Managing Risk: a fundamental part of the procurement process

Defence Contracts Bulletin - 13/08/2008

Managing Risk: a fundamental part of the procurement process

Why is risk management so important during the procurement process?
Here, Greg Brownlee, Managing Director of commercial and contract management consultancy Blake Newport, looks at the importance of risk management and why the opportunity to use best practice for commercial gain should not be shied away from.

Put simply, risk management is a decision-making process in which consideration is given to the likelihood of a problem occurring. At its most basic it is a process that we use every day in both our business and personal lives. Often occurring as a matter of instinct or common sense, this process is usually based on past experiences. But whilst this may be appropriate at a personal level, today’s business world demands a more formal and structured approach. This is never truer than in the defence sector, where the ability to deliver on time and within budget is fundamental to an organisation’s longevity.

Why is risk management so important?
The ability to take risks is a fundamental part of any business, and in this context risk management plays a core role in determining how successful a business can be. It reduces the impact and likelihood of failure and should form part of any management process at some level. If implemented and correctly administered, it is a proactive management approach which identifies and eliminates (or reduces) problems before they have a opportunity to occur, greatly reducing the likelihood of dispute.

Risk management is a management tool used throughout the decision-making process and as such is not dependent on any particular form of contract for its effective operation. Most traditional contracts do not make definitive references to risk management and simply seek to apportion hazards between parties. This is a historic technique that stems from the opinion that the best solution to risk is to pass it onto others. This however, can often enlarge risks and reduce the effectiveness of any risk management, as the other party may not be in the best position to deal with that risk. The result is often inflated costs as the other party seeks to cover the uncertainty, that is, higher tender values and significant claims when projects commence.

The use of risk management is prevalent throughout the entire defence sector, with clients keen to understand how risks will be identified, managed and controlled. This is particularly relevant to Defence Estates, for instance, where a budget in excess of £1 billion a year is prioritised across construction and maintenance contracts. By making risk management an integral part of the procurement process, the organisation has successfully identified the lowest-risk option, awarding five Prime Contracts, each of which also has a clear risk management strategy.

How the process of risk management should be undertaken
The key to successful risk management is ensuring that all current issues and potential risks are identified, clearly understood and agreed by all involved. At its simplest, risk management can be split into three stages: identification, analysis and monitoring.

The initial stage involves the identification of the relevant risks. This can be accomplished when the individual charged with the risk management function uses their personal expertise, with the help of empirical data or the aid of a checklist of risk elements, to identify the hazards which may prevail.

A more appropriate and effective approach, however, is a ‘risk workshop’. This involves representatives from all the project disciplines, that is, project managers, designers, technicians, contractors and specialists attending a risk workshop meeting to share knowledge, experience and views in an open forum, collectively identifying risks. This multidisciplinary approach will highlight more risks and potential solutions than involving just a select few.

Held at different stages throughout the project, risk workshops will also identify and cover all aspects of a project, as well as design and development, and will widen participants’ perceptions, knowledge and understanding of the risks that apply to their own disciplines, as well as to those of others.

The second risk analysis stage evaluates the source of the risk in relation to the likelihood of an event occurring and its potential impact. The particular approach to the analysis of the risk will depend on the project size and type and the requirements of the parties. Risks can therefore be prioritised into categories to allow parties to concentrate on those with potential impact and a greater chance of occurring. Without assessing and prioritising risks in such a manner, time could be wasted dealing with risks which are not likely to occur. Equally, spending too much time assessing and managing unlikely risks can also divert resources that could be used more profitably elsewhere. It is important to find a balance.

The final stage occurs when the participants give consideration to the management of the risk. Effective risk management considers where individual risks can be reduced through clarity of information of further investigation, offset to another party that is better suited to deal with them or simply accepted. Alternatively, risk may be eliminated altogether through the rejection of a particularly risky aspect of the work.

The benefits
To some risk management may seem like a costly addition to the contract process, but the impact of not practising effective risk management far outweighs the costs involved. Companies that employ this technique are likely to be rewarded with a greater ability to achieve goals, objectives and win tenders. The process of risk management will not only allow for greater risk-taking due to a better understanding of the potential problems, but also lead to an improved definition of strategies and a greater confidence in budgets, quality assurance, delivery, improved insurance cover and programme schedules.

Risks are a factor in nearly every business decision, but by employing effective risk management an organisation will be in a far stronger position to deal with elements of uncertainty and change.

How do I find out more?
For further information please email Greg at leeds@blakenewport.co.uk or alternatively contract Blake Newport on 0113 222 1400

Greg Brownlee, Managing Director, Blake Newport

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