Following our post last month, ContractKen engaged with many practitioners to understand what is the best-in-class industry framework and approach to defining, measuring, and managing contract risks.
We attempt to summarize our viewpoint on contract analytics here.
Contracts exist so that the parties' risks, commitments, and obligations are well understood, negotiated, and managed. So, what do you mean by contract risk analysis? Is it a fancy way of saying contract review?
Yes, and No.
Contract Risk Management is a practice of active (re)definition, measurement, and management of legal, financial, brand, and security risks that have significant business impact potential. Risk clauses in the contract address situations when things may go wrong or opportunity costs for either party.
A rigorous approach towards these risk clauses is the foundation of management of contract risks.
It varies by the scope of the transaction. For e.g., below is one rank order to prioritize agreements for rigorous risk analysis
Progressive companies keep track of regulatory risks as the language in your contracts needs to be compliant with changing regulations. Few examples:
Most organizations have simple rules of thumb like below to categorize 'risky' contracts:
A rudimentary, yet effective, approach toward risk assessment is to identify all such factors for your business and assign each 'position' a score (say, higher for more risk). Then, have your contract managers score each contract according to the matrix, and lay special emphasis on riskier contracts.
A more sophisticated and scalable approach towards contract risk management is combining the use of Digital Playbooks and AI.
ContractKen is working with some leading US organizations to assess their contract risk frameworks, design & implement digital playbooks and leverage AI to automate the audit of a large number of contracts for risk.
Senior execs managing risk (GCs, CFOs, CROs) love Risk Dashboards which capture an enterprise-level view of contract risk trends. To enable the build-out of such contract analytics dashboards, organizations need to treat contract data as assets and link it with tools that extract and present risk information in a visual manner.
Analysis and management of various types of contract risk is a massive topic for each organization and deserves much deeper treatment. In subsequent posts here, we will discuss many of these elements and our approach toward them in detail.
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