Managing Risk and Uncertainty

In 2018, IACCM (now World Commerce and Contracting) was commissioned to identify ‘leading practices in post-award contract management’. Following intensive study, we had not found any organization that could claim a consistent post-award capability, especially for more complex forms of relationship.

Good contract management is not about simply having a robust process and properly skilled and equipped teams. As with any process, the real measure of success lies in the quality of the deliverable and what we discovered was plenty of individual examples of excellence, but none that demonstrated consistency across an entire contract portfolio.

Managing risk is consistently viewed as one of the core purposes for having a contract and therefore lies at the core of contract management. However, that sense of purpose does not necessarily translate into effectiveness. For one thing, many contracts lack balance and seek to apportion risk primarily in the context of consequence (for example, liabilities and indemnities). They do not fully address issues of risk probability (for example, a change in market conditions or poorly defined requirements). This means that resolution of many of the events that occur post-award depends on the strength of the relationship between the parties and the skills and attitudes of the individuals managing that relationship.

The depth of these weaknesses became especially evident with the outbreak of COVID-19. Not only was this the sort of risk that contracts could not accurately predict, it also introduced an extraordinary depth of uncertainty. Contract managers knew that supply was under threat, but struggled to know where that threat would materialize and also found that they lacked the tools to handle it. In general, contracts simply are not designed to manage uncertainty and, while the pandemic is an extreme example, it is in fact indicative of our increasingly volatile and uncertain world.

When we published our report in 2019, this issue was identified as one of the key findings. We observed that a leading practice in post-award contract management would shift thinking from ‘risk management’ and instead embrace ‘uncertainty analysis and management’. This approach led us to create a new ‘Value-Compliance-Uncertainty Framework’ (see chart below), a method by which organizations position their contracts into a risk and uncertainty model which guides the form of agreement and the depth of contract management skills that will be required. The adoption of this model by several leading corporations has equipped them to better identify and manage risk and uncertainty – a critical capability in today’s business environment.

The VCU Framework

Copyright IACCM 2019

‘Managing Risk and Uncertainty’ is the topic of World Commerce and Contracting’s current topic as part of its Tools, Analytics, Skills and Knowledge (TASK) program, which can be accessed at https://www.worldcc.com/Resources/TASK