How Contract Management System Can Help Avoid Legal Issues

January 6, 2025
1:44 pm

Contracts are the backbone of any business, yet they often become a source of significant risk when not managed properly. Imagine a missed renewal deadline or a compliance oversight, these common mistakes can lead to lawsuits, financial losses, and reputational harm.

These scenarios are not uncommon, and they highlight the importance of using a robust contract management system to reduce risks and safeguard your business from legal pitfalls. In this blog post, let us see how effective contract management reduces the legal issues.

Hidden Legal Risks of Poor Contract Management

Without a systematic approach to handling contracts, businesses open themselves up to numerous hurdles. Here are some of the legal risks while managing contracts.

Data Breaches

Poor contract management can lead to data security risks, such as unauthorized access when sharing files across departments. For example, financial documents should be managed securely within the finance department, and HR contracts should remain within HR, preventing potential data breaches and legal issues.

Missed Deadlines and Renewals

Missing key deadlines, such as domain renewals or SSL certificate updates, can create unexpected challenges for businesses, including temporary service disruptions and reduced trust from users.

Imagine a manufacturing business forgetting to renew an important vendor agreement, leading to service delays and expensive renegotiations. This shows why it is important to use reminders and tracking systems to keep track of key deadlines.

Non-Compliance with Regulations

In industries like healthcare, finance, and manufacturing, non-compliance with regulations can have serious consequences. For example, a healthcare provider might overlook a requirement related to patient data, leading to a breach of privacy laws like HIPAA. This can result in heavy fines, legal actions, and reputational damage.

Similarly, in finance, failing to update anti-money laundering rules can trigger investigations and penalties. In manufacturing, not following environmental rules could lead to fines and production delays. These examples highlight how small mistakes in managing contracts can escalate into costly legal and financial problems.

Increased Risk of Unauthorized Changes

Without centralized control, unauthorized changes to contracts can go unnoticed, leading compliance issues.

These alterations may undermine the intent of agreements, resulting in legal complications during audits or enforcement.

Multiple Types of Agreement

In many organizations, outdated contract templates are often shared via email, leading to the use of old versions when signing new contracts. For example, a procurement team might unknowingly use an old supplier agreement template that lacks updated terms, requiring the legal team to spend time reviewing and making changes, which delays the process.

Additionally, there is often no clear ownership of decisions made within the contract, such as why certain terms or conditions were added or removed. This lack of accountability can lead to confusion and inefficiencies.

Lack of Visibility and Accountability:

When contracts are scattered across email threads, shared drives, or physical storage, the lack of centralized oversight can make it difficult to track obligations, risks, or potential issues

Overlapping Contracts with Vendors

Managing multiple contracts with the same vendor without clear visibility into their terms can create several challenges. These can include redundant services, conflicting clauses, or missed opportunities for better terms, all of which can lead to financial inefficiencies.

For example, you might unknowingly pay for the same service under different contracts or overlook a more favourable clause in an older agreement.

A contract management system addresses these issues by centralizing all vendor contracts in one accessible location. This allows you to compare terms across contracts, spot inconsistencies, and ensure you’re not duplicating services or missing key clauses.

The system provides transparency, ensuring that all agreements are up to date, aligned, and properly managed. With this approach, you can streamline the contract process, minimize risks, and optimize vendor relationships, ultimately saving both time and money.

How to Address These Risks Effectively

Managing contracts effectively goes beyond storing documents. It involves creating a structured process that addresses potential risks before they happen. Here are some key strategies to implement.

Centralize Your Contracts

Imagine a company with multiple departments managing contracts with various vendors, clients, and partners. Without a centralized system, contracts may be stored in different locations, some in physical files, others in different employees’ emails or computers. This can lead to misplaced documents or confusion when it’s time to review or renew an agreement.

For example, a legal team might miss a critical contract renewal because the document was stored on a department manager’s email and not easily accessible.

By centralizing all contracts into a single, accessible repository, the company can ensure that everyone, from legal to procurement teams, has visibility into critical agreements. This not only reduces the risk of lost documents but also makes it easier to track deadlines and stay compliant.

Standardize Templates and Processes

Using consistent templates and approval workflows helps reduce errors and discrepancies across contracts. Standardization ensures that all contracts comply with company policies and regulatory requirements.

Over time, these templates can be updated to reflect the latest legal or business changes, ensuring that the most current version is always available for future use.

Regularly Audit, Obligation and Review Contracts

Periodic reviews of active contracts are essential for identifying potential compliance issues and ensuring that all obligations are being met. A key feature of a contract management system is the ability to centralize all obligations in one place and track them automatically.

This eliminates the need for manual audits and reduces the risk of missed deadlines or overlooked terms. Regularly reviewing contracts in such a system helps spot outdated clauses, terms that need updating, or potential issues before they become hurdles.

Enhance Collaboration Across Teams

Imagine a company where the legal, finance, and operations teams are all working on a major supplier contract. Without a streamlined collaboration process, delays occur as the legal team waits for approvals from finance, and operations is uncertain about the final terms.

With a contract management system in place, these teams can work seamlessly together. For example, the finance team can quickly review payment terms and share feedback directly with the legal team, while operations can track delivery schedules in real-time.

The Role of Contract Automation system in Business

Managing contracts effectively is no easy task, but technology can make it simpler and more efficient. Here’s how it helps.

Automatic Alerts and Reminders: CLM keeps track of important dates, like when contracts need to be renewed or payments are due. It sends reminders so you don’t forget, helping to avoid penalties or missed opportunities.
Get relevant clause suggestions with help of AI: AI simplifies contract creation by offering relevant clause suggestions based on your industry and specific contract needs. These smart recommendations cover various scenarios and can be customized to align with your requirements, saving time and ensuring accuracy.
All Contracts in One Place: With the Contract management application, all your contracts are stored in one organized and searchable system. This means legal teams and other departments can easily find and manage the contracts they need, saving time and reducing confusion.
Helps You Stay Compliant: The software checks your contracts to make sure they meet legal requirements and company policies. It flags anything risky so you can fix it before it becomes a problem.
Clear Reports and Insights: You can see how your contracts are performing, spot potential issues, and make informed decisions. The software’s reports help you understand what’s working and what needs attention.
Streamlined Processes: Each contract follows a clear review and approval process using customizable fields and workflows. These workflows help ensure every agreement is thoroughly checked, minimizing the risk of errors or overlooked details. This makes it easier for departments to share documents efficiently.For example, custom fields for the legal team could include contract details, legal agreements, and compliance documents. This helps track contract milestones, monitor obligations, and ensure regulatory compliance.

Conclusion

In conclusion, adopting effective contract management strategies can greatly improve efficiency and reduce risks. Here are the best practices for managing a contract effectively train your team, invest in automation, collaborate across teams, standardize processes, and define clear ownership.

By implementing structured processes and leveraging it with effective CLM 365, you can safeguard your operations and focus on growth. A proactive approach today can save you from expensive mistakes tomorrow.

Looking to reduce the legal risks involved in managing contracts? Book free demo today and let our demo specialist guide you through the process.