Avoid, reduce or pass the buck on procurement risk... (Part 1)

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Clever suppliers will plan to introduce risks after you've entered a into contract or started a project. As part of a "foot in the door" strategy, they might be the lowest bidder initially but with a deliberate plan for increasing costs once the "Balance of Power has shifted"....

A good example of this is in outsourcing contracts / projects. The supplier knows that once the buying company has given over management responsibility to the supplier, the negotiating power has shifted in the direction of the supplier. If the supplier planned its strategy carefully, this would be a good time to start introducing risks / costs that the buyer never though about earlier...

In our previous article, we discussed the first major reason why Procurement projects / contracts fail... The second major area is that of managing risks.

The graphic below indicates that the ability to influence risk is the greatest at the planning stage. It is also here where it costs the least.

Contract.gif

On the other hand, as time moves on, the ability to change the outcome of the contract is greatly reduced while the cost of doing so greatly increases.

Sophisticated suppliers bargain on this trend to renegotiate with their customers who did not plan properly. (Rather naughty of them!)


STEP 1: Is to develop a clear understanding of the potential risks throughout the lifecycle of the item /project:
Just as in the strategic sourcing process we would map the lifecycle of the item and identify costs throughout the lifecycle...we need to do the same for risks throughout the project / contract lifecycle.

The Lifecycle can be described as from the moment an item is needed until the time it is disposed of.

The first question to ask is: What do we require, throughout each phase of the lifecycle of the contract / project?

This research can be categorised as follows:

A. What we have at the moment that we would like to keep. (These are typically things that we would like to retain. A good example of this is the concept of "Flexibility to change suppliers". A potential risk would be "Becoming locked into a single source")
B. What we don't have at the moment but would like to have in the future
C. What we have at the moment but do not want
D. What we do not have at the moment and would like to avoid in the future.


Once we've mapped our requirements throughout the lifecycle, the next question is: What potential risks are there at each step of the lifecycle?

Here follows a ticklist of sample risks that you might want to consider at each stage of the lifecycle:
- commercial
- financial
- operational
- legal
- production/manufacturing
- quality
- labour
- environmental
- client satisfaction etc.

It is a good idea to get other stakeholders involved to look at the lifecycle as defined above, and to brainstorm with procurement about potential areas of risk.

In my next article, we will be dealing with methods to analyse and classify risks as well as specific Risk Management Strategies.

(Thanks to Julian Curtiss for his assistance in compiling this article)

Regards
Bernie van Niekerk

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