I had a fantastic conversation with Tim Cummins of IACCM in a videotaped webinar yesterday, and we discussed some of the many elements that surround contract risk. The link to the video is available to all.
Much of Tim’s discussion was focused on the theme that we spend too much time in contract negotiations on consequences of failure. Instead, we need to spend more time upfront on risk of dispute, not the consequences of failure. A primary reason for disputes occurring is that there isn’t a clear path of escalation when things go wrong – and disputes occur because it has been allowed to fester without any senior level intervention. If you use formal escalation procedures that get it to senior levels – they can be resolved without the need to go externally. Another effective technique is to introduce the wise intermediary – you inform a recognize industry expert, recognized by both parties, and they are briefed at the time of the signing, and available for reference if there is a budding dispute coming up. About 95% of the time both parties will accept the decision, even if they don’t like it! The use of facilitators during negotiation can help calm troubled waters to help reach a balanced position during disputes.
I also heard from a group at Stanford University – who stated that Risk is the Holy Grail. It is another of those areas where I believe we have made it more complicated than it needs to be. So many risk specialists make it too complicated. What are the core risks in contracts? That one or the other party doesn’t do what they promised – or don’t do it in an acceptable way – and they do something which isn’t directly related to the contract but damaging to the counter-party. Let’s expand from that – and talk more generally about what those risks are.
This is also a subject that we will be covering in the upcoming SCRC meeting, as marketing and procurement interface to deal with the consequences of risk in contracting!