Commitment Matters Blog

 

If you are a professional in Contract & Commercial Management, committed to achieving the best possible outcomes from negotiations with all your trading relationships, then ‘Commitment Matters’ is the perfect source of regular articles and posts dedicated to helping you achieve that goal.

Competing on risk

Posted by Tim Cummins, President of IACCM, Professor, Leeds University School of Law; Chair, International Commercial & Contract Management | Mar 8, 2017 8:03:55 AM

One of IACCM’s ‘big themes’ for 2017 is the idea of competing on risk. That means, rather than working to avoid risk, instead embracing it as an opportunity.

We are not suggesting that risks are simply taken on board without thought and evaluation, but we are suggesting that commercial competence requires attempts to better understand and evaluate risks. And whenever it proves attractive (i.e. a source of competitive advantage), we should find ways to accept that risk through creative terms or capabilities.

Far too many commercial groups – whether lawyers or contract managers – tend to evaluate opportunities by listing all the things that are wrong – and often passing the list to the opportunity owner with the attitude ‘job done’. Such an approach is not risk management; it is not even risk avoidance, since the result of their action is itself endangering the future of their business and all too often the list is ignored.

Competing on risk can begin in quite a simple way; for example, by better understanding market norms and behaviors. In a recent survey of the technology sector, IACCM discovered wide variations in the risk appetite between companies. This appeared to be largely attitudinal or cultural, nothing to do with relative propensity to handle the risks concerned. We are talking here about the response to clauses such as liabilities or rights to audit – significant issues, but while a high proportion of the companies surveyed reject certain terms out of hand, others do not. A quick review of the profitability and performance of those companies revealed no real differences – so this appears to be simply a matter of policy and risk appetite. However, guess which of the businesses is seeing faster growth.

When they were asked whether this risk appetite was based on specific market or competitive knowledge, the answer was no. These companies were unconsciously competing on risk. How many more opportunities might they have had with some market research and evaluation of customer needs and priorities?

A different example of competing on risk came from an article in Strategy+Business and concerns car manufacturer Hyundai. In the depth of the financial crisis in 2009, car sales plummeted and several of the industry’s giants filed for Chapter 11. They moved into a highly defensive mode, expecting (rightly) a collapse in sales. But Hyundai saw opportunity. It realized that consumers were fearful of losing their jobs and were therefore deferring expenditure. It tackled that concern by offering a buy-back guarantee in the event that a purchaser lost their job; it gained sales accordingly.

A simple example of how one term can make a real difference. More fundamentally, a great example of how we can choose to see risk as a threat or as an opportunity. Neither may be right all the time, but those who persist in seeing risk as a negative will certainly not turn it into revenue and competitive edge.

Topics: contract /commercial management, risk management, contract management

Posts by Topic

see all

Recent Posts

How To Order IACCM Services

To be eligible to order IACCM’s services, you or your organization need to be paying members. Compare Membership Types & Pricing to find a membership package to suit you.

 

Membership Types and Pricing