Essay Sample on Risk Management

Introduction

Organizations continuously find themselves in need to enter into a contract to protect the business' interests. However, poor management of these contracts will leave the organization unguarded and at risk of penalties both legally and financially. Lawsuits or compliance violations may be brought about by a lack of proper management of contract risks. To prevent such situations, the organization needs to set up a sufficient contract opportunity and risk management strategies, which will help boost revenue and rate the contract terms to know the potential risks and avoid them.

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Different tools can be used to help assess risks and opportunities associated with a pending or potential contract. With developing technologies, organizations now have the privilege to use artificial intelligence (Rendon, 2019). Contract management software helps organizations by alerting them on various risks. An example of such software is VISDOM AI and machine learning, which can quickly identify opportunities and reduce risks by evaluating the historical data and the organization's goals without necessarily having to assess each contract. The best part about this software is that one can design it to run analysis as frequently as one wishes. A notification regarding sensitive information like employee data, credit card numbers, and more are given.

Risk Assessment Matrix

Another tool that can be used is the contract management risk assessment matrix. Here, the manager collects data for the different identified risks. Each risk determines the extent of the stake through the available data, the integrity, quality, and reliability of the provided data. The above information will help him determine the severity of a risk (Turner, 2018). A probability and impact matrix may also be used to determine which risks require immediate attention. Each organization tends to customize then standardize their matrixes to ensure repeatability between various projects. A review of the performance schedule, pricing, and payment terms should be presented to the client to avoid future complications. A Monte Carlo analysis, which simulates the cost of a project, maybe performed to show just how much damage will be caused if certain aspects of the contracts were to be changed. The Monte Carlo analysis requires a compute based program which determines the risks in a specific project by running various probabilities. It determines the likelihood of activity being on a critical path, the possibility of completing a particular task on a particular day, and thus helps determine the impact of rescheduling or changing cost on a project.

Assessment Tool

Based on the information an organization acquires after running a contract management risk and opportunity assessment tool (CMROAT), they may decide to implement several different controls to safeguard their interest in minimizing risks but maximizing opportunity. The CMROAT will focus on both the buyer's and seller's perspective. After obtaining the results, conclusions are drawn, and appropriate actions are taken to promote business performance. In the seller’s perspective evaluation, ten risk elements and ten opportunity elements are considered. Risk analysis is performed on each of the aspects where risk factors and opportunity factors are determined. The total scores are then plotted on the CMROAT matrix, where the full scores for risks and opportunities that fall below the diagonal line show that they require more managerial attention (Kivilä et al., 2017). The same concept is done from the buyer's perspective. After plotting the total scores of both the opportunities and risks, these that fall below the diagonal line are concluded to deserve more attention through planning, risk containment, etcetera.

Conclusion

The organization will decide on the best response, whether to share the risk, reduce it, or transfer it through a contract, insurance, or other means. The organization might salvage whatever has been left behind after the threat has passed and decided where to continue with the same project but a different approach or disregard the entire thing. After experiencing such risks, the team members will sit down and develop better methods to ensure their preparedness in the future. Despite having the right tools or performing a CMROAT, for contract risk management to be effective, it should be preceded by following four simple steps. The state of the contract should first be thoroughly assessed to know the essentials of the specific contract. An audit should then be performed to ensure that the contracts are all complete. Next, each contract's risks should be measured by identifying key clauses and potential points of disputes. Finally, a compliance plan is drafted using those as mentioned earlier and other tools, after which the way forward is prepared and agreed upon.

References

Kivilä, J., Martinsuo, M., & Vuorinen, L. (2017). Sustainable project management through project control in infrastructure projects. International Journal of Project Management, 35(6), 1167-1183.

Rendon, R. G. (2019). Enhancing professional and technical excellence: Analysis of contract management competency models.

Turner, J. R. (2018). The management of the project-based organization: A personal reflection.