When Threats Become Opportunities: Assessing Risk to Derive Value from Contracts

Many businesses lack a clear set of defined guidelines for contracting teams and business leaders to follow during contract negotiations. This often results in organizations becoming obligated under contract terms that raise undue risk or are misaligned with the business’s needs. When this happens, the potential fallout can remain out of sight and out of mind for months or years. That is, until an event arises, such as a disruption in the supply chain, blocked strategic transaction, data breach or regulatory investigation, that exposes issues within the contract portfolio.

The matter of risk within contracts is widely overlooked and stands counter to organizational goals of maximizing business opportunities and leveraging value from business agreements. In the instances where leaders do recognize the sensitivities surrounding their contracts, the issues are typically left unaddressed, as organizations struggle to define, identify and evaluate the risks in specific and practical terms. 

Legal teams need a framework they can implement to evaluate risk within their existing contracts and establish processes that ensure risks are fully understood before entering into any new agreements. By identifying categories of risk and defining a scoring system for varying degrees of risk, in-house counsel can systemize how they uncover and mitigate potential issues in individual agreements, across pools of contracts or over the organization’s entire portfolio. 

An effective framework should include the following three elements, which are described in detail in FTI Technology’s white paper, A Framework to Transform Contract Riskinto Business Opportunity:

1. Mapped sources of contract risk according to the organizations portfolio of agreement types.
2. A risk scale to enable classification of various risks.
3. A unique risk tolerance profile, which provides a gauge for how the organization balances risk against business upside.

By tackling contract risk holistically, and embedding risk management practices into pre- signature and post-signature processes, organizations can proactively manage risks, make informed decisions and ensure compliance across their entire contract portfolio. This comprehensive approach enhances business value and supports sustainable growth.

A clear framework ultimately provides an objective, standardized methodology for organizations to evaluate the potential downsides of contractual relationships and removes ambiguity from a traditionally opaque workflow. Benefits and value-add for the business include:

• Regulatory and legal protection
• Improved risk awareness and action
• Operational efficacy
• Enhanced decision making and fewer surprises
• Decision efficiency
• Resource optimization

Teams must not let perfect be the enemy of good in these efforts. There will always be gray area in balancing risk and opportunity. The key is to create a foundation that can be built upon over time. Once a program is up and running, learnings and improvements can be incorporated continuously as new risk types and criteria are identified, risk tolerances change and risk impacts are better understood.

FTI Technology provides clients with a clear and actionable framework for analyzing contract risk and deriving value from contracts. Additional guidance for designing a balanced risk framework and risk scoring system is provided in this white paper, A Framework to Transform Contract Risk into Business Opportunity.

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The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.