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Handling Uncertainty

March 24, 2011

Yesterday I met with a senior executive from one of the largest oil and gas companies. He opened the conversation by commenting: “For the last few years, we just seem to move from one crisis to another. Every time we think things are settling down, there’s another shock to the system”.

He is not alone in that feeling – and nor is it peculiar to the oil and gas industry. In fact, surely there comes a point at which we may have to conclude that ‘a state of crisis’ is increasingly the norm and that we maybe need to stop handling crises as exceptions, instead planning for the unexpected.

Such a transition would fundamentally alter the way most organizations handle risk – and would have major effects on the approach to contracting. This executive, like many others, grasped that point and wanted to understand more about the implications.

Key to this change is that we must stop allowing the contract to be used primarily as a vehicle for protecting against the consequences of failure and start to use it equally as a tool for reducing the probability of failure. This is what drives a re-emphasis on three key areas:

1) Improving the selection and evaluation process. If we need more partnering and flexibility, we need to be sure we are picking the right custoemr and supplier, with a good cultural and strategic fit.
2) Developing contract strategies which provide agreements and support relationships that suit the levels of risk and the extent of interdependency. The ‘one size fits all’ model is a failure – in fact, in many cases it fits absolutely nothing. Many contracts are not ‘fit for purpose’.
3) The focus of contract terms must shift to a far greater emphasis on the governance and management principles, providing a framework for the management of change and incentives for both sides to collaborate and share information.

As this executive understood, these changes demand some new approaches, especially in the role and contribution of Procurement. And he also acknowledges that this is an investment that must be made if we are to improve our ability at managing crises.

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