How Proactive Contract Risk Management Empowers Procurement

Procurement professionals face many challenges from unexpected supply chain disruptions to complex contract negotiations. Many teams are content to simply react to these challenges in the moment. After all, how can they predict a new international tariff or a natural disaster hitting a vital port? 

The answer is simple: Don’t predict; prepare. 

The best procurement teams take proactive measures to mitigate risks in their contracts. These practices protect supply lines and provide valuable cost-saving opportunities. They also strengthen the relationships between procurement teams and their partners. In short, proactive measures create tangible business value for both parties.

Learn how to make contract management and procurement processes proactive.

What is the relationship between procurement and contract management?

Procurement and contract management have a symbiotic relationship. They both help companies achieve their strategic goals, but they have different focuses that complement one another. Often, both processes are managed by a single team.

Procurement focuses on the pre-award phase. It involves sourcing suppliers and negotiating the best possible terms for contracts. It establishes the blueprint for the relationship that contract management then enforces.

During the contract creation stage of the contract lifecycle, teams ensure all parties adhere to the agreement. This process typically involves tracking performance and handling renewals or terminations.

The data gained in this stage can then inform future procurement strategies: 

• Were the contract’s standards attainable for both parties?
• Could the contract be enforced when necessary? 
• Did the contract expose the company to risk? 

The answers to these questions and others will influence all future negotiations. When the procurement team considers risk in this way, contract management becomes easier, too.

These reasons are why contract management is important in procurement. The processes influence each other in a continuous feedback loop. 

Moving from reactive to proactive risk management

Transforming procurement and legal risk management starts with a shift in perspective.

Reactive risk management focuses on firefighting. Team members scramble for solutions only after problems emerge. This approach leads to poor corporate agility and an increased risk of unfavorable contract terms.

Proactive risk management identifies potential risks at the start of the contract lifecycle. It involves building mitigation strategies into agreements and monitoring them for trouble. This approach enhances corporate agility and decreases the danger of a contract violation.

Proactive risk management is usually supported by a shift in technology. Rather than relying on spreadsheets, agile procurement teams now use dedicated Contract Lifecycle Management (CLM) platforms. These platforms turn static legal documents into dynamic sources of business intelligence. Procurement teams can then use the collated data to adjust their decision-making and mitigate risk.

Key benefits of proactive contract risk management

Proactive risk management brings many company-wide benefits with it as well. 

These benefits include:

• Secured savings: Reactive contracts often leave space for rogue spending and auto-renewals for poorly performing services. Proactive contracts place and enforce spending caps. CLM platforms can flag poorly performing services so that the contract can be adjusted upon renewal. They can also ensure that negotiated volume discounts and performance-based rebates are claimed.
• A more resilient supply chain: With the help of a CLM platform, procurement teams can map out supplier dependencies. They can then identify alternatives to reduce single-source vulnerabilities. Having alternatives increases supply chain flexibility and resilience. It can also help procurement teams cope with geopolitical disruptions. This is one of the most impactful benefits of contract risk management.
• Stronger supplier relationships: Proactive contract management promotes safety and trust between all parties involved. Using the performance data from contracts can lead to more productive quarterly business reviews, for instance. It can also create transparency around each party’s obligations. This transparency makes it easier for them to adapt and decreases the chance of disputes. 
• Regulatory policy compliance: Environmental, Social, and Governance (ESG) regulations are always evolving. Proactive contract management teams takes these changes into account when contracts are negotiated and executed. This vigilance protects organizations from policy violations and potential legal issues. CLM platforms can also automate compliance checks against internal company policies and broader industry standards.

A four-step framework for proactive risk management

Proactive contract risk management won’t happen overnight. It’s a multistage process that each procurement team has to adapt to in unique ways. 

Generally, though, it starts with four steps:

Step 1: Centralize and digitize all agreements

Risk management pertaining to the agreement phase starts with creating a centralized contract repository. Without one, contracts are isolated within information silos. They become harder to find and use as a resource for future contracts. They’re also tougher for procurement teams to manage and enforce.

Collecting all contracts within a single, searchable repository or “source of truth” eliminates these problems. It also increases procurement teams’ ability to manage contracts throughout their whole lifecycle. Many companies use a CLM platform for this reason.

In some cases, physical contracts will need to be digitized to fit this new system. Optical Character Recognition (OCR) software can handle these outliers. They make legacy paper or PDF contracts fully text-searchable. Then, procurement teams can access and manage them with ease.

Step 2: Identify and score procurement-specific risks

The procurement stage of contract management brings many potential risks. The contracts themselves can contain high-risk language, such as uncapped liability or ambiguous termination clauses. Or, maybe the data that would need to be shared with potential suppliers is highly sensitive.

Creating a risk-scoring matrix can help procurement teams identify and evaluate these risks. Those scores can then be sorted into categories based on risk type. For example, many companies will sort them into financial, operational, or compliance categories. These categorizations help teams avoid problematic partnerships.

Step 3: Develop mitigation and contingency plans

This is perhaps the most important step of proactive contract risk management.

All contracts must include clear contingency plans in case of unforeseen issues. For example, many will include requirements for buffer stock or prequalified alternative suppliers. Contract templates can also be updated to reflect these contingencies.

Procurement teams should also develop detailed playbooks for responding to common issues. If there’s a supplier data breach or a request for an unsubstantiated price increase, teams must be prepared to deal with it.

Step 4: Implement continuous performance monitoring

CLM platforms don’t just collect contracts in one place. 

They can also: 

• Monitor supplier performance.
• Visualize supplier performance against contractual obligations in real time.
• Send automated alerts for renewal deadlines, reporting requirements, and deliverable milestones.

Some teams even use the CLM platform to send automated reports on risk exposure and compliance to key stakeholders. These features allow procurement teams to anticipate and adapt to performance changes. They can also inform future contract negotiations.

Unlock proactive contract risk management with Agiloft. Get a personalized demo of Agiloft’s data-first CLM platform today!