Companies can mitigate the risks that threaten their profitability and survivability in several ways. One of the best known is by purchasing insurance. Another of the most common ways to address and reduce risk is contract risk management. This is the process of trying to identify the risk of entering into agreements with given vendors and partners before entering contracts and then reducing those risks through contract negotiations and the writing of the contracts.
The opposite of contract risk management would be entering into contracts without taking a possible unfortunate event into consideration. In such a case, companies would agree to a deal with a vendor or contractor and then simply fill out a boilerplate contract. It might be a matter of just changing names and dates. Instead, however, companies could be performing risk analysis for each particular deal and then altering contracts to address risks, such as the partner going bankrupt or reneging on the deal.
During the process of contract risk management and before entering contracts, companies should ask several questions to assess risk. They include what exactly could go wrong in the particular business agreement? What are the chances of those things going wrong? If an unfortunate event occurs, what would the consequences be, and how serious would they be? Companies can change the wording of a contract or add clauses to it in carrying out contract risk management.
Contract risk management does not have to be a matter of getting ahead of the partner or vendor. One of the keys to this kind of risk management is simply a matter of being clear. The contract should plainly state which party to the contract is responsible and liable for what. In the end, contract risk management should end with a deal that is fair to all the parties involved.
Another end result of contract risk management is that companies might determine that changing the contract will not be enough to mitigate the unfortunate event. Partners might not agree to have a liability transferred to them, for instance, or they might insist that the other companies involved in the contract take on certain risks. In either case, companies might decide that they cannot afford to take the risk. Insurance can then be bought to complement the contract risk management.
To properly analyze risk and address risk during contract negotiations, it might be important to seek assistance from experts. These could be internal resources, such as the corporate counsel or the risk management department. Companies could also seek assistance with contract risk management from outside experts, such as their insurance agents or brokers or from outside legal counsel, for example.
