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Risk: Attitudes Are Changing

June 10, 2014

Business risks often appear endless. The list seems to grow by the day. No wonder it takes ever more time to make decisions and the number of reviewers and approvers increases exponentially.

Yet is this apparently daunting view of risk reflected in reality? Certainly there are many who presume that a career can be built around the growth of complexity and its operational management. But the signs are that most of them will be disappointed.

Business inertia created by worries over risk is perhaps itself the ultimate risk. As the list grows, leading companies and organizations are forcing themselves to re-think the way they look at this problem. Executives are demanding far more intelligent analysis, in particular around assessment of probability. In addition to this, they are pushing for tools and procedures that offer early warning of potential risks and which will prove adaptable when the unexpected occurs.

These more adaptive organizations demand substantial changes to contracts and commercial practices. For example, a growing number of organizations have almost eliminated ideas of litigation from their thinking. Rather than acting as the bottom line assumption for contract terms, it is increasingly seen as an exception scenario that must be discounted in the majority of agreements. This change alone is  liberating in the freedom it gives to negotiators. They can instead turn to focus on the terms that actually define and motivate healthy business relationships. It moves risk from a thing to fear to a thing to be managed – and that management is increasingly a shared activity between trading partners.

Much of this change is evident in the push for new tools and systems. Applications that simply replace administrative staff and perform traditional activities have a limited place in today’s dynamic business environment. The need is for systems that provide data analysis which supports business decision making – for example, which contracts are not tracking to plan, what sets of terms offer greatest economic advantage, which suppliers or customers represent a source of performance risk?

Rather than being a source of despair, the growth of risk is in fact proving salutary. Leading organizations are focused on mastering risk and managing it better than their competitors; the same is true of leading contracts and legal groups. It is indeed a time of outstanding opportunity – but only for those who have the courage to think differently.

  1. kulbir lamba permalink

    Nice to hear that “a growing number of organizations have almost eliminated ideas of litigation from their thinking”.
    But what is the way out in case the company has to enter into a litigation, as the numbers are increasing in construction industry.
    Would like to hear for an alternate..:)

  2. We have many clients that now think differently and use sophisticated tools in order to highlight issues prior them becoming recognized as a negative risk. Of course, calculated and positive risk can lead to discovery, outstanding performance and a paradigm shift. It is negative risk that needs to be identified early and resolved within a collaborative culture and environment.

  3. Ted Delyanis permalink

    It is refreshing to read that risk is being put into perspective and balanced with the need to move “at the speed of business.” The danger of course is in being perceived as difficult to deal with due to slowing a negotiation at every potential risk situation. Many times in dealing with decision makers, I attempt to give them perspective by reminding them that they will drive home that evening without a cap on their liability. My personal focus in on high probability of a medium risk or even low probability of a grave risk.

  4. Eugene P. Grace permalink

    Risk management assumes risk identification and the ability to control risk. Risks that can be identified but not controlled present warning signs about your product or service. However, I have found that most risks are controllable, if you can identify them. The biggest risks are the ones that are not previously known.

    On the other hand, certain risk items are not negotiable. For example, the disclaimer of consequential damages in a wire transfer agreement is not negotiable. The risks are too great for the financial institution to accept those outsized liabilities for a modest transaction fee. However, the assumption of risk should also be accompanied by a heightened profit margin since many industry participants want to steer away from risky services. I would disagree with the article in that the potential for litigation should always be a consideration in product development. That should not be a deal-killer, it should simply provide another window into how to build the product so as to minimize the risk of litigation. In certain cases, creative contract drafting, including client sign-offs on the riskiest elements, may prove helpful.

    With all that being said, I have been involved in creating some innovative financial products that had high risk profiles. In order to do that, I needed to fully explore the operations of the service/product and identify all points of failure. For example, when restructuring the wire transfer department, we upgraded the software and personnel within that department. We identified every single action taken within the department and assured dual sign-offs as required. Risk assumption demands a keen attention to detail at the micro level. The wire transfer agreement was upgraded as well, became a model in the United State and was published by the Bank Administration Institute.

    Risk and liability should not be show stoppers. However, it takes experience to know what risks can be assumed and those that cannot. If you can find the right risk balance, the rewards will follow.

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