Your 9-Step Cheatsheet for Negotiating Risk in Business

YOUR 9-STEP CHEATSHEET FOR AVOIDING RISK! IN ÎN BUSINESS Risk is a reality in every business sector, but the adverse effects of such risks can be reduced greatly through careful negotiation during contract formation The common mistake of less CONTRACT Risk is one of the most undervalued variables during contract negotiations experienced negotiators: Forgetting the importance of 'total contract value', which includes risks THE DEFINITION Alternative definitions are: OF RISK: • The distinction between certainty and uncertainty. Uncertainty forks into assumed and unknown probabilities. Dictionary definitions: • The possibility of suffering • Unknown probabilities fork into known and unknown categories. harm or loss • A factor/element involving uncertain danger • Known categories fork into 'including the uncertainties in the probabilities by explicitly assuming a uniform distribution' (Laplace) or neglect (or use other non-probabilistic techniques). • The danger or probability of loss • The chance of non-compliance Dictionary definitions of risks are a source of confusion when it comes to risk in contract negotiations REMEMBER: individuals are not always consistent in their approach to risk YOUR SECRET FORMULA FOR 375.926 CALCULATING RISK Estimation of risk = probability of event occurring x negative consequence Did you know? The perception of risk is a greater barrier in negotiation than actual risk 2 THINGS TO BEAR IN MIND AT ALL TIMES OR LIMIT 2) EXPOSURE TO IT (through planning and preparation) QUANTIFY IT (giving a tangible value to it) THE 17 TYPES OF RISK CONSTRUCTION RISK AVAILABILITY RISK The risk that construction of The risk that the quantum of service is less than required assets is not completed on time, to budget or to specification DECANT RISK DEMAND RISK The risk that staff/clients will The risk that demand for a need to be decanted to one service does not match levels site to another during accommodation projects planned or assumed DESIGN RISK RESIDUAL VALUE RISK The risk that design does The risk of physical asset value uncertainty at the end of a contract not deliver the services at required standard/ performance ENVIRONMENTAL RISK FUNDING RISK The risk that a project due to have a major impact on the local area will have objection from general public The risk that project changes or delay occur due to available funding MAINTENANCE RISK LEGISLATIVE RISK The risk that legislation changes will increase costs The risk that keeping assets in good condition will vary from budget TECHNOLOGY RISK POLICY RISK The risk that changes in technology result in non- optimal technology being used The risk changes in policy (not involving legislation) affect the direction of a project PROCUREMENT RISK VOLUME RISK The risk of working with a contractor, arising from capabilities of a contractor or when a dispute occurs The risk that actual usage of product/service varies from the level forecast ECONOMIC RISK OPERATIONAL RISK The risk that project The risk that operating costs vary from budget, performance standards drop or that a service cannot be provided outcomes are sensitive to economic influences (e.g., actual inflation different to assumed inflation rates) PROJECT INTELLIGENCE RISK The risk that the quality of initial project intelligence is likely to impact on unforeseen problems occurring 6 WAYS NEGOTIATORS CAN MINIMISE RISKS 1) Retrospective discounts Due diligence exercises 2) Payment terms 5) Penalty clauses for delay 3) Trade term agreements based on performance levels Minimum quality levels UNDERSTANDING THE 3 TYPES OF RISK PERSONALITIES To understand how a person will respond to risk, first identify their personality type: THE RISK SEEKERS Definition: people who actively seeks out risk, for the thrill Approach to risk: prepared to accept short-term loss in pursuit of large potential return Likely to: enjoy gambling and gaming • have financial stability, and can afford short-term loss THE RISK NEUTRAL Definition: a person who has a balance view of risk, often rational in their thought process Approach to risk: will allow themselves to take risks, offsetting high risks against low risks to obtain risk neutrality Likely to: • invest in high risk, medium risk and low risk investments, for a balanced portfolio THE RISK AVERSE Definition: people who will do everything they can to avoid risk Approach to risk: prudent in the short term, sacrificing potential long-term gain Likely to: • avoid gambling and gaming carry an umbrella everywhere in case it rains 6 COMMON BUT • "Risk is outside my control" UNHEALTHY "There is a risk - but it's not mine" ATTITUDES • "We do that at the year-end-don't we?" TO RISK: "Managing risk is the responsibility of management" • "I have review our exposure and there's nothing new" • "I'm too busy to check for every risk" RISKS & THE LIFETIME OF A CONTRACT It's crucial you understand the factors which will influence risk during the lifetime of a contract: Likelihood Impact (Seriousness) (Probability) HIGH Could easily or does occur Serious impact i.e. reduced ability to achieve financial aims and objectves Limited impact i.e disruption to normal operations with a limited effect on achievements of the financial aims MODERATE Likely to occur and objectives Unlikely to occur within the contract life LOW No significant impact on the achievement of the financial aims and objectives HOW TO IDENTIFY AND EVALUATE RISKS: 1. List the potential, known risks 2. Rank each risk based on probability (P) 1 = very high 10 = very low 3. Estimate the seriousness of each risk by predicting the cost (S) 4. Calculate: cost/value of trade off in negotiation = S divided by P THE 4 STEPS TO IDENTIFYING AND EVALUATING RISKS 1 2- 3 - 4 Put in place a Identify possible risks and put Put in place a Have the right process to monitor balance of control framework of risk mechanisms in and access in place to mitigate analysis and place to minimise up-to-date adverse evaluation to likelihood of their information about consequences of risks, should they support your decision making materialising; these risks; materialise; 10 WAYS TO MINIMISE THE ADVERSE EFFECTS OF RISK EARLY CONSULTATION PILOT STUDIES Costs tend to increase as more 1D requirements are identified. Early consultation helps identify these needs, and address them, as soon Acquire information about possible risks through a pilot study and mitigate either the adverse consequences of bad outcomes, or increase benefits as possible of good ones AVOID IRREVERSIBLE DECISIONS MINIMAL TECHNOLOGICAL EXPOSURE: If commitments are irreversible, a full assessment Reduce the risks involved with of costs should include possibility of delay, allowing time for investigation of alternative methods to achieve objectives complex technology by choosing a simpler method which will still provide many of the same benefits FLEXIBLE DESIGNS If future demand and pricing is uncertain, choose a design with flexibility so you are able to adapt as required PRECAUTIONARY PRINCIPLE: Because some outcomes are so bad, even though unlikely, precautionary action may be justified CONTRACTUAL BUY-OUT: INCENTIVE CONTINGENCIES: Risks can be contractually Where risk is probable, it is possible to neutralise this with transferred to other parties, as is the case in Insurance incremental benefits in over-achieving RE-PACKAGE RISK OPTIONS: ABANDON PROPOSAL, OR INSURE IT: If a project is deemed simply too risky, it could be best to abandon the proposal or secure insurance, the cost of this can ШI Following risk analysis, it may be sensible to develop alternative contingency proposals to deal with risk more efficiently be built into the contract G The Gap Partnership www.thegappartnership.com