Effective risk management is one of the most important aspects of contract lifecycle management. Particularly during procurement, contract management software can support risk management professionals in mitigating and minimizing potential risks. Risk management professionals work to identify possible scenarios that might result in additional liabilities that could harm the company. To properly manage risk, it’s necessary to identify any potential risks in every department within an organization. When considering procurement, this process specifically contains additional risk, meaning that procurement contract risk management is essential to safeguard against the implications of potential risks.
Today, we’ll take a look at how contract management software can reduce and mitigate procurement risk.
What Is The Procurement Process?
While procurement and purchasing have many similarities, the terms are certainly not interchangeable. Purchasing is involved in procurement, where purchasing refers to the ordering, receiving, and payment of goods and services. However, the procurement process is much broader in scope, meaning it requires careful planning and consideration in any organization’s business strategy.
Procurement results in the selection of vendors. Companies might develop requirements for the vendors they choose to work with based on geographic or social factors, for example. In enterprise-level organizations, the procurement department might conduct research on the state of the current market. Procurement involves negotiation with counterparties and the execution of contracts, and each stage within procurement includes a varying level of risk. We’ll discuss these risks below.
Risks To Be Aware of During Procurement
Risks that occur as a result of the procurement process include the following:
- Misidentification of company needs
- Failure to appropriately define the product or service
- Subpar assessment of offers
- Damage of products in transit
- Loss of products
- Missed opportunities from failure to pinpoint sources
Risks Associated with Procurement Contract Management1. Failure to Write the Agreement
When a disagreement comes about pertaining to a contract, it can cause some strife if intentions and concerns aren’t appropriately communicated between parties. With a written contract, you ensure that expectations and terms are officially notated so that each party can refer to the document to gain clarification regarding their contractual requirements. Failing to create a written document can result in preventable risks, one of which being that one party will “forget” about terms and obligations that they do not want to comply with. Failing to create a written contract additionally results in an increase in legal risks.2. Misplacement of Contracts
There’s hardly anything that’s worse than losing your contracts. This risk has close ties with the failure to actually write your contract. Even when you store a written legal agreement, what’s the point if you lose it? Then you can’t properly enforce it. The majority of enterprise-level organizations are unable to locate about 10 percent of their contracts at all times.
Learn more about the importance of efficient contract storage here.3. Poor Timing
Most contracts contain a provision with specified timing requirements, for example a delivery deadline or payment due date. However, some problems with timing are far more convoluted. In one scenario, the counterparty might not be requirement to execute their contracted obligations until the organization is compliant with a certain condition. In the same way, contracts often contain time-sensitive clauses like sunset clauses and auto renewal clauses. With these provisions, you can develop trackable timing requirements for your organization. Failing to comply with these deadlines can lead to increased liabilities and the loss of rights.
4. Compliance Risk
For an in-depth overview of contract compliance, check out this post.5. Subpar Contract Monitoring and Fulfillment
Many contracts include provisions that a create to ensure the quality of what is being promised in the agreement. However, organizations with a high contract volume often forget about these provisions, failing to request that the product or service being delivered matches the level of quality promised in the contract. Essentially, the organization might not hold their supplier or vendor accountable.6. Ineffective Contract Execution and Negotiation
The companies with the most value-driven contracting practices have a massive competitive edge over their competitors. Many companies will enter rocky negotiations to sort out contractual provisions and transfer risk to the other party. By failing to acknowledge these provisions, you greatly increase risk potential.7. Breach of Privacy
The sharing of proprietary information is just part of creating an agreement – and this confidential information is often shared during contracting activities or when bidding. However, during the procurement process, unauthorized users might gain access to your sensitive data and propriety information.
For an overview of different types of breach of contract to be aware of, take a look at this blog.
Contract Management Software Supports Procurement Risk Management
Contract management software supports procurement professionals, risk management teams, and contract managers in numerous ways. Business relationships built during the procurement process can span globally, where companies far and wide enter into contracts at faster rates than ever. With contract management software, you can equip your procurement team with advanced procurement contract risk management capabilities.
To learn more about contract risk management tools, click here.
Considering the aforementioned risks, it’s clear that adopting a contract management software solution can alleviate and minimize many of them.
Let’s discuss what contract management software can do for your procurement contract risk management strategy.
Centralized, Cloud Secure Contract Storage
Contract management software empowers businesses with secure contract storage within a cloud, meaning all of their contract data is accessible from any device by their authorized employees. This nearly eliminates the likelihood of misplaced and lost contracts. Within your digital repository, you can use customizable filters and text-based search capabilities to easily locate and retrieve exact contracts and clauses. In this way, you can effectively select which contracts require further monitoring for appropriate fulfillment of contracted obligations and terms.
Enhanced Data Security
Contract management software provides increased security over your company’s contracts and associated data. With user permissions settings, data encryption in transit and at rest, audit trails, and other advanced security features, you can have the confidence that all of your organization’s sensitive information is safe from cyberattacks.
For more information on contract management software security features, give this blog a read.
Automated Alerts and Notifications
Never miss a deadline ever again thanks to customizable automated alerts and notifications. This supports all of your teams in cultivating a proactive approach towards your key dates, obligations, and contract-related responsibilities. Automated notifications can be configured to remind employees of key dates and deadlines well in advance, giving them the time they need to prepare ahead.
Contract management software not only supports procurement risk management and the procurement process itself, but it also supports the entirety of the contract lifecycle. With an intuitive contract management solution, you can increase compliance rates, mitigate risk, and drive results. Contract management software streamlines every aspect of contracting, so get started with Dock 365 today!
Written by Lindsey Paulk
Lindsey Paulk is a Content Writer in Jacksonville, Florida that specializes in digitally communicating all-things contract management.