How to mitigate risk in the era of black swan events

We currently live in the era of black swan events.

Black swan events are unpredictable events that impact businesses and people across countries and even globally. They’re extremely rare — challenging standard forecasting and risk management practices.

We’re all well aware that we are living in a unique period of history, where these type of events have become the norm. From the global pandemic to the supply chain crisis to the invasion of Ukraine — over the past four years alone, we’ve seen black swans flying left and right.

So how can companies survive with the constant disruption, much less thrive in this era? According to Dawn Tiura, CEO and President of Sourcing Industry Group, the best way to prepare for uncertainty is by mitigating risk.

What are black swan events?

Black swan events are unpredictable, seemingly once-in-a-lifetime events. They happen almost without warning — like the COVID-19 pandemic — and impact all aspects of society. Sudden, devastating events can affect your company’s predicted risk management, leaving you in a precarious position.

These events can reveal a business’s often-overlooked risk areas. Standard practices focus on measurable or historically predictable risks. Black swan risk management involves predicting what you don’t even know. Black swan events challenge businesses, forcing them to adapt to unpredictable disruptions. Contract risk management is one way your team can handle new surprises.

New era = new contract risks

In her main-stage presentation at the Agiloft Summit 2023, Dawn argued that black swan events expose businesses to major contractual risks. These risks are wide-ranging and include financial risk, reputational risk, supply chain risk and even risk of sanctions.

When Russia invaded Ukraine, new risks came up that Dawn had never considered.

“Now, I certainly have to look at all my contracts and say, ‘Who do I have that now might be on a sanctions list? Who am I selling to that might resell my product into a finished good going to Russia? That is not allowed.’ So I have to know who the buyers of my products are, where they’re selling from me. They buy it from me, they sell it again, and where does it go in manufacturing? Does it end up in Russia? If so, I can be fined,” she said.

In another anecdote, Dawn shared how a casino’s wireless network got hacked, making them vulnerable to data leaks and theft. And the source of this security vulnerability? An independent contractor who connected to the casino’s network — and there was no clause in the contract about connecting to the local network.

The rise of technology, geopolitical instability, and the general speed at which the world is evolving exposes businesses’ contracting to risks for which many were prepared. So, while risk may expose the organization to any number of issues, the ability to foresee it and overcome it also ensures that the organization not just survives but thrives in the face of volatility.

“Risk is everywhere, and this is why it’s everyone’s job to be aware of it,” Dawn said.

What contractual risks should you watch out for?

In the context of black swan events, you need to be ready for anything. While these events are, by definition, unpredictable, businesses can look for contractual risks that might expose or protect them:

• Supply chain disruptions: Look for clauses in supplier agreements that address interruptions or delays. What, if any, delays are written into your agreements?
• Data security: Make sure all your vendor and contractor agreements include cybersecurity clauses. Proper cybersecurity clauses and tools protect your business from liability and exposure during sudden events.
• Regulatory compliance: Compliance is always shifting. Monitor your contracts for compliance with changing sanctions and laws so you’re always following regulations.
• Force majeure: These clauses protect you in case of unforeseen events, like black swan occurrences. The stronger your force majeure clause, the better your safety net.

Steps to improving risk mitigation

According to Dawn, effective risk mitigation can be the difference that contributes to the company’s success when faced with black swan events.

“Everything that happens, we can impact play as it’s happening on the field right now and change what’s going to come out in the financial statements, change what’s going to go to the shareholders. We can mitigate that risk and be the heroes,” she said.

Below are some of the steps Dawn shared for how you can improve risk mitigation in your organization:

1. Monitor all contracts for clauses regarding reporting and identifying risks.
2. Make sure you have a well-defined force majeure clause in contracts.
3. Ensure you are using best practices for your risk management structure.
4. Understand how the contours and interrelationships of existing risks may change.
5. Anticipate future risks before they develop and have mitigation strategies in place.

How technology enhances risk management

While the above steps can certainly prepare your organization for black swan events, they could still be insufficient without the right tools. In order to overcome disruptions, you need a technology solution that offers speed, agility, and flexibility. This is why Dawn advocates for a powerful Contract Lifecycle Management (CLM) software like Agiloft.

CLM software can help mitigate risk because it provides transparency over all your contracts. The real-time visibility provides critical information like contract status and obligations, ensuring your business is following legal and regulatory requirements and avoiding financial liabilities.

The importance of Artificial Intelligence (AI)

Another critical tool to have in your CLM arsenal? AI. 

AI and risk management are becoming essential partners in the business world. With new technology changing our world, AI can help predict and track rising risks.

“If you don’t have a contract management system that uses AI, bless your heart… because you’re going to die. You’re going to get massacred somewhere,” she said.

AI-powered CLM platforms enable teams to:

1. Search contracts intelligently: Features like conversational AI let users ask questions using natural language. Ask them, “Which contracts include cybersecurity clauses?” Or, “Sort by contract expiration to check upcoming deadlines.”
2. Anticipate risks: AI can flag high-risk clauses or spot missing provisions. Your teams can address issues before they escalate instead of just reacting.
3. Optimize workflows: Use AI to automate your approval processes, compliance checks, or contract reviews. These features reduce human errors and speed up decision-making.

Dawn highlighted Agiloft’s ConvoAI solution — a search feature that allows users to find contracts by typing questions in natural language.

“When I heard about ConvoAI, I was so excited because these are the questions we’ve been asking, ‘Which contracts have this kind of termination clause? Which contracts make us identify our fourth parties? Which contracts have force majeure?'” Dawn said. She believes understanding these clauses in your contracts is essential in protecting the company or organization.

A good CLM solution has a robust workflow engine where you can automate every step of the contract lifecycle, from creation to approval to renewal. This eliminates manual, error-prone processes and ensures your best people are freed up to focus on more strategic initiatives.

“You’ve got to be digitized as much as you humanly can because smart people don’t want to do dumb work. So, get it digitized. Get it automated,” Dawn says.

How CLM platforms support data management

CLM solutions play a crucial role in managing contract data. Businesses get a centralized repository for all their agreements, streamlining management and compliance. CLM platforms collect, store, and retrieve contract data, enabling companies to stay on top of their work, even during high-risk periods. 

Use CLM platforms to:

1. Track tasks: Track renewal dates, deadlines, and compliance requirements. With all this data in one place, teams can easily stay on top of obligations, making it easier to avoid risks.
2. Access insights: Use CLM reporting dashboards to analyze contract trends. Teams can make more data-driven decisions, helping you adapt to changing conditions while meeting specific goals.
3. Identify risks: Leverage the power of CLM software to identify force majeure clauses, noncompliance risks, and other user-defined risk indicators in seconds. The faster you can detect risks, the faster you can resolve them.

Are you prepared to face future black swan events?

In preparing for a black swan event, CLM software is an indispensable tool. CLM platforms ensure compliance, improve risk management, and enhance contract visibility, enabling organizations to navigate unforeseen challenges with agility and confidence. By streamlining contract processes and providing real-time insights, CLM solutions empower businesses to be well-prepared for the unexpected.

Use Agiloft’s award-winning CLM platform to streamline every step of your contract lifecycle. Even with the risk of black swan events, our platform gives you the tools to prepare for uncharted territory.

Reach out to us to schedule a demo and discover how AI-powered insights can drive your success!