The Role of Contract Management in Risk Mitigation

Contract management is one of the most important parts of legal risk mitigation for any startup company that is negotiating contracts with customers. The reason for this is that when contractual obligations are different for each customer the scaling up process becomes very difficult. You run into issues for billing, due diligence issues and simply keeping up with what you need to provide your customers. The role of contract management in risk management can’t be overstated. This is particularly true for startup companies that sell to enterprise customers. Standardizing contracts for enterprise customers can be challenging or almost impossible when selling a software-as-a-service (SaaS) product for a number of reasons. The difficulty that this creates for a startup company is one that can plague it for years. Non-standard contracts mean that you need to track and understand all of the variations of your contracts.

Imagine that your first ten customers have different billing terms, 30 days, 60 days, billed monthly or quarterly. This is fine for ten customers, how about fifty? One hundred? One thousand? Keeping track of this as well as other contract terms such as liability, service level agreements or termination clauses is the main role of your contract management system. Let’s have a look at some of the risks that contracts with enterprise customers can create.

1. Complexity of Services: Enterprise customers often require more complex services than small to medium-sized businesses. In your early days as a startup it’s common not to have standarized payment terms or standardized pricing/product offerings. You’re really just trying to get sales across the line. Understanding how and when to move towards a simplified product offering and pricing is something that needs to be down as you scale.

2. Negotiation: Enterprise customers often require a lot of negotiation when it comes to contract terms. They may have legal or compliance requirements that must be addressed, and they may also have specific needs or concerns that must be addressed in the contract. One of the key areas of risk here is in your liability, warrants and termination clauses, keep an eye on how these are negotiated.

3. Size and Complexity of the Enterprise: Large enterprises may have multiple business units or subsidiaries that require different levels of service. This can make it difficult to create a standardized contract that meets the needs of all units. You might get into the position when you have multiple SOWs under one MSA or multiple MSAs for one company based on their departments. This just increases the level of complexity that you’re dealing with and makes contract management more important.

4. Regulatory Compliance: Different industries have different regulations and compliance requirements, which can vary from region to region. SaaS providers need to ensure that their contracts are compliant with all applicable regulations, which can be difficult to standardize across different industries and regions. When it comes to your contracts it’s important to understand the jurisdiction that your contract is governed by and the implications of this.

Due to these challenges, it may be necessary to develop customized contracts for enterprise customers rather than relying on a standardized agreement or template contract. However, it’s important to work with your SaaS legal counsel to ensure that customized contracts are consistent with the provider’s overall business objectives and policies.

What are the risks to look out for when managing SaaS contracts?

There are a lot of risks associated with master service agreements (MSAs) when selling a software-as-a-service (SaaS) product. Here are a few key risks to consider:

1. Lack of Flexibility: An MSA is typically a long-term contract that outlines the terms of service between you and your customer. While MSAs can provide a solid foundation for a business relationship, they can also lack flexibility if the terms of the agreement do not evolve with the changing needs of your business or your customer’s business. You’ll often find yourself in a position where you agree to terms early on in your growth that are not appropriate as you grow. Understanding when and how you can renegotiate your contract terms is important.

2. Liability and Indemnification: MSAs can contain provisions that shift liability and indemnification responsibilities between the parties. As a SaaS provider, you may want to limit your liability exposure, but you also need to ensure that you are not agreeing to indemnify your customer for losses that are outside of your control. This is particularly important when it comes to bringing on a round of investment.

3. Intellectual Property: MSAs can also contain provisions related to intellectual property ownership and use. As a SaaS provider, you need to ensure that your customer is only using your software in accordance with your license agreement and that your intellectual property is protected.

4. Data Security and Privacy: When you are providing a SaaS product, you are handling sensitive customer data. Your MSA should include provisions related to data security and privacy that ensure you are complying with all applicable laws and regulations. A large number of enterprise customers require a data processing agreement now and creating a standard DPA as part of your master service agreement will speed up the process.

5. Termination and Renewal: MSAs should include provisions related to termination and renewal, including notice requirements and any penalties for early termination. These provisions can impact your revenue and your ability to grow your business.

When you first start selling your product there will be a lot of times where you need to make decisions between getting terms that you want and landing a deal. A good legal team will help you with this but it’s important to understand the risk of what you agree to and how to mitigate this risk in the future.

Know when to set up a contract management process is important

In general, startups should begin to establish a contract management process as soon as they start to engage with customers, suppliers, or investors. Even if the startup is not yet generating significant revenue, having a formal process in place can help ensure that contracts are managed effectively and that the startup is able to scale its operations as it grows. But how realistic is this? As with anything in a start up company you should look at what your future desired state is and iterate towards that. Getting a minimum viable solution in place which may be an excel spreadsheet or contract management software such as Contract Sent might be your first iteration.

How does contract management help startups with risk mitigation?

A contract management process can help a startup company mitigate risk in a lot of ways. One of the core issues that contract management solves is that of data transparency and availability. Contracts are ultimately your source of truth for your customer relationships but the data in them is prone to issues of data silos. Data becomes stuck in a signed PDF, your sales team don’t update the deal in the CRM properly, you don’t have anything in place to capture data points around liability or break clauses. A number of these risks can be mitigated with contract management.

1. Better Visibility and Control: A contract management process can provide better visibility into the contracts the startup has entered into, making it easier to identify and manage risks. It can also provide greater control over the contract lifecycle, ensuring that contracts are properly executed, monitored, and renewed or terminated as necessary.

2. Compliance: Contracts often contain legal and regulatory obligations, and a contract management process can help ensure that the startup is meeting these requirements. This can help the startup avoid penalties or legal disputes related to non-compliance.

3. Risk Assessment: A contract management process can help the startup assess and manage risks associated with its contracts. This can include identifying potential risks and developing strategies to mitigate them. For example, a startup may identify a risk related to a supplier’s ability to meet delivery timelines and develop a contingency plan to mitigate that risk.

4. Contract Standardization: A contract management process can help standardize contracts, ensuring that all parties are operating under the same terms and conditions. This can help reduce the risk of misunderstandings or disputes related to contract terms.

5. Improved Negotiation: A contract management process can help the startup negotiate more effectively with customers, suppliers, and partners. This can include identifying areas of negotiation, developing negotiation strategies, and ensuring that contract terms are aligned with the startup’s business objectives.

By implementing a contract management process, a startup can proactively manage risk and ensure that its contracts are aligned with its overall business objectives. This can help the startup operate more efficiently and effectively, while minimizing the risk of legal disputes or other issues related to contract management.