5 Contract Management Risks You're Unaware of in 2024

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As your business grows, you will often deal with numerous contracts. While this is a good sign, staying unfamiliar with the common contract management risks will become a significant issue.

Weaknesses in the contract management process can have severe consequences. While some issues may be minor inconveniences, others can escalate into major crises.

For example, in 2014, Facebook failed to identify a breach of its agreement with Cambridge Analytica. This incident led to a considerable loss in its stock value, wiping out $150 billion in market capitalization in just 90 minutes after the earnings call.

Such incidents highlight the importance of managing contracts. Effective oversight can prevent financial losses, reputational damage, and legal repercussions.

Without proper management, compliance failures, missed deadlines, security concerns, and ambiguous SLAs can easily arise. These issues can disrupt operations, damage relationships, and lead to costly disputes.

Given the critical role contracts play in establishing and maintaining vendor relationships, you must be aware of these risks to safeguard your business’s stability and growth.

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5 Underestimated Contract Management Risks in 2024

According to various reports, it costs thousands of dollars to draft a single low-risk contract. However, despite the cost, more than 71% of businesses fail to find at least 10% of their contracts.

Poor contract management practices can affect your business’s bottom line. Not to mention, you become vulnerable to numerous contract management risks. Let’s take a look at the 5 underestimated risks of contract management.  

Automatic Renewals and Price Increases

Automatic contract renewals are undoubtedly one of the most common contract management risks you must avoid. While you may think that automatic renewals will benefit your business, it’s certainly not the case.

Contrary to popular belief, auto-renewals often lead to increased spending. But how? Well, when you have auto-renewal clauses in the contracts, your business will continuously spend money on specific apps or subscriptions.

This will be beneficial as long as your business uses those apps frequently. However, you might also spend money on apps you no longer use.

But that’s not the only problem with the renewal clauses. Sometimes, the vendors will inform you about price hikes just before the renewal. Such price hikes will increase your business’s spending.

While automatic renewals ensure continuity of services, don’t forget they come with a financial burden. If you don’t pay close attention to the renewal dates, you will be committed to contracts you don’t need anymore.

How to Mitigate This Risk?

Negotiate Clear Renewal Terms

During the initial contract negotiation, pay close attention to the renewal terms. Remember to specify the renewal period, notification timeframe for price changes, and whether the vendor will renew your contract without increasing the price.

The best contract negotiation checklist will help you know the important negotiation parameters.

Monitor Contract End Dates

Track contract end dates and automatic renewal clauses. With automated reminders, you can ensure you’re not missing renegotiate opportunities or cancel before price increases occur.

Shop Around Before Renewing

Don't blindly accept automatic renewals. Before the renewal date, research alternative vendors and compare pricing to ensure you get the best value.

We believe that auto-renewals and missed renewals will lead to cost overruns for your business. Our deep understanding of this problem allowed us to help Wefunder track their renewals.

Wefunder needed a centralized system for managing SaaS contracts, causing auto-renewals, missed deadlines, and extra costs.

CloudEagle connected with Wefunder's systems, organized vendor data, and transferred SaaS contracts from spreadsheets. We gathered details, stopped auto-renewals, and started renewal processes 90 days prior, ensuring prompt renewals and better deals.

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With CloudEagle's 90-day advance workflows, Wefunder now stays on top of contract renewals. They steer clear of auto-renewals, renegotiate contracts, and recently save money by canceling an unused vendor contract.

Data Security Concerns with Third-Party Integrations

When you integrate third-party SaaS solutions into your existing system, you will face potential vulnerabilities. Not to mention, you will expose sensitive data to security threats.

Data security concerns with third-party integrations are among the most crucial contract management risks. Even though SaaS integrations can enhance accuracy and consistency, they can also transfer and store data over which you have no control.

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This reliance on external vendors increases the risk of data breaches and unauthorized access. Without robust security protocols, data confidentiality will be compromised. If such things happen, your business will lose all credibility and trust.

Weak contract language regarding data residency is a significant challenge. Contracts with SaaS providers often lack transparency regarding where data will be stored, processed, and transmitted.

This may leave your business vulnerable to regulatory issues. You can face legal penalties, fines, and sanctions for non-compliance without clear contractual provisions.

How to Mitigate This Risk?

Security Reviews of Third-Party Vendors:

Before you integrate a third-party solution, conduct thorough security reviews of their data handling practices. Look for certifications like SOC 2 or ISO 27001, which demonstrate their data security commitment.

Contractual Data Security Clauses:

While drafting contracts with SaaS vendors, include robust data security clauses. These clauses should outline specific security protocols, data breach notification requirements, and your right to audit their security practices.

Data Minimization:

Don’t share all data with third-party integrations. Only share the data necessary for the integration to function. This will reduce the potential impact of a security breach.

Lack of Compliance with Changing Regulations

SaaS contracts are important for boosting business partnerships. Therefore, don’t overlook data compliance and privacy regulations.

