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4 Risks Exposed by Ineffective Vendor Contract Management

2 min read
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At every point in the vendor risk management lifecycle there are risks that need to be anticipated, identified and mitigated. Contract management is no different. As you likely already know, contracts are serious, complex business, with a lot of moving parts, and are not meant to be rushed through.

The Dangerous Cost of Poor Contract Management

You should have well-developed vendor contract management processes in place. And, on top of that, potentially a contract management platform. Unwillingness or hesitation to utilize a contract management platform to help streamline the process, due to cost or the work to onboard, may ultimately cost you more in the long run. But, whether you’ve automized or not, the bottom line is, when contracts aren’t managed effectively, you open up your entire organization to a variety of risks.

4 Ineffective Vendor Contract Management Risks that Can Happen

Here are four common risks you need to be aware of:

1. Bleeding costs. Loss of revenue is one of the largest risks associated with poor contract management. Without properly reviewing contracts you leave your organization wide open to wasted dollars in several areas, including:

  • Money spent on underperforming contractors
  • Opportunity cost
  • Redundancy cost
  • Scope creep
  • Loss of customers due to flagging quality
  • Missed automatic renewals

2. Missed renewals. Without effective contract management processes in place, it’s pretty easy to lose track of when a contract is expiring. Ultimately, this may lead to an unexpected delay or halt of core services and/or product delivery. When you miss a contract renewal, you also miss an opportunity to choose a vendor that may offer a lower rate (aka opportunity cost). In many cases, vendors will try to negotiate better deals upfront, with the hopes of scoring a long-term set up.

Typically, there are also restrictions and time limits around the length of time organizations can have access to intellectual property. So, if your organization and/or your vendor allows an agreement to expire, but the vendor continues to have access to your product, you open yourself up to liability.

3. Poor service level performance. Contract management requires a lot of ongoing oversight. The good thing is, with a centralized, streamlined contract management system, this is much easier. However, without a solid process in place, service level agreements (SLAs) are often overlooked or mismanaged. The end results? Poor delivery, declining quality of service and products and fractured communication.

For example, what happens if you don’t properly review your contract for continuing service requirements and the vendor’s obligation to continue providing specific service levels (such as data security) during a transition? You could open yourself up to data breach and a whole host of other security issues.

4. Compliance failure. Without a doubt, regulatory compliance has become increasingly complex and is unique depending on industry, state and/or region. Overlooking compliance clauses in your contracts can have major implications for your organization. When juggling a lot of contracts, it’s critical to make sure the necessary compliance clauses are included so your organization can oversee both internal and external compliance. Having contract management platform can help you simplify and digitize the audit process so you can better manage data privacy, confidentiality and arbitration regulations. Without, you put your organization at risk of compliance failure, which can also have financial implications!

Don’t forget that contract management is a key part of the vendor management lifecycle. It’s critical to the overall success of your third-party risk management program. Leverage the power of effective contract management to take some of the manual, heavy lifting off your plate and to help with the day-to-day oversight – all in all limiting risk exposure.

Dive deeper into learning how to manage your vendor contract compliance. Download the infographic.

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