Risk Management – How To Manage What You Cannot See
In the movie “The Usual Suspects” Kevin Spacey’s character, Verbal Kent, is describing Keyser Söze, the mysterious and utterly ruthless criminal mastermind who is the main protagonist in the movie. Verbal says that “the greatest trick the Devil ever pulled was convincing the world he didn’t exist.” My clients are generally not worried about criminal masterminds, but they are worried about risk. Over time, I have realized that while my clients understand the need to manage risk, they frequently have no clue what the risks of a venture are. They are concerned about a devil that they cannot see, and because they cannot see what the sources of risk are, they cannot take steps to manage that risk. Waiting to get hit by a truck they never see coming is as scary as looking over their shoulder for Keyser Söze.
So how do I help my clients identify the risks that might exist in a venture? The details will depend on the specifics of a situation, but there are some very general sources of risk that are a good place to start.
1) Contracts
My parents are getting ready to renovate the kitchen at their home in Ohio. They asked me to review the estimates from the contractor they plan on using. After making some comments on the estimate, I mentioned that I would want to review the contract before they signed it. My parents agreed, but they stressed that the contractor came highly recommended and that based on his reputation they were not concerned about his performance. The contractor provided them with a contract and stated that even though he knew he should use one, he almost always used a handshake and it generally worked out. Despite the fact that I felt like I was bringing cynicism to Mayberry, I feel better knowing that there is a simple contract in place.
Contracts are like an insurance policy; you do not need it until something bad happens, and then it is the most important thing in the world. Contracts are useful because they lay out the details of the agreement; who is doing what, how much will it cost, start and finish dates, and so on. While bad contracts exist (ever really read a rental car agreement?), they are still generally better than no agreement. Time will pass, memories will fade, and self-interest will color recollections. Having a contract is a good risk management tool because it provides a starting point for a risk management discussion.
2) Money
Understanding where the money for a venture is coming from, how payments will be dispersed, and when payments will be due are all critical to identify risk. Money may or may not be the root of all evil, but it is at the heart of many disputes. If you can understand the financial aspects of a venture, then you have identified a large source of project risk.
3) Warranties/Guarantees
I was recently working on a contract review for one of my clients. As my client and I were going through the agreement, she mentioned that another project team member was frustrating because he kept making very broad promises that she was not sure would be met. I explained that she was right to be concerned, because by making a promise the other team member was offering a guarantee. If anyone heard this guarantee and relied on it in making a financial decision about the project — and the promised performance was not met — they could have a cause of action.
Most of us are familiar with warranties, the kind we get when we buy a car or an appliance. A source of risk I am always working with my clients to manage is making sure that promises and guarantees being made about the project will actually be delivered. This is a fairly nuanced area of law, and there are all kinds of ways that promises may or may not turn into guarantees. Having said that, knowing what promises are being made helps to identify an area of risk and allows for active risk management.
There is risk in everything we do, every day. You take a risk every time you climb into your car and drive anywhere. The goal of risk management is not to avoid all risk or even to worry about everything that might go wrong. The goal of risk management is to be able to identify sources of risk, analyze that risk and make sure it is acceptable, and then to proceed in a manner that minimizes the risk and allows for the expected return. If you are not confident you understand the source of all the risks in a venture, talk to a professional who can help you analyze those risks; an attorney, a CPA, an insurance broker. You know that risk is out there; don’t spend all your time looking over your shoulder waiting for Keyser Söze to show up and ruin your day.
Matthew C. Boomhower is the founder and president of Southern Cross Property Consultants; a construction