Risk management is on the tip of every CEO’s tongue this year—and for good reason. A contract risk is anything in a written agreement that could potentially adversely affect the operations, employees, or business relationships of a company. While unforeseeable conditions do arise, as we saw with recent economic crises and the global Covid-19 pandemic, many companies fail to account for how these fluctuations in the economic landscape and their respective industries can impact contract risks.

What is a High Risk Contract?

Contract risk comes in many different forms, such as the following: 

Slow Time-to-Execution

When it takes legal departments weeks or even months to agree upon standardized language, decide on a template, or draft a contract, deals stall and eventually fall apart. Time-to-execution is a crucial metric for businesses, and more than half of companies surveyed in Ernst & Young’s 2021 law survey say slow contracting processes have cost them money. 

Lack of Regulatory Compliance

“I didn’t know” is never a valid reason for failing to follow business regulations. The average cost of a single noncompliance event reached $5.87 million in 2022 for fines alone. Once business disruption, productivity loss, reputational damage, and revenue loss are factored in, the total is closer to $14 million.

Contract Non-Performance

Financial risks arise when companies miss a key delivery or renewal deadline. In other cases, the company fails to include sufficient details to cover contingencies when unexpected events occur. Without strong force majeure clauses, companies open themselves up to contract termination and liability. 

Invisible Contract Breaches

Is a lost contract still enforceable? Yes. At one point, 71% of companies couldn’t find at least 10% of their contracts. With larger companies handling on average 41,000 contracts a year, that amounts to 4,100 missing contracts. Switching from paper filing cabinets to cloud repositories has helped tackle the issue over the past decade, but many companies still struggle with decentralized version control processes that can make adhering to contracts a challenge, resulting in fines, lost opportunities, and damaged reputations.

Divergence from Desired Positions

A company’s corporate posturing is only as good as its enforcement. All too often, senior counsel develops standardized language, templates, and clause libraries only to find they are not consistently upheld. While a corporate legal playbook is a good start, learning curves for associate training initiatives can be steep, especially when turnover is a concern. And senior counsel can potentially lose exorbitant amounts of time overseeing enforcement.

So, How Do You Identify a Contract Risk?

With a holistic risk management approach, of course. Yours should include measures such as:

• A searchable, centralized cloud contract repository
• A system for important date and deliverable tracking
• Supplier/vendor performance tracking
• Clear specification of obligations and noncompliance measures 
• Inclusion of clauses related to force majeure, governing laws, and liability limitation
• Managing template and clause libraries
• Contract lifecycle management software, with special attention paid to contract review processes

Manual Contract Risk Management

Old, manual contract review processes that are susceptible to human error lack the necessary failsafes to protect the company from damaged relationships, lost opportunities, and liability in court. Cross-functional teams can be deployed as a potential solution, though it may not be feasible to manually identify potential risks when staff or financial resources are scarce. And having many sets of eyes on a document is expensive in both time and cost—especially at scale. 

Automated Contract Risk Management

Legal departments must embrace digital transformation to delegate repetitive tasks and more involved, high-level work to appropriate personnel. Why? Because doing so can truly mitigate risk. Increasingly, artificial intelligence (A.I.)-powered technology is performing lawyer-quality redlining in a fraction of the time. Utilizing automation technology for the first pass at contract review and risk determination ensures adherence to standard provisions and helps staff better focus their attention.

Manage Contract Risk with the Right Solution

LexCheck’s automated redlining software allows legal teams to quickly identify and manage potential contract risks in the pre-execution contract review and negotiation stage, functioning as a key part of the company’s legal team and overall digital transformation initiative.

Once a new draft has been fed into the system, it’s guided by an AI Digital Playbook that  automatically compares it to the company’s preferred negotiation positions, best practice guidance, and any lawyer-provided inputs. Errors, omissions, and deviations from company standards are color-coded red for high risk, yellow for moderate risk, or green for low-risk. In five minutes’ time, legal teams can receive fully redlined agreements complete with risk analysis, context-based revision suggestions, and the ability to make changes at the click of a button. 

LexCheck’s AI-based automation reduces manual workloads, automates risk assessment, and accelerates time-to-execution by eliminating first pass manual review. The system can be trained to look for and flag compliance related language so no detail is overlooked. Contracts are also compared to the company’s legal playbook so all positions are strictly upheld. 

Companies bogged down by error-prone manual risk management processes are unlikely to survive, let alone thrive. In the very near future, every company will be employing automation technology to maintain competitiveness.