Turning risk to opportunity
Wherever we turn, risk is high on the agenda. There are always perceptions that risk is increasing, but in reality it probably just changes. Many challenges of the past are no longer significant or relevant; many risks of the future have not even been envisaged.
Business inevitably involves risk and you could say that its management lies at the core of competitive advantage. I think that this issue sits at the heart of the contract and commercial management role – but what position should a contract or commercial manager be taking?
There is a tendency in many standard forms of contract or during negotiations to engage in relatively mindless games of risk allocation. This is done in the name of efficiency and without giving thought to its consequence in terms of missed value opportunities or subsequent impact on the behavior of our counter-party. We know that this approach often makes little sense, but it serves the interests of time and expediency.
Making commitments always carries a degree of risk. Receiving commitments is also risky, since it implies reliance on another party who may not perform. Contracting is often an exercise in minimizing our own commitments and extracting not only commitments from the other side, but also imposing unpleasant consequences for their failure. To some extent, this will always remain a significant component of the contracting and negotiation process.
But I believe that contracts and commercial professionals have another and more valuable role to play. Their skills and experience can lead them to a superior understanding of their own organization’s capabilities, the limits of which place constraints on what can be negotiated. Since competitive advantage comes from superior abilities in risk management, it is my contention that contracts and commercial staff should always be exploring ways to improve their commitment capabilities, making business performance safer, but also making their organization a customer or supplier of choice.
We all like dealing with highly competent people. We are more likely to trust them. The same is true of business. If we are seen as constantly battling to avoid risk, what does that say about our organization and its competence, its trustworthiness? So for the commercial expert, the opportunity is to identify areas where commitment is valued by our counter-party and seek creative ways to accept it. It is my contention that over time, responsible risk adopters will always win out over risk avoiders.