offers. Features such as advanced insights and data provide your team with the information needed to minimize risk.