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Home arrow Sociology arrow A short guide to contract risk


Today's companies possess a wide range of contract-related and risk management-oriented skills and capabilities, yet these are often fragmented. It is not easy to transform the skills and knowledge of individuals to organization-level competence. Despite the obvious benefits of managing contract risk in a systematic way, challenges remain for someone wishing to change the ways a company sees and treats contracts and risk. one of the major challenges is the current "dual ownership” of contracting processes and documents. While contracting (as part of selling, purchasing, alliancing, networking, and so on) is a business process and business management is in charge of its outcomes, contracts often seem to fall into the sole domain of lawyers.

Who, then, is in charge of the contracts a company makes— or of the processes through which contracts are made, implemented and managed? Who is in charge of managing the risks related to them? Who is their "owner?” Is it wise when, first, the sales or account manager is in charge, then during negotiations the contracts or legal professionals take over, and after contract signing the project manager or the implementation team (along with the production or operations manager and eventually field or support services) take charge? When this happens, the right hand does not always know what the left hand is doing. Roles and responsibilities relating to obligations, tasks, costs, implementation, and risk may remain unclear and may cause confusion inside the company and among its customers, suppliers, and subcontractors. Buy-side contracts and warranties may not support sell-side contracts and warranties, and supply contracts may not be coordinated with insurance. Individual's responsibilities and the extent of their authority are not always completely clear.

As the number of people who work with contracts grows, questions about how the contract portfolio is administered and used and how its risks are managed need to be addressed. If the company operates multiple facilities in different locations and countries and its business units are independent, the difficulties increase. The company is not always aware of the contracts made in the different business units and whether the units' contract processes and documents are up to date. information about aggregate liabilities or risks might not be available quickly. Purchasing power is hard to leverage if the units do not know that they are using common suppliers or the value of their total purchases. on the sell-side, payment terms, warranty periods, liabilities and other terms may vary significantly between the different business units and also between the different product and service groups within one unit.

on the business operations' level, somebody must ensure that the interests of the different units, functions and professionals are aligned. Contracts must be easy to use and effective, and they must be legally valid. Risks must be reasonable in relation to the anticipated benefits, and the costs of contracting must not become excessive. operations and resources need to be managed, and processes need to be repeatable. Healthy bureaucracy is needed—but at the same time, creativity, innovativeness, and flexibility are also important. The strengths of different professional groups must be merged and the various roles and responsibilities must be coordinated. While a matrix can help define the areas of responsibility of each group or function, somebody must be in charge of integrating the different areas.

Who then is this "somebody” who is in charge of integrating the various skill sets, actions, documents and interests related to contracts, risks, and their management? The answer varies from one organization and from one project to another. The sales, procurement, project, risk or contract manager can be in charge of a major part of the whole. However, business leaders and executives are ultimately responsible for business results. So ultimately the responsibility for business contracts and for organizing the management of contract risks will normally fall on the shoulders of business leaders and executives. In any case, their attitude towards contracts determines how the opportunities offered by contracts are used—or whether they are used at all.

Executive management can delegate the responsibility for contracts and for managing the related risk, as long as this is visible in the job description of the person(s) to whom it is delegated. Responsibility is connected to the question of authority and a common understanding is needed regarding both. What matters most is clarity for everybody involved.

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