Whether a business manages hundreds of contracts per year or only a few for key relationships, contracts are a fundamental component of risk management for every company. Contracts define business relationships and transactions. Moreover, how a business mitigates contract and dispute risks profoundly affects its financial health and reputation as a business partner.
What are your risks?
This executive uses a one-contract-fits-all approach. Every vendor, customer, and partner receives a variation of the same contract template, often replete with one-sided provisions. Since previous disputes have been limited in number and stakes, no budget is accorded to contract management and business owners hope that if any dispute arises, the stakes stay within small claims court range. Little follow up is given to signed contracts to manage the agreed upon commitments and adjustments that might be needed.
RISK: Highest financial, operational and reputational risk. Both contract content and management fail to reflect the value of the relationship. Litigation (lengthy and expensive) or forbearance (frustrating) are the only resolution options for profit-stealing disputes.
This executive has contract approval, renewal, and review processes. Contracts are reviewed for hazardous clauses and are managed, possible dispute resolution is budgeted, and most disputes are resolved by contacting a retained attorney. Although the contracts are written with the intent to mitigate risks, little advance thought is devoted to likely real-world scenarios and how to manage them to the best economic and reputational outcomes. Misunderstandings may escalate into irreversible conflicts.
RISK: Persistent risk of financial, operational, and reputational disruption. Although some effort is proactive to minimize contract disputes and their costs, there are still only limited and traditional resolution options in place, none of which can inexpensively intercept misunderstandings before they reach critical mass. Operational disruption risk is high due to the time-consuming process of investigation and information gathering.
Best practices are the science and art of developing, customizing, and applying practices in an organization that lead to optimal company performance. An executive committed to best practices constantly strategizes how to maximize the company’s potential and adapt to meet long-term goals. This executive has a contract management process in place for contract creation, tracking contract commitments, and managing contract risk, disputes, and resolutions. Contracts with customers, vendors, and partners are implemented through a review process, the negotiating of win-win terms and conditions, and diligent execution. This includes a realistic assessment of the potential for disputes and agreement to appropriate dispute resolution mechanisms and clauses. Contracts are managed to ensure financial and operational fitness while minimizing risk to the company. Dispute resolution takes into account the situation and stakes, sometimes with multiple avenues available to right-size the process employed and enable fast and inexpensive intervention.
RISK: Financial, operational and reputational risks are low. Proactive, win-win contract management that includes flexible, innovative dispute resolution methods can get the parties back to business faster, cheaper and easier.
Not all disputes are financially and time worthy of litigation and it is critical to assess these risks before contract execution. To learn more about contract management best practices, contact JustResolve.