A major misunderstanding that we often encounter in practice with suppliers and their clients is the belief that Best Value suppliers should manage project risks. It may seem like a bit of a semantic discussion, however, Best Value suppliers manage mitigation of external risks and that’s really something else! They do this by identifying risks, making them transparent to everyone involved and including preventive management measures in their planning.
The starting point is that expert suppliers have no risks of their own. How does that work?
Expert suppliers identify risks within and outside the sphere of influence in their project plans. They then reduce or change the scope of their plan in such a way that there are no or hardly any risks within their own sphere of influence and in such a way that the risks outside their own sphere of influence are minimal. If they are unable to achieve the client’s project objectives as a result, they consider tendering for the tender. If they see risks caused by a lack of information, they estimate the situation to the best of their ability. They make an assumption based on expertise.
The identified non-affective risks are made transparent in such a way that these external risks are clear to all project actors. The risks are minimised by control measures consisting of mitigation steps (activities in time). Suppliers then measure and monitor the external risks they have identified (outside their sphere of influence) and the associated control measures / mitigation steps.
Client pays for risks that have occurred
All events that occur during the execution and cause a deviation from the plan are for the account of the client, not for the supplier. By this we mean risks that have occurred with effect on time and/or money and/or quality. Whether or not the risks that have occurred have been anticipated does not play a role in the financial responsibility. The more risks that have occurred are identified by the suppliers in advance and provided with measures, the better his performance. It goes without saying that suppliers themselves are responsible for mistakes they make themselves.
Defining risk management
The management of the control measures/mitigation steps is done by means of the Weekly Risk Reporting (WRR). In other words, the risk management (administrative function) is laid down in the WRR. It is important that the WRR also contains performance measurements with regard to risk mitigation. The great advantage of this is not only that it has been made transparent for all the actors involved, but also that these measurement data make it possible to improve performance in a subsequent process. This performance measurement prevents discussions with the client and creates learning effects. The information in a subsequent project can also be used as verifiable performance information. And it protects the profit margin of suppliers, since the client is financially responsible if the risks occur. It goes without saying that expert suppliers act in the interest of the customer if a risk occurs. Smart solutions can limit the ‘damage’ to the customer).
Help causes risks
It is in everyone’s interest to help the project actors that cause risks. In the interest of the client because otherwise the result is not optimal and in the interest of the supplier because disruptions to the service do not, at least, contribute to a satisfied client and the project result.
Understanding this principle is very important: Actors or mechanisms that negatively influence the activities, and therefore pro-activity, of suppliers, constitute risks and are the financial responsibility of the customer!
Activities that increase risks
Clients should understand that the following activities have a risk-increasing effect (and will not lead to ‘Best Value’):
- Asking suppliers to describe their offer in terms of content in the registration form.
- Asking suppliers to describe their technical competence in their tender.
- Using the members of the assessment team’s own experience in assessing tenders based on technical preconditions, rather than assessing them on the basis of the included dominant (performance) information.
This blog may seem more focused on suppliers rather than clients. However, it is important for clients to recognise the starting points for mitigating risks. The awareness that the financial risk lies with the client and that the supplier is responsible for the risk management is particularly important. If a client does not sufficiently recognise this, a supplier will be less inclined to be transparent and less inclined to think and act in the interest of the result for the client.
Would you like to know more about how you, as a client, can optimally design and secure risk management within the organisation? Please contact us.