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Contracts, Risk & Deepwater Horizon

September 8, 2010

BP today issued its internal report into the Deepwater Horizon accident. It emphasizes that this analysis did not include input from external sources and it is therefore only one element of the wider investigation into what went wrong – and what must be done to reduce the chances of similar events in the future.

The challenge with all risk management is of course to anticipate, rather than react. No management wants to be caught out by the same mistake twice; no management wants to be shown to have failed to learn from the mistakes of others. There will be many eyes on this report, using it as a way to test internal systems and procedures and to reduce the probability of similar occurrences.

So what did the BP investigators find? ‘A complex and interlinked series of mechanical failures, human judgments, engineering design and operational implementation and team interfaces came together to allow the initiation and escalation of the accident. Multiple companies, work teams and circumstances were involved over time.’

The  key recommendations from this report include a need to rethink contractor oversight and awareness, risk assessment, well monitoring and control practices, plus integrity testing practices. So while there are clearly engineering issues involved, the governance of contract relationships is identified as a critical issue. This reflects findings from other industries, which show that our constant development into areas of ever-increasing complexity demand new instruments for their management.

The deabte on this particular incident will continue for many years. But it appears already to reinforce the point that contract structures, terms and oversight provisions need to be substantially revised to cope with the increeasing complexity and risk of today’s trading relationships. That demands new skills and new levels of empowerment. Senior management must start to take greater interest and stop abdicating or avoiding responsibility for an effective contracting process. BP is not alone in this regard; indeed, our evidence suggests that its contracting practices are better than those of many companies. But the report suggests that they weere not good enough to deal with the complex environment in which Deepwater Hoizon operated. And it implies those failings were not only due to BP, but also to the behaviors and performance of key suppliers.

Once again, I cite the observations of Professor Leslie Willcocks, who last year commented that ‘contracting’ is one of the three core competencies required by companies to be successful in 21st century markets. Hopefully, we can all learn form this incident and apply renewed focus to the quality of contract and commercial management.

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  1. Service Quality & Performance « Commitment Matters

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