Risk Management Research Paper

Contracts management, the mitigation of risk by excluding or transferring risk to another party, is a form of risk management. Risk Management can be defined as a process for identifying, assessing and prioritising risks of different kinds. Once they are identified, the responsible person will create a plan to minimize or eliminate the impact of negative events. Risk can be managed effectively through the drafting of a contract in such a way as to transfer the risk to the party who is best able to manage it. A different approach is that the stronger party imposes risk on the weaker party whether the weaker party can manage it or not. An example of the former is the offshore industries’ generally accepted indemnity regime; ‘knock-for-knock’.

Risk is transferred to the weaker party. Who the weaker party is will depend on many factors including market conditions and the number of competitors. Typically, the client is in the most powerful position. However, this is not always the case, particularly in a dynamic industry. Negotiation in this circumstance is a ‘sum-to-zero’ game. What one party gains, the other loses. It is ‘win-lose’ not ‘win-win’. In isolation, it may appear to be cost effective for the stronger party but, in the long-run risk is often carried by the party least capable of managing the risk. This can result in additional cost to the client as market prices are increased to accommodate the additional risk and insurance and may result in bankruptcy for a contract who, ultimately, cannot honour the promises made. Typically, the industry will experience a combination of the two extremes; established industry norms which are predicated on the principle that risk is transferred to the party who is best able to manage it and risk being transferred proportionate to each party’s respective competitive muscle and anything in-between. Factors that determine the outcome include industry standards, risk of the product failure, geographical cultural aspects and market forces. With the large number of variables, and the dynamisms of both the industry and the market, it is impossible to predict an outcome. Consequently each contract is typically unique. This means that

There are few, if any, ‘rules’ in contracting. It is very much a soft subject. That is to say it is unbounded and unstructured. To deal with contracting issues you need both intellectual and social skills. In organisational management terms there are two types of problems : difficulties and messes. Difficulties are characterised by the problem being simple, relatively small, not serious and a small number of people involved over a short time frame. Messes are, in contrast, large, complex and serious, involve a greater number of people over a longer timeframe and have interlocking aspects. Additionally, there are two types of complexity: hard complexity and soft complexity. An example of hard complexity is a game of chess. There are almost a countless number of permutations and combinations of moves but, ultimately they can be predicted by a computer. This can be compared to a murder enquiry which is characterised by subtlety, chance remarks, alternative explanations and points of view and different behaviours. Different interpretation and ambiguities characterised soft