Contract risk

Managing risk and unlocking value

Contracts may be complex but the dynamics that govern their creation are simple: one side wants the largest amount of revenue, the other the smallest expense. Whatever you're looking for, one lesson is vital: the value of contracts is realised only after they're signed. Tuck them away in a drawer and you could not only lose out on benefits you've sought to secure. You could be opening yourself up for a multitude of new risks.

Types of contract risk
Poor or perverse incentives, bad planning and demand management, ill-informed buying, deliberate contract manipulation, miscommunication - they can all erode the value of a contract. Other areas of risk include:

Revenue leakage and cost overruns - including failure to monetise high value services appropriately

Scope creep and quality failures - including failure of the contract to meet the business needs

Damage to business - from loss of competitive edge to personal reputation

Loss of intellectual property - poorly managed knowledge transfer

Loss of bargaining power - inability to act as an informed buyer

Getting it right
A fundamental part of managing contract risk is clearly understanding your contract in-depth. You also need to engage with the end users of your contracts to ensure they fully understand the terms of the contract and how it is intended to operate.

But how do you make sure the contract delivers as you expect? Once again, the answer comes from information. How often do you review your contracts and what have you discovered? How do you get the information you need to monitor and manage your suppliers? How do you measure the value they're giving you?

Although purchasing and invoicing may have been accurate at the start, how do you monitor pricing adjustments, price list additions or other amendments that have altered the original contract?

A lot to consider, certainly, but look at the benefits of getting it right: revenue enhancement and cost savings. Improved performances from suppliers. Less time wasted for your business. Above all, knowing how to manage your contracts well so you can hone your procurement strategy and be better placed to consider your contracts in the future.