Contract Risk Mitigation
At Contract Clarus, we operate on the principle that risk is opportunity if you have fundamental contract knowledge. The suggestion is that risk doesn’t have to be viewed as a threat. This basic principle also suggests that contracts inherently carry risk for all parties. No one is ever free of risk after signing a contract. Contracts aren’t just a piece of paper that gets signed and everyone forgets about. They are a foundation of trust. There are real people making decisions in real time that influence the terms and conditions of a contract.
Understanding Risk Tolerance
One of the most overlooked concepts of a contract is risk tolerance. Being successful in negotiations also requires some knowledge of your team and their views on risk tolerance. Is your team made up of people who are comfortable with taking risks? Is your team made up of people who are overly risk averse? The collective make-up of the entire team is probably somewhere in the middle of those two views.
Risk Aversion During Contract Negotiations
If you’ve ever worked in financial services, you’re familiar with how risk averse stakeholders can be. If you’re working for a company that has a history of being overly risk averse and you as the negotiator are more comfortable with taking calculated risks that you know are in the best interest of the company, you need to develop a strategy for successfully completing contract negotiations.
Relationships as Risk Mitigation
As a negotiator, one of the tactics found to be most successful, particularly in high visibility negotiations, is shifting the focus from risk tolerance and risk assumption to developing a relationship with the people who represent the other party. Many negotiators have said that the best approach to risk mitigation is to develop a strong working relationship with the other party. As a negotiator, it is imperative that you have a good ability to read the room. Know your team, know the other party, know where you take some risks and be willing to present options to both parties if necessary.
By understanding the risks associated with the contract and developing a relationship with the other party, it is easier to view risk as an opportunity instead of a threat. Mitigate those risks by making sound decisions in real time that both parties can benefit from. Being overly risk averse during negotiations might seem like a good plan on the surface, but it makes for a very difficult negotiation and could indicate a lack of understanding for roles and responsibilities or lack of vision. You might hope that you’re minimizing risk by being overly risk averse, but hope is not a strategy. The best risk mitigation plan is to have a relationship with the other party that allows for open, honest communication and collaboration as needed. In most cases, if the relationship between the parties is strong the risk mitigation will take care of itself through managing expectations and understanding responsibilities for successful risk mitigation.
Continue Building Contract Confidence
Want to better understand how risk, responsibilities, and communication shape the contracts in your life? Contract Clarus helps individuals and small business owners build contract literacy so they can make more confident decisions before and after contracts are signed.