Risk Management: A fine balance of sharing

Every engagement has a host of uncertainties associated with it. These uncertainties bring in the risks to the engagement. When two parties contract with each other for an engagement, the customer wants to handover all the risks to the vendor and vendor wants to take over none of these. This is not a practical situation. A fine balance of risk sharing has to be achieved between the two depending on the respective stakes involved for each one of them.

How do the two contracting parties agree on this balance?

The risks must be assessed by both the parties in terms of what is the probability of risk occurrence and what is the likely loss if the risk happens. The likely impact of an event (risk value) is a product of probability and potential loss. Now the vendor can take a risk where the likely impact is a factor of the total contract price. If the risk value is significantly larger than the contract value, then the vendor is unlikely to take on the risk upon themselves. We also need to understand, who is in a better position to mitigate the risk. If all the mitigation is with the customer then trying to handover the risk to the vendor is unfair, but if the customer is entrusting a critical IP to the vendor, then the vendor should take due care of it. If the vendor fails to protect the customer IP, then the customer can impose huge penalties on the vendor for handling it casually.

For a successful relationship, a common understanding and open discussion must take place between the customer and the vendor to have a single view of risks and decide upon who is in a better position to mitigate these risks. They need to define a joint mitigation plan and accept responsibility of their part of misses. Consequential and loss of business risks are very hard to take over for a vendor. The penalties can be rightly assigned based on the responsibilities and likely returns to the respective parties.

Beyond contract, when the engagement materializes for a win-win, all the risks of the engagement should be jointly maintained and reviewed frequently by both the parties.Demonstrating actions taken by the parties for mitigating risks helps in cultivating mutual confidence and a fruitful long-term relationship.