Managing Contractual Risk: What Tech Companies Need to Know

As an associate sponsor of the Leeds Digital Festival this year, Marsh Commercial is delighted to share some of our insights and knowledge of key issues facing the tech industry, many of whom are based here in Leeds.

As a leading insurance broker and risk management firm, we look at those contractual risks tech companies are entering into regularly, and what companies need to be aware of when doing so to manage their risk best.

Technology plays a role in almost every aspect of our lives. In recent years alone, we’ve seen significant developments from a business perspective. The Cloud, AI and automation technologies, as well as digital transformation projects, are all driving innovation and efficiency in virtually every sector. [1]

But this ongoing innovation presents a challenge – an increase in the volume, and in some cases, the complexity of contracts that technology companies are expected to manage. [2]

Contractual Risks

Technology companies manage thousands of contracts covering a wide range of applications: customers, resellers and distributors, third party technology licencing, joint ventures, employment and contractors, to name a few. If robust risk management processes aren’t adhered to, these companies may find themselves exposed to a wide range of risks, which include [3]: 

• Revenue leakage and overrun costs – may arise from loose contract terms and having limited control of a contract during project delivery. For example, leaving additional service hours unbilled or not monetising high-value services. [4]
• Scope creep – creates additional costs outside the contract’s scope, leaving a business without sufficient contractual cover for further liabilities.
• Quality failures – or a contracted product or service failing to meet business needs. This can result in complicated contract disputes.
• Damage to a business – occurring from breached contracts.
• Intellectual property (IP) loss – from inadequate contractual coverage.

If not managed well, each of these risks can lead to contract disputes, liability claims and even litigation. [2] 

The most significant risk technology businesses face concerning contracts is the acceptance, limitation or exclusion of liabilities. A challenging errors and omissions (E&O) insurance market creates contractual issues regarding liabilities and arranging sufficient insurance to cover them. [2]  

Technology companies may find themselves taking responsibility for contracts and potential liability for issues that may be out of their control. This could include unenforceable liability exclusions or agreeing to limitless, or burdensome, liabilities in one-sided agreements. These may all have significant legal and financial consequences should a dispute arise. [5] 

Risk Management Framework

The scale of managing technology contracts and the associated risks is vast. Technology companies should adopt an advanced risk management framework that extends over the life of the contract, covering a range of business functions:2 

• Procurement or sales processes – to identify issues and risks affecting contract or insurance terms should include due diligence as well as credit and litigation checks.
• Contract approval – a detailed process that should be informed by contract risk reports, the contract business case, and a robust approval process.
• Governance boards – should have visibility of contract risk through weekly or monthly reporting.
• Internal assurance – carrying out a full independent audit of processes and quality control for risk management adds a reassuring layer of defence. This approach strengthens and assesses the risk management process, and controls employed by operational and delivery teams, as well as compliance functions.

This framework aims to identify and manage the risks associated with technology contracts. It’s fair to say that contract risk isn’t simply about the terms of a contract. 

In a world of increasingly complex technology contract risk and insurance, these approaches are critical to protecting revenues and reputations. And in the face of a challlenging E&O insurance market, they’re also crucial for managing effective risk transfer programmes.

Want To Know more?

A recent Marsh webinar explored these issues in detail, looking at key contract risks, real-life case studies, contract risk management frameworks, implications for insurance and more. You can watch it in full here, check out the Marsh Commercial Tech Hub for advice and support for your tech business, and see some of the Leeds Digital Festival events we think are worth checking out below!