Building a resilient business: A guide to proactive compliance risk management

The modern business landscape is plagued by challenges. Whether it’s supply chain disruptions or shifting trade regulations, something is always making operations more complicated. Even attempts to circumvent these issues can backfire.

But true business resilience doesn’t come from trying to guess the market. It comes from building a proactive framework that anticipates threats, including threats from the inside. 

Some of these internal threats come from contract compliance. From contract renewals to providing deliverables, there’s a lot to manage here. If a company takes these tasks lightly, it can experience legal problems, financial instability, and lost trust. It may even unintentionally violate local and international regulations.

Luckily, businesses can avoid these problems with proactive compliance risk management. Contracting professionals must learn how to manage compliance risks and build strategic resilience.

How does compliance risk management improve business resilience?

Compliance risk management isn’t just a safety measure. It actively promotes business resilience in a number of ways. 

Some of the benefits include:

• Stronger operational stability: Risk management practices can resolve weak points in supply chains and internal processes. For example, some shipping contracts may not allow companies to shift partners in case of geopolitical disruption. Identifying this limitation can help companies build a more flexible supply chain.
• A healthier brand reputation: Companies that reliably fulfill their commitments build trust with customers and other companies. That trust can lead to new partnerships and increased revenue. It can also lead to more far-reaching and flexible contracts.
• Increased financial predictability: Predictable finances allow companies to move with confidence. Compliance risk management provides both by preventing unnecessary expenses and building more robust supply chains.

Reactive vs. proactive risk management

There are two main approaches to risk management — reactive and proactive.

Many companies use the reactive approach. They don’t attempt to predict problems and develop countermeasures in advance. They simply react to compliance issues once one is discovered. For example, if they miss a deadline, they might spend extra resources on damage control, fines, and other forms of remediation. This approach leaves companies vulnerable. It also fosters a culture of constant crisis.

The proactive approach is the opposite. Rather than waiting for problems to appear, proactive risk management attempts to anticipate potential issues. It then develops plans to address those issues. The heart of this approach is the Contract Lifecycle Management (CLM) platform.

These platforms power many of the compliance risk management best practices. For example, proactive companies tend to use CLM-powered analytics as part of their decision-making process. This approach allows them to identify weak points that they might otherwise miss. As a result, companies tend to be very stable while remaining agile and resilient.

What are the benefits of proactive compliance risk management?

The proactive approach takes all the benefits discussed above and expands them. Companies can identify risks and solutions sooner, circumvent legal problems, and consistently deliver on time.

Other benefits include:

• Enhanced strategic decision-making: A CLM platform can collect and analyze contract data, clarifying the risks companies face. This knowledge allows leadership to make strategic decisions backed by data rather than instinct.
• Improved operational efficiency: CLM platforms can automate repetitive tasks, giving teams time to focus on what really matters. They can also streamline workflows and approval processes.
• Greater stakeholder and investor trust: Robust compliance systems are a staple of effective corporate governance. Good governance builds loyalty with stakeholders and attracts new investors.
• Significant cost savings: Effective risk management also helps prevent the high costs associated with litigation, operational downtime, and reputation damage.
• A sustainable competitive advantage: All these factors combine into a significant and sustainable competitive advantage. Proactive companies tend to be more agile and resilient than their reactive peers. They have what it takes to weather the uncertainty of the market and come out stronger on the other side.

What are the steps of the proactive risk management process?

Proactive risk management has five major steps. They are as follows:

1. Identify risks

Companies should start by conducting a comprehensive compliance risk assessment across the entire organization. 

Typically, the assessment involves three major stages:

1. A review of the company’s entire contract portfolio to pinpoint obligations, deadlines, and nonstandard clauses.
2. A review of all applicable regulations, whether local, national, or international.
3. Interviews with key stakeholders in Legal, Procurement, and Finance to identify department-specific risks.

At the end of this process, the current risks facing the company should be clear.

2. Analyze and prioritize

Once companies have identified risks, it’s time to evaluate their severity with a risk assessment matrix. The matrix takes two factors into account: the odds of the risk occurring, and the potential impact of that occurrence. 

Typically, the risks are also sorted into tiers to determine which are the most pressing. Many companies use a basic “High, Medium, Low” framework. Some may even use data visualization tools to highlight the most critical risks.

3. Implement controls and mitigation plans

Now, it’s time to address the identified risks. There are two main ways to do so.

The first is to design preventive controls that preemptively avoid compliance issues. For example, many companies use standardized clause libraries and approval workflows to ensure contracts are safe. CLM platforms facilitate both.

The second is to create action plans that mitigate the impact of unavoidable risks. Many supply chain disruptions fall into this category. For example, if flooding impacts a vital port, companies need to have alternatives available.

4. Monitor and review

Compliance risk management doesn’t stop after companies handle current risks. The system must continuously identify and evaluate potential threats as they come. 

A CLM platform is the best choice here. It can track Key Risk Indicators (KRIs) and warn companies when they start to increase. It can also send alerts when renewal dates approach or when approvals are needed.

Many companies schedule regular internal audits of their compliance framework to identify weak points and opportunities for improvement.

5. Optimize

Once a company has implemented the basic processes, all that’s left is optimization. 

There are four main ways to approach this process:

1. Develop intuitive CLM dashboards that provide real-time visibility into compliance.
2. Establish clear lines of communication for responding to critical issues.
3. Conduct regular training to help employees understand their compliance responsibilities.
4. Foster an open culture where employees feel comfortable flagging potential issues.

How to improve compliance risk management with a CLM platform

Managing compliance and risk management is made far easier with a CLM platform. It transforms awkward manual contracting processes into highly efficient digital workflows. But the benefits of a centralized data platform don’t stop there. 

CLM solutions also:

• Create a single source of truth: CLM platforms collect all contract information in a single repository. They are also compatible with other business platforms, increasing visibility and data quality.
• Automate key workflows: Review and approval processes must be thorough and efficient. CLM software reviews every contract and automatically alerts the right stakeholders.
• Provide proactive alerts: CLM platforms automatically send reminders for key dates, such as renewal and compliance deadlines.
• Leverage Artificial Intelligence (AI) for deeper risk analysis: Many CLM solutions use AI to scan contracts for risky or noncompliant language. This extra layer of security lets companies move forward with confidence.
• Simplify auditing and reporting: CLM platforms can generate comprehensive audit trails and customizable reports. This feature saves tremendous time for both auditors and internal team members.

Agiloft’s award-winning CLM platform has transformed the lives of contracting professionals around the world. Call us at 888-727-2209 and book a personalized demo today!