Risk Management

Risk is exposure to loss as a consequence of uncertainty. There are a variety of risks faced during
the procurement process. There are global risks and risks in every phase and stage of the process,
with certain risks of greater importance during each stage. Understanding the main categories of
risk faced in the procurement process assists in risk assessment and planning practical
management and operational measures that should be taken to mitigate those risks.

Risk analysis and management

The impact of risk can be measured by the likelihood of an unwanted event occurring and the
consequences if it does occur. For planning purposes, the impact of risk could be the same for
both small damages resulting from a highly probable recurring event and very large damage
resulting from a rare event. But the two situations would be managed in different ways. For
example, the highly probable event could perhaps be made less frequent through improved
procedures and professional practice, whereas insuring (or self-insuring) for the damage of the
rare event could be a practical alternative if it can be combined with a class of similar risks.

Risk analysis
Risk analysis is a planning stage which seeks to identify the origin, probability, and magnitude of
the risks. It helps direct attention to which risks warrant close attention and have the greatest
potential for reducing exposure. There are distinct risks at each stage of the procurement process.
Risk analysis should form part of each stage of procurement planning and be regularly updated.
Risk management
Risk management seeks to mitigate the impact of the risk by reducing the likelihood of its
occurrence and/or reducing avoidable consequences through planning, monitoring and other
appropriate actions. Whether in general or in the specific case, procurement officers should
identify and analyze all risk factors that are likely to occur on a project, and then decide on the
most appropriate management response for each risk/combination of risks.  Responses may
include:
 ignore
 reduce
 transfer
  manage, and
 decide which party is most appropriate to manage each of the risks identified.
Neither in the business world nor the public sector can risk be avoided entirely, rather it is part of
the normal work environment within which we operate. It can to some extent be managed. Some
measures to manage risk are based on the quality of the procurement process applied across all
activities, while other measures may be targeted to specific risks inherent in certain categories of
procurement.

Benefits of risk management

The benefits of effective risk management include:
 Greater confidence of right supply at right time, to further specific activity goal
 better control of uncertainty
 reduced impact of risk
 improved decision making
 realistic estimates less likely to be exceeded
 stronger team communication
 lower probability of damage to the image of the organization.
In managing risk, it is important to understand the extent to which a party has control over the
risk and the ability to do something about it. Responsibility for risk should be allocated
according to the ability each party has to manage the risk. Efforts to make a party responsible for
risks over which it has no control are likely to lead to dispute and additional costs in time or
money. In fact, such “risk avoidance” leaves the risk in place, when it is in the interest of the
organization that it be managed.

Source of risk
Risks to successful procurement can come from several types of sources, namely:
 external factors
 project complexity
 project planning
 procurement process
 fraud, corruption, and unprofessional conduct.
External factors can include political, economic, and even nature. Among the more frequent
external factors are the UN organization and partner government decision making processes that
are used to approve activities and their budgets. While political and budgetary factors are
generally outside the control of the procurement officer, to reduce the risk of late supply, it is
appropriate to begin the procurement process with sufficient lead time and include appropriate
caveats to potential suppliers when a solicitation is issued in advance of authorization, ensuring
that it will not lead to binding commitments until and if such authorization is received.
Project complexity may lead to objective difficulty in specifying requirements, either because
conditions are not fully known, or the requirement is subject to change for political or other
reasons. Risks can be reduced by early involvement of procurement officers in the project team,
and by regularly reviewing the requirement. In some cases, such as major civil works, this may
call for appropriate contractual arrangements that recognize the specific uncertainties involved.
Where project planning not properly carried out, this can contribute to each of the negative
outcomes referred above, as well as to friction in relations among colleagues. The risks can be
best reduced through early involvement of procurement officers in planning respective activities
to ensure that requirements for and of procurement are properly integrated.
The procurement process contains in each of its stages, multiple specific risks and consequences.
Managing these risks is part of the professional responsibility of each procurement officer.  
Fraud, corruption and unprofessional conduct can enter into any stage of the procurement
process, producing the risk of loss of organizational resources and budget for inappropriate
supply, with corresponding great damage to the image of the organization. Key among the
measures to mitigate these risks are:
 transparent process
 competition
 separation of functions
 clear rules and procedures
 standard documents
 professional training of staff
 effective control systems
 accountability.
Competition, transparency and separation of functions are the foundation of risk mitigation since
they ensure any fraudulent or corrupt behavior will not go unnoticed. These need to be linked to
senior management that does not tolerate such behavior, provides training, systems, authority
and controls so staff may carry out the procurement function correctly.
All those involved in the procurement process should consider themselves, “risk managers” and
be aware of the potential risks at each stage in the procurement cycle in both planning and
undertaking their activities.

Risk management in procurement process

There are risks in each phase of the procurement process, and there are organizational and
commercial measures that can be taken to mitigate those risks. Examples of typical risks,
possible consequences and what to do at each stage are listed in the tables below:

 Strategic organizational procurement analysis and planning

 Planning of a procurement activity
 Requirement definition
 Sourcing
 Selection of procurement strategy
 Preparation and issuance of solicitation documents
 Receipt and opening of offers
 Evaluation
 Procurement review and award
 Contract finalization and issuance
 Contract management
 Logistics