PROCUREMENT RISK MANAGEMENT

ASSIGNMENT: BBM 444

GROUP 5
Compare methods to manage risk by implementing structured
contracts with suppliers (Refer to KEMSA case)
Introduction
One of the Common types of procurement risk is Inefficient Contract Management
• Modern procurement practitioners regard contracts as much more than a simple
agreement to buy. Contracts are a strategic opportunity to form mutually
beneficial partnerships with vendors who share the ideals and goals of your
organization and without an effective way to manage them, you’re sacrificing both
cost savings and opening your business to compliance issues.
• Reducing the Risk: A centralized document library, with terms automatically linked
to approved vendors and rich transactional data that can be turned into reports for
finance, marketing, and upper management makes negotiations much simpler.
Review and approval by your legal team means contract information is always
accurate and up-to-date, and staff can create new contracts from pre-approved
templates for easy review and approval.
A valid and enforceable all contracts must have the
following basic components:

• Consideration - each party to the contract must be providing something of

value to the other, such as a product, service, or payment.
• Offer and acceptance - an offer made by one party, such as to provide a good
or service, is accepted by the other, often for payment
• Intention to create legal relations - the parties to the contract must intend for
the contract to be legally binding, and if such intent is not the case, it should
be clearly stated within the document
• Legal purpose - in order to be legally enforceable, the contract must be for
legal purposes
• Competent parties - the parties entering into the contract must be capable of
making the contract and understanding what they are doing
Types of Risk in contract Management
• Financial Risk - Financial risks, often categorized as credit, liquidity, asset-backed,
and equity risk, are contract risks associated with the loss of money regardless of
whether it impacts your top or bottom line.
• Legal Risk - Legal risks arise when you have a breach of contract with the
potential for legal accountability or litigation.
• Security Risk - can be attached to some of the highest profile and most severe
consequences for your organization.
• Brand/Image Risk - Brand risk is essentially your risk associated with negative
public and customer opinion, poor employee morale, and is part of the aftermath
of financial, legal, and security issues. Mitigating brand risk is more important
than ever because bad news travels fast in today’s hyper-connected digital world
and can quickly impact your brand reputation.
 Methods to manage risk by implementing
structured contracts with suppliers
Allocation of Risk - Contractual risk transfers are intended to assign responsibility (financial or
otherwise) for associated risk exposures to one party or the other.  Contractual risk transfer
can relieve the person or organization originally responsible for the risk (the "transferor") by
assigning it to one or more of the contract's counterparties (the "transferees"). 
• Indemnification/Hold Harmless. An indemnification clause obligates one party (the
"indemnitor") to compensate the other party (the "indemnitee") for losses or damages
(physical injury or monetary) caused by that other party. 
• Limitation of Liability. Sometimes referred to as a damages cap, it seeks to limit the amount
payable in damages on a breach, restrict the types of loss recoverable or the remedies
available, or imposes a short time frame in which damages are recoverable.
• Waiver of Subrogation. An agreement between two parties in which one party agrees to
waive subrogation rights against another in the event of a loss. The intent of the waiver is to
prevent one party's insurer from pursuing subrogation against the other party.  Subrogation
occurs when an insurance company pays its insured and then sues the entity or person
responsible for the loss to recover the amounts paid to their insured.
Cont…
• Putting it in writing.” - Contracts are the lifeblood of an organization as they
codify the relationships that enterprises have with suppliers and customers.
Pricing, service-level agreements (“SLAs”), and terms and conditions (“T&Cs”)
should all be carried over from the sourcing phase and written into the contract
so that all parties are aware of their responsibilities and can faithfully and
dutifully execute them.
• Audit and Compliance – Regularly conducting contract audits can help to drive
both internal and external contract compliance, which can help to reduce costs
and increase savings.
• Holding Suppliers Accountable. Contract auditing can also help to hold
suppliers accountable and drive increased contract compliance. Audits (and, for
the record, spend analysis and supplier performance management, too) can
help to shed light on supplier adherence to contract T&Cs, SLAs, and generally
how well they performed in accordance with the contract.
Cont…
• Act of God – A contract may contain an act of God or force majeure
clause. This is a clause that stipulates what happens in the event the
terms of contract cannot be carried out cannot be carried out
because of an event that is beyond the control of the parties. It may
allow a party to terminate the agreement in the event of an act of
God.
.
Conclusion

Although the contract management process is typically regarded as a

routine and unglamorous part of B2B relationships, a closer look
reveals that it can play a very significant part in preventing and
managing enterprise risks. As the saying goes, “the Devil is in the
details,” and he (or she) can strike when it is least expected.
Fortunately, common contract management processes and language
are available to procurement and legal/general counsel teams to keep
the Devil at bay.
THE END