Risk – what risk?
Risk is about uncertainty – and good risk management is about distinguishing the uncertainties that matter from those that don’t.
This was just one of many valuable insights offered by Dr. David Hillson in an IACCM ‘Ask the Expert’ interview on ‘Bringing a risk perspective to Contract Management’. He was explaining that those who assess risk often focus on future uncertain events and fail to consider factors such as variability and ambiguity.
David made these useful distinctions:
- uncertainty of an event is based on the question will it or will it not happen?
- variability occurs when we can be sure the event will happen, that the goal can be achieved, but key parameters are uncertain – for example, how much it will cost or how long it will take
- ambiguity occurs when we are not quite sure what it is to be done, or what capabilities or competence it may require
These characteristics of risk demand different contractual terms or approaches. They should affect how a deal or relationship is structured, the pricing model, the termination rights etc.
Dr. Hillson also challenged use of the term ‘risk probability’ because, as he pointed out, probability relates to how likely it is that something will or will not occur. It does not take account of frequency. Therefore he suggested that we should think in terms of ‘risk likelihood’, which embraces both probability and frequency.
With these background concepts in place, the discussion moved to their application in the world of contracts – but I will write more about that tomorrow.
Recording of this webinar is available in the IACCM Member Library