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Stephen Cannon, from the Chartered Institute of Purchasing and Supply (CIPS), underscores the importance of planning strategies for risk rather than simply assigning ownership of it.

The seven steps approach is based on the idea of starting with the outcomes of a project or contract and working backwards. The analysis throws up ways of minimising risk. It is not possible in a short article to describe the process in detail, so what follows should be seen more as an indication than a complete description.

STEP ONE: Outcomes   [top]

The first step is to write down the outcomes of the project or the contract. The outcome might be a clean hospital ward, a new IT system, a newly built nursing home, the purchase and installation of specialist x-ray equipment and so on. At this point, it is quite acceptable to keep the description of the outcome at a very high level.

STEP TWO: What can go wrong?   [top]

The next step is to define what can prevent or hinder the achievement of the outcome. At a generic level a list of these has been provided in figure 1 for a procurement of some goods or services.

There could be other reasons for the outcome not being achieved. You should brainstorm to identify other possible reasons. The list is not necessarily exhaustive and, of course, not all of these things will apply in every procurement.

STEP THREE: Why would it go wrong?   [top]

The next step is to take each of the things that might prevent achievement of the outcome and ask the question why? Figure 2 shows this question applied to late delivery.

The eventualities shown on the above diagram are not meant to be exhaustive.

A similar process needs to be followed for all of those things that have been identified in step two, as things that can go wrong.

To avoid the process becoming unwieldy, we should assign a probability to each of the eventualities. This can be done quite simply using high, medium and low and assigning them on some reasoned basis. We should devote our attention to those eventualities where the risk is greatest.

We still need to be aware of the other eventualities with lower probabilities and to keep our eyes open for signs of them during the procurement because, of course, low probability is not the same as no probability.

STEP FOUR: How could the risk be minimised?   [top]

For each of the answers to the question 'why?', which have a high probability, it is now necessary to ask: 'how could the risk be minimised?' See the example in figure 3: Poor Planning. In addition, the figure gives a number of solutions or tasks that need to be done to answer the question 'how?' These are shown in italics. Again, this is not intended to be exhaustive and you should brainstorm to identify solutions that might be more apposite for your organisation.

A cost should be assigned to each of the possible ways of avoiding the risk. To do this it will be necessary to think through each way of avoiding the risk in some detail.

Costing enables the cheapest risk-avoidance option to be selected, although it is necessary to check that it will be effective as well as cheap. In some cases, it might be worthwhile accepting a higher level of risk associated with a lower cost but less effective option.

In other cases, there might be only one way of avoiding the risk and this might be very expensive. In such cases, it might be necessary to decide whether to take the risk and not try and avoid it.

STEP FIVE: Who should manage the risk?   [top]

The most obvious answer is that it should be managed by the person or organisation best able to manage it. For contracts, this often comes down to a question of whether it should be the contractor or the supplier or the purchasing organisation that should manage the risk. Each party to a contract is often keen to pass as much risk as possible on to the other. This can obscure the need for effective management of risk. Where a party has the best skills and facilities on tv manage the risk effectively, then it should be that party which takes on the management.

However, taking on all the management of a risk is not the same as bearing all the risk. If the probability of the risk occurring is high and cost consequences are also high, then the costs arising if the risky event actually occurs should be distributed in some equable way.

STEP SIX: Where should the risk be managed?   [top]

In most cases, deciding who should manage the risk will mean that where the risk should be managed will also have been decided. In most cases, but not in all. The management of risk needs to be located as close as possible to the scene where the risky event is likely to take place. If that is not possible, good communication with the people at the scene is essential.

STEP SEVEN: When should the risk be managed?   [top]

Answering this question requires an analysis of when the risky event is likely to take place and the time needed to put in place a risk-avoidance measure. In effect this is counting backwards to determine when you need to start managing the risk.

Stephen Cannon is an Associate Director of the Chartered Institute of Purchasing and Supply's Corporate Partnership Programme. The Programme is managed by Aria CIPS Ltd, a wholly owned subsidiary of the Aria Group plc, which specialises in purchasing and business management.

Stephen Cannon   [top]
CIPS
Easton House
Easton on the Hill
Stamford
Lincolnshire
PE9 3NZ
Tel: 01780 756777

Email: stephen.cannon@cips.org
Website: www.cips.org

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