Procurement's Role in Contract Risk Management
Contractual risk isn’t just something for your legal department to consider. Your procurement team also plays an integral role in handling legal agreements and reducing contractual risk. By working together, your teams can streamline and synchronize contract review and approvals. You can also better track spending, even when procurement contracts vary by supplier, source, and department.
Effective contract management lets your procurement team integrate with enterprise resource planning (ERP) solutions. You can put guardrails in place that make it easy to implement self-service purchasing procedures for teams across the country. This automation lets your team handle approval efficiently and with less overhead. Additionally, you will have real-time data to protect your entire company from litigation.
What is contract risk management?
Contract risk management refers to the procedures, software, and personnel in place to reduce potential business risks associated with legal agreements. Many different risks can arise in legal contracts. These include, but are not limited to:
- Rogue contracting. This occurs when departments leave legal out of the loop on agreements or without a comprehensive contract lifecycle management (CLM) software in place. It could mean unenforceable agreements, inability to perform under the contract, or many other risks in-house counsel or a CLM could alleviate.
- Lack of consistency. Contracts should be standardized whenever possible. This reduces risk across the company and creates consistency in your business. This is just as true for procurement as for any other department.
- Lack of contract visibility. You need access to your contracts and their essential metadata. Procurement plays a vital role in ensuring agreements are followed and counterparties meet their obligations.
- Wrong versions. Contract versioning is a significant problem for many companies. When a procurement team uses the wrong version of a contract, it could cause considerable legal risk. CLM software makes sure every team is in the loop on the most up-to-date agreements.
Tracking contractual obligations
Procurement uses contracts throughout the purchasing cycle. There is often a disconnect between procurement and legal regarding these agreements. This is a major problem and can cause friction in your organization. It can also lead to significant legal risk.
Procurement teams are typically focused on getting the right value for the dollar, protecting your supply chain, focusing on regulations, and complying with the law.
The problem is that procurement is often bogged down in the constant edits, negotiations, and other issues commonly associated with contract approval processes. Instead, an organized approach with CLM software makes it simple to track contractual obligations.
Failure to track obligations leads to lost revenue
You lose money when your department doesn’t track its obligations correctly. You need to know what your and your counterparties’ responsibilities are. Tracking this can be very difficult, especially with antiquated contract management strategies.
If you are still filing contracts in a physical cabinet or using Excel spreadsheets to store your agreements, you are missing essential tools that can help. You can instead use tools that:
How much of this is procurement's responsibility? (As opposed to legal's?)
Many companies assume the legal department should have to handle everything contract-related. This creates contention between your departments and reduces your efficiencies. If this is true for your company right now, you will likely see significant business delays.
It takes additional time when legal must be notified and consulted. Manual contracts and old systems mean that legal must do an individual review of each contract and approve it. This is time-consuming and can even lead to lost deals as you sit waiting.
Instead, procurement should play a critical part in contract risk management. This doesn’t mean you need lawyers on the team, but rather that you will benefit from CLM software that manages this risk for you. It lets you automate systems and streamline how you run your procedures, all while reducing risk.
Quiz: test your current contracting process
Procurement tools to reduce contract risk
With the right tools, procurement can play a vital role in reducing contractual risk. A comprehensive CLM software empowers procurement to help with tools like:
A procurement delay can have significant effects down the road on production and, ultimately, revenue. Your department may still be using a manual process for contract management. This is slow and very prone to human error.
Automation is the key to your future success. This doesn’t mean “no control.” It means you set up workflows that manage your contracts. It also fosters communication between departments with @mentions and internal comments so that internal stakeholders are always aware of what is happening. Now procurement can focus on buying rather than time-consuming contract processes.
Self-serve contract workflows
Self-serve workflows are a crucial part of automating contract management. They let you quickly engage with vendors and understand when to notify legal for edits or reviews.
You can standardize purchasing procedures to make it easier for your team. A purchasing policy can make it easier to set guidelines for documents, approved vendors, purchasing limits, and much more. This can help you implement standardized procurement contract procedures for your company. Standardized systems reduce risk and save you time manually reviewing contracts.
Implement low-threshold change approvals
Some changes to a standardized contract are inevitable. Many of these are minor or administrative adjustments, such as scope, timeline, or cost. Procurement and legal can work together to create standards for low-threshold change approvals.
With these standards in place, procurement can move forward with small changes to save time and increase efficiency. Not every little detail should have to go through legal. This increases efficiency, but pre-approval of these thresholds continues to mitigate contract risk.
Help procurement reduce contract risk with CLM software
Procurement should be part of the contractual risk management process. CLM software gives your procurement team the tools they need to automate contracts, create self-serve workflows, and automate other key areas of their job. All of this is done under the protection and guidance of contract risk management strategies to protect against liability.
Procurement can track their obligations with advanced tools that make it easy to comply with legal agreements and regulations. You can move past the manual review of individual contracts and streamline how you do business.
- What is contract risk management?
- Tracking contractual obligations
- How much of this is procurement's responsibility? (As opposed to legal's?)
- Quiz: test your current contracting process
- Procurement tools to reduce contract risk
- Help procurement reduce contract risk with CLM software
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Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.