Today's contract tip is about managing risk in your contract drafting and negotiations.
You’ve heard people say how important it is to manage risk in your contracts. But what they leave out is exactly what that means and how you do it. This tip explains both of these things.
My favorite definition of risk is “the effect of uncertainty on our objectives.” To manage the risk in your contracts, do these things:
1. Identify your most important objectives – What must happen for the deal to succeed? You are only at risk if an outcome matters to you.
2. Identify any uncertainties - What could prevent those objectives from happening? Look at each of your important objectives and brainstorm about things that could interfere.
3. Evaluate the effect of those uncertainties on your objectives – To do this, we look at two things - likelihood and impact. What is the likelihood of those uncertainties happening and what impact will they have on your objectives if they do?
With those answers, you can prioritize your contracting approach. Our focus should be on any uncertainties that have a high impact. Start with the high likelihood ones as they present the most risk. But you’ll need to be careful with the less likely ones too because of what happens when they do occur. We pay less attention to the low-impact uncertainties, especially the ones with low likelihood. But don't ignore any with a higher likelihood. They cumulatively may have a big impact.
Do you have any other advice related to this process and how we can better identify and manage risk in our deals?
