Managing risk in a time of uncertainty
by Paul BradfordBack to Insights
Managing risk in a time of uncertainty
March 2022 by Paul BradfordBack to Insights
In times of instability and unpredictability, the established patterns associated with business relationships can be severely tested. This may cause significant disruption and negative impact to planned or ongoing commercial negotiations. What can businesses and their negotiators do when faced with uncertainty and the risk it brings?
For all but the oldest individuals reading this, the last few years have probably seen more commercial uncertainty than you have ever experienced in your working lifetime. Unprecedented global issues have left business with challenges that few have faced before. And certainly in the short-term, the uncertain times in which we now find ourselves do not look like abating.
In times of crisis and uncertainty, the established patterns associated with business relationships are severely tested. This is often acutely felt in commercial negotiations taking place, and the contracts that follow which then provide the blueprint for the ensuing business relationship.
Even against a stable political and economic background, agreeing contracts which satisfy both parties’ needs is often a difficult task. But what happens when this background starts to destablise? Creating value in negotiation is all about certainty. Relatively stable currency exchange, low inflation, reliable and secure distribution, transparent costs, secure labour conditions and predictable consumer habits will all allow relative value to be attributed to issues being negotiated. In doing so this forms the basis of the give, take and compromise of negotiation, during which both parties can predict the value being exchanged, and perhaps importantly for them, the value they gain.
A destablisation of the environment will immediately affect the evaluation of value and lead to uncertainty. And this uncertainty leads to risk.
So what can businesses do when faced with uncertainty and the risk that this brings?
Conduct detailed scenario planning and assess and quantify the risk that exists. By an assessment of the potential risk that exists, you can begin to predict its potential impact. If evaluated you can quantify, qualify, prioritize, and then make a conscious decision on how to manage it. Scenario and risk planning enables you to take control of the situation. This may allow options to be identified, allowing the mitigation of risk, the building of contingency plans, or perhaps even using risk itself as a trading variable.
Gain alignment and manage expectations. Times of uncertainty may mean previous expectations of performance and results achieved will need to be modified. Goals based on previous performance may no longer be an adequate measure of performance. Re-evaluating in the light of current circumstances will be needed. Inevitably this could lead to a far-reaching impact within the business with the consequences affecting many. Against this background, the managing of internal expectations and alignment behind modified goals will be key, especially if these have significant time or financial impact.
Build closer business relationships. It is perhaps a reflection on the nature of the commercial world that while for the last 40 years or more, businesses the world over have talked about the benefits of forging close partnerships, we still see self-serving behaviours at the negotiation table. During times of crisis and uncertainty, the need for true partnerships are needed. Assessing and mitigating problems may serve you well in dealing with predictable risk, but in uncertain times, it is the occurrence of unforeseen problems that also need to be overcome. This is when we will see if a true partnership exists. As a guide, The Gap Partnership has consistently used as part of a ‘true partner’ definition, the concept of an interdependency between the parties, and a willingness to disproportionately invest to solve problems.
During times of crisis, and the unforeseen problems it brings, will you (and your business partners) be open to renegotiate, defer or change contractual agreements, and even be willing to incur a financial loss to maintain the business relationship?
For some of you reading this, particularly those who have witnessed in the past a gap between the rhetoric of partnership and the actual practices of those involved, this may look an aspirational dream. It should be remembered however, that in times of uncertainty, all businesses may be affected. Previous (often established) balance of power between parties may change, and the uncertainty that you face may be impacting your counterparties even more. The case for a more open, trusting business relationship is never more compelling.
Move to short, and long-term planning. Business contracts and planning cycles tend to be reasonably consistent within the industry you operate in. Long range forecasting and longer-term business planning are essential to most businesses, without which it will be impossible to plan for growth, budget for investment and plan for the ongoing health of the business. However, in uncertain times, this should be supplemented by shorter planning cycles, and the agility to react swiftly to the moving landscape. The more agile and responsive a company is, the more likely it will adapt. Negotiation objectives and clauses within contracts should reflect this. A goal to bring two companies together for a long-term interdependent business relationship could still see the introduction of short-term renegotiations in light of changing circumstances, unforeseen problems, or new opportunities.
Develop a negotiation mindset. The contracts negotiated by the commercial teams could have significant internal implications. As mentioned above, faced with uncertainty, adjustments may be needed, certainly to short-term goals, and this may well have an impact which will be felt throughout the business. With internal dependencies it will be beneficial if these other departments are not only aware of the implications, but they themselves are not inadvertently misaligned. Even today, we probably see too often siloed departments working on their own agendas. Developing a negotiation culture mindset in which all departments are conscious of the support that they can give to the commercial effort is even more important in times of uncertainty.
Encourage creativity and innovation. Uncertainty brings fear of the unknown, and a natural tendency during challenging times is to default to the norm. Keep to the tried and tested. Don’t deviate from the practices that made us successful in the past. Unfortunately, this behaviour may exacerbate, not rectify, the issues you face. Instead, be proactive; look for the opportunities and solutions. While creativity and innovation are usually associated with other business functions, these can also be applied to negotiation. Look for more creative ways of solving problems and building value. Share more information, explore mutual opportunities, and remain open minded to your counterparty’s ideas. Perhaps slightly ironically, in an article looking at managing risk in uncertain times, this is now suggesting that doing so should involve the taking of some risk yourself. Whether it means being more open with a partner, disproportionately investing in solving your mutual problems, demonstrated unprecedented trust, or being prepared to look at concepts not previously considered, creativity and innovation in negotiation inevitably involves some risk.
It would be naive to think that there are simple solutions to dealing with uncertain times and the risks they bring. It has also been argued that human nature is often predisposed to handle risk poorly. The normalcy bias (or normality bias) - a cognitive response which leads people to disbelieve or minimize warning signs - is a well-known concept that leads people to underestimate the impact of crisis, and as a result to not take action. History, unsurprisingly, is peppered by those who did little. As this article suggests, there is an alternative. Be proactive, step outside the norm, and be prepared to take a few risks of your own.