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Managing risks

All activity is subject to some risk and business and the world of contract management is not immune.

Risks however might be better described as uncertainties since sometimes things happen which were not foreseen but are actually better than anticipated.

Risk however, in popular usage, represents some events or disruption to plans and expectations which are unwelcome and cause difficulty, stress, the need to re-schedule activities or in some cases severe death and destruction.

However we cannot forecast everything and can control only some processes to avoid a potential problem so there are fundamental considerations.

Donald Rumsfeld famously described the ‘unknown unknowns’. That is those things we do not know that we do not know. These are the risks that no one was looking for or perhaps could not even understand were threats until they happened.

These have also been described by Nassim Nicholas Taleb in his book ‘The Black Swan: The Impact of the Highly Improbable’ (further details of this book are available from the link at the bottom of this page).

The point of these is that they are very low probability events but their impact can be huge.

Most other risks have variable probabilities of happening and their impact can be estimated so there can be a cost benefit calculation about whether to spend resources to lower the probability of things happening or to reduce the impact if they do.

Some of these risks are day to day changes and small disruptions to plans that operational and contract managers deal with daily and are part of the normal challenges of their role but there are much bigger issues that all in society should be aware of and consider taking collective action to mitigate.

The World Economic Forum has been evaluating these for some years and their 2015 publication ‘Global Risks Report 2015’ is worth reading.

This lists the collected risks under the headings of:

  • Economic

  • Environmental

  • Geopolitical

  • Societal

  • and Technological.

Some of these are influenced by people’s actions and some by the joint effects of the planet and climate change.

These global threats can of course impact our contracts and some degree of risk sharing and joint action to mitigate or recover is worth building in to the contract agreements where possible and economically sensible but sometime we simply have to react and that can also make an amazing difference.

An example of this is the difference that Nokia mangers made compared to their competitors in Ericsson when their common supplier suffered from a small fire after a lightning strike.

Amit S Mukherjee describes this in an extract from his book ‘The Spider’s Strategy: Creating Networks to Avert Crisis, Create Change, and Really Get Ahead’ on the FT Press website.

Nokia initiated a series of changes before Ericsson realized there was a serious supply disruption and as a result Ericsson had to abandon their phone production while Nokia’s results showed little impact.

You may also be interested in reading the ‘Executive summary of the Institute of Risk Management’s ‘Extended Enterprise: Managing risk in complex 21st century organisations’ report’ and ‘Zurich Insurance Group’s ‘Global Risks 2015 report’ by Steve Wilson and Linda Conrad’ - both of which are available from links at the bottom of this page.

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This article is from the free online course:

Contract Management: Building Relationships in Business

University of Southampton