Contracts define rights, obligations, and remedies. Thus, every contract contains multiple provisions that create or mitigate risk. Frequently, when an adverse event occurs or a potential adverse event is recognized, you look to the contract to determine the impact of that event. This reactive approach to contract risk depends on good fortune for success and is not true risk management. If you do not know what risks you have accepted or shifted through contracts, you may only learn about exposure when it is too late. What can you do to proactively manage contract risk.
Proactive Contract Risk Management Pre-execution
There are two critical periods for contract risk management, pre-execution, and post execution. Pre-execution includes the period leading up to a renewal opportunity. You can start by defining the process and procedure for pre-execution review and approval of contract language. You can create templates with required or preferred language for specific provisions. You can insist that the other party uses your language. You can mandate no contract automatically renews or has a duration greater than 2-3 years. These pre-execution steps can be effective in reducing contract risk on a go-forward basis, but the level of effectiveness depends on your leverage in contract negotiations. Few individuals or organizations can dictate all terms in all contracts.
Proactive Contract Risk Management Post-execution
You have worked tirelessly to put in place procedures and practices that manage the risk inherent in contracts. You now require review of every contract by a limited number of people with authority to require revisions. You are always in the strongest negotiating position. You have standard terms that you demand are included in every new and renewed contract. You imposed limited durations and now refuse to enter automatic renewal or evergreen contracts. If you have taken these steps and others, you are proactively managing the risk inherent in contracts during the pre-execution phase. If you have had all these controls in place and you have confirmed they are working as designed for all contracts in your portfolio, you should have confidence that the risk profile of your contracts is within your tolerance.
However, you may have inherited some contracts that automatically renewed or have evergreen provisions and therefore have not been subject to the controls. A new risk may be identified or your risk tolerance change. You may be just starting on the journey to pro-actively manage the risk in the pre-execution phase. You may be trying to evaluate the need for pre-execution controls by understanding the risk in contracts executed without those controls. You may want to avoid the surprises that can arise through a reactive approach.
Under any of these scenarios you can use skilled professionals to manually review and evaluate your existing portfolio of contracts, identify, and quantify the risk and report out so you can determine what action may be appropriate. The resources and time you will need to devote to this manual review effort depends on the number and complexity of contracts in your portfolio. However, artificial intelligence (AI) can find the provisions that create or shift risk, can evaluate those provisions consistent with your risk tolerance and specific business requirements and can report on which contracts and provisions are outside your current risk profile.
DocLens, through its AI driven product, ContractLens, can help you efficiently identify, evaluate, and mitigate contract risks.
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