CEO Blog 7: I want to know if my contracts are risky. How do I do that?
Aaah – a loaded question. There is much talk about software telling you if there is risk in your contracts. Well, what is a risk to you? That would be different than a risk to another company or someone else.
To you, if the limitation of liability is capped to 2x the spend by the client in the last 12 months, that would be ok, but to others, even 5x would be ok, but not to you.
So, if someone tells you, that we can tell you if your contract is risky, question it!
The way to do this correctly is to define what is a risk to you. Contracts are broken down into different clauses. Within the clauses, you can break that down into data points. So at the first level, you have to define which clauses are risky. Then you weigh the risk of each of the clauses over the contract. To give you an example, you can say that the only 2 clauses (for the sake of keeping things simple) are the LOL and the Insurance clauses. But you believe that the risker clause is LOL, and you weigh it, say 70%, and the Insurance clause as 30%.
Now you break each of the clauses into finite data points and assign a risk score to each of the data points. Eg. Insurance: Professional liability missing – 5 risk factors, $1M and below, 4 risk factors, $2M-$1M, 3, etc…. Same for other data points. Give weightage to each of the data points within the clause (e.g. Prof Liability limit – 50%, Workers Comp limit – 20%, etc.)
Do a similar exercise for the LOL clause.
Then you will get a score for the risk of each data point. Roll that up to the risk factor of the clause, then roll all the clauses up to the risk score of the contract.
Brightleaf specializes in the extraction of these data points at insane levels of accuracy! Happy to brainstorm and discuss anytime. Contact us