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Is your risk management a source of risk?

February 2, 2012

A few weeks ago, I was asked by an IACCM member company to review their approach to assessing contract risk. It was a sell-side organization and I discovered a fairly standard listing of the risk factors that they assessed when dealing with their customers.

Like many companies, this organization was finding it increasingly hard to sell on their terms. So they had developed a standard check-list of the contract provisions that needed review. The content will come as no surprise to any of us – it had several categories of liability, indemnities, warranty clauses, performance undertakings, IP rights, liquidated damages, governing law …. in other words, all the things that could represent risk when things went wrong.

Not surprisingly, the contracts group was struggling to make much impression. Armed with this list, every negotiation became confrontational and a battle over risk allocations. Contract closures were delayed. There were frequent internal escalations because almost every situation resulted in a risk profile that was outside company standards. Senior management was becoming increasingly frustrated and saw contracts (and by extension the contracts department) as a problem.

The issue in my opinion was that risk was being viewed far too narrowly and the consequence was an overall increase in risk – risks of lost business, of increased chances of failed projects, not to mention risk to internal relationships and the future of the contracts team! So we spent time expanding the risk list and thinking about a range of contract terms that often don’t make it onto the typical risk list. These included things like ‘Requirements definition’ and ‘Documented scope’. We added ‘Client resources’, ‘Sources of funding’, ‘Cash flow’ and ‘Performance reviews’. And within these – and a host of other areas – we wrote down what standards need to be achieved to reduce the risk of contract failure. For example, lack of clear requirements is a massive risk, as is an unwillingness to ensure a properly documented scope, with mutually agreed procedures for change. If the customer is not willing to commit resources for on-going implementation or management, we have another factor that makes a positive outcome unlikely.

These additions have led to new conversations, dealing with value and how each party will contribute to success. They are topics that executives understand and can perceive a new level of value-add from the contracts team.

Ironically, our perspectives towards risky terms today often lead to the sources of risk being ignored. We become so fixated on the downstream consequences of things going wrong that we increase the likelihood that they will. It is rather like worrying about the insurance policy on our car, but never bothering to check its mechanical condition.

How good is your risk assessment? Are you managing risks or are you just dealing with limiting their consequences?

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