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The Blame Game

May 5, 2010

The oil rig explosion in the Gulf of Mexico represents just the latest example of a high-risk incident for which preparations were inadequate. Like other recent examples (the volcanic ash from Iceland springs to mind), the relevant parties who should be engaged in resolution move quickly to recrimination.

There are several key aspects of these disruptive risk incidents that contracting experts should be considering. One – which I raised in a recent blog – is the fact that we cannot anticipate and make provision for every specific risk; instead, we should ensure that our contracts and relationship processes envisage and encourage a risk regime that causes the relevant players to come together rapidly and to cooperate in remediation. The Gulf incident appears to lack any such governance regime – and it is interesting how quickly the Federal government has moved to blame BP, when it could certainly be argued that they should have ensured the responsibilities for resolution were more clear and that the resources to deal with such incidents were in place.

An article in the New York Times questions the fairness of the criticisms levelled at BP and suggests that Federal officials shared the view that the incident was manageable and took no steps to validate the early assumptions. The article also points at the lack of coordination between relevant parties, especially within the government sector – a seemingly familiar refrain. One cannot help asking whether the public pronouncements by the US Administration are designed to help resolve the oil spill, or are instead focused on political damage limitation for government agencies.

Stratey+Business this week issued a timely and fascinating article entitled “Why We Hate The Oil Companies“. Written by a former President of Shell Oil, it highlights the need for better communications and transparency in an era where politicians are in denial over the truth of energy costs and policy. The volatility of oil prices is frequently seen as price gouging or profiteering by the industry, rather than subject to the laws of supply and demand. Oil companies make convenient scapegoats and public opinion is likely to assume their guilt. Therefore smart businesses will recognize and plan for this key aspect of reputational risk. Sustained focus on public image is critical to trust. Yet when I look at typical oil company behavior (as evidenced in their contracting practices), I see an environment in which transparency is discouraged (confidentiality is key) and where contracts focus on the allocation of blame and management through fear (onerous liabilities, indemnities and damages provisions).

The Gulf incident will of course have wider ramifications for the industry. In addition to the questions about off-shore drilling, we can doubtless expect more after-the-fact regulation by lawmakers and perhaps greater oversight by government agencies. But there will also be short-term impacts that raise other questions about the balancing of risk. For example, today’s lean supply chains will once again be tested by the diversion of resources towards this incident. How many oil companies may find their operations exposed by the lack of spare resources available to maintain their standard operations? To what extent will contractors take advantage of the resulting shortages to hike their prices?

This incident is just the latest in a continuing series of unexpected events. The turmoil of recent times certainly appears to be part of the ‘new normal’ that has arisen from an increasingly inter-dependent and inter-connected global economy. It is also a result of the increasing dependence that companies have on external suppliers, with more and more of their core operations outsourced. All of this points to the critical importance of relationship management. As smart people, we know that good relationships are not based on a system of punishments for failure, but depend also on rewarding success. Contracts and contracting practices represent a fundamental element in framing those relationships and especially in providing a governance process which ensures coherent behaviors across a value chain. As professionals, it is the duty of contracting and legal experts to consider whether the instruments and approaches they use today are truly assisting in both the creation and protection of organizational reputation and value delivery.

One Comment
  1. Tim, this is an excellent article and in Business Continuity terms I find it a rather chilling expose of interdependencies not being managed at a fundamental level!
    Thank you!

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