How to Manage Contracts Risk in a Startup?
There are tons of contracts that any startup would come across in its day to day life, to remind a few – Employees contract, Vendor Agreement, Logistics level contract, Service level contracts etc. Alarmingly 2017 has seen a massive increase in startups utilizing the opportunity of free contracts template, and a majority of these contracts are invalid and have opened up doors for legal disputes. Founders and decision makers of startups, areas of contractual control should be a focus for you this year. Why? Well the room for corporate governance has been boundless and the government is not going to back off, with this in effect to protect company and shareholder interests, companies need to be proactive in assessing their contract risks. With that as the abstract, let’s see How to manage contracts risk in a startup.
First and foremost, you should have a clear understanding of the contract in depth and get it right while highlighting what could go wrong as a risk management initiative.
Secondly, never treat all contracts alike, the reason being objective of each contract would be different. For instance, a contract drafted with a purpose to streamline inventory management in logistics would be much different from employee contract.
Thirdly, Majority of times contract related problems arise from lack of transparency between parties, types of contract risks that can deduce the value of a contract:
- Poor or perverse incentives
- Bad planning
- Bad Demand management
- Ill-informed buying
- Deliberate Contract Manipulation
- Embedded options
- Elaborate pricing structure
- Poorly managed knowledge transfer
In a recent study, by Contract Management Benchmark Report cited “Ineffective control and management of supplier contracts cost businesses $153B per year in missed savings opportunities and increased risks. With Globalization and the trend to outsource non-core business processes have also contributed to increasing use and importance of contracts, the number and complexity of contracts have increased, so has the volume of risks associated with those contracts.
Ways by which Contract Risks can be managed:
At Contract Drafting Stage –
- Establish the scope of the contract review
- Review and validate the universe of vendor relationships
- Agree on objectives mutually
- Understand Expectations
- Developing contract review procedure
- Establish a legally enforceable format
At Contract Review Stage –
- Review of regulatory and business risk factors
- Third party or contract risk profile
- Areas of focus for monitoring procedures
- Contract assessment reviews
- Contract financial visibility assessment
At Contract Improvement Stage –
- Implementation of changes in legal viability format
- Highlight and leverage embedded options
- Highlight for improvements
At Post-Contract monitoring Stage –
- Compliance verification and validation procedures
- Data extraction and Analysis
- Trend Analysis
- Industry Analysis
At Communication or delivery stage –
- Contract Assessment reviews and reports
- Coverage of client expectation
- Compliance and monetary findings
- Process and control improvement recommendation
- Revision of contractual terms, termination of the relationship, contract enhancements etc.