You must ensure the contracts comply with new regulations like CCPA, GDPR, Etcetra. These regulations change often, with the new ones replacing the old ones.

The danger of non-compliance is massive. First, data privacy regulations are becoming stricter. Nowadays, these laws pay close attention to how companies handle customer data, and non-compliance will make you vulnerable to fines.

Non-compliance can also lead to other negative consequences, including lost trust, damaged reputation, and even legal action.

So, how do you avoid getting stuck? A proactive contract with future-proof clauses. You must acknowledge that data privacy laws change and adapt to contracts that meet future legal requirements.

How to Mitigate This Risk?

Future-Proos Clauses:

You should consider the clauses that acknowledge the changing data privacy regulations. Also, outline a commitment to adapting the contract to meet future legal requirements.

Automatic Updates:

Consider including provisions for automatic updates to the contract based on new or amended regulations.

Regular Contract Reviews:

Review your SaaS contracts periodically, especially when regulations change. This way, you can identify and correct any potential compliance gaps.

Vendor Lock-in and Data Migration Challenges

When you don’t negotiate the contract properly, it will lead to vendor lock-in. This is one of the most underrated contract management risks you must know about.

Becoming excessively reliant on a vendor won’t be good for your business, especially in the long term. We are not saying that you cannot build a solid relationship with the vendor, but you cannot look for alternatives.

Sometimes, unfavorable contract terms prevent you from switching to an alternative solution. Failing to negotiate these terms will affect your business.

But let’s say you want to terminate the contracts with your current vendor. In that case, you will need to pay additional costs. This is because the vendor might include contract terms outlining you need to pay penalties or fines in case of early termination.

That’s not all. When terminating the contract with your current vendor, you need to consider the data migration process. And believe us when we say it’s a complete hassle. Data migration often comes with unexpected costs, which can cause financial problems for your business.

Some of the common risks of data migration are:

• Complexity of the process
• Data integration
• Disruption to your business’s operations
• Security and compliance risks
• Extra costs

How to Mitigate This Risk?

Negotiate Data Portability Clauses:

During contract negotiations, prioritize data portability clauses. These clauses ensure your right to easily extract your data from the vendor's platform in a usable format, making the migration process smooth.

Develop a Clear Exit Strategy:

When you draft a contract with the vendor, include a proper exit strategy. This means having a solid plan for vendor switching is necessary. Having an exit plan ensures you’re not bound to only one vendor.

Regular Data Backups:

Maintain regular data backups outside the vendor's platform. This creates a safety net in case of vendor lock-in or service disruptions.

However, negotiating is easier said than done. You will need experienced professionals to negotiate the best terms for your business. With our seasoned negotiators, you needn’t worry.

Unclear Service Level Agreements

Let’s imagine this: you’re using SaaS software for your business. Everything is going smoothly until you face a bug and the server is down. You become frustrated and contact the vendor, only to experience delays and unclear expectations.

This is the prime example of the dangers within poorly designed service level agreements. While it may not look much, you must avoid this contract management risk.

SLAs are agreements that outline exactly what kind of service/contractual obligations you can expect from your SaaS provider. Hence, they should be clear and concise and outline the most important things, such as uptime, response time, security, etc.

But, unclear SLAs can cause numerous troubles for your business. Vague terms like "high uptime" leave too much room for interpretation. Without specific numbers, there will be disagreements between you and your vendors.

Ambiguous SLAs often lead to service disruption. If response times for fixing issues aren't clearly defined, delays will more likely disrupt your business.

Remember, the best SaaS agreements will have certain key clauses to streamline the contract signing process. Here are the important key clauses you need to look for in a SaaS agreement:

• Agreement scope
• Service level agreements
• Subscription and pricing plans
• Data security and ownership
• Auto-renewal and termination
• Liability
• Customer support
• Product modifications

SaaS agreements are crucial for your business or vendor partnerships. Understanding the key clauses is essential to avoid financial risk and legal issues.

How to Mitigate This Risk?

Clearly Defined Metrics:

Ensure your SLAs define all relevant service metrics, such as uptime percentages, response times for issue resolution, and data security protocols.

Specific Benchmarks:

Develop specific and measurable benchmarks for each metric within the SLA. This will help you communicate with the vendors properly.

Dispute Resolution:

To prevent vendor disputes, create a well-defined dispute resolution process. This should include timelines for response and clear escalation procedures.

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Conclusion

As discussed above, these common SaaS contract management risks can lead to increased spending, breach of contract, poor cash flow, vendor lock-in, migration issues, and more. These issues will affect numerous aspects of your business, especially profitability in the long run.

So far, we have discussed the 5 contract management risks and their mitigation tips. Follow the tips to build a long-lasting relationship with the vendors.

We believe the contract management process shouldn’t be hard for your business. With proper contract management software, you can mitigate the various types of contract risks and safeguard your company’s interests.

Do you want to manage your business’s contracts effectively? Make sure you schedule a demo and our experts will assist you.

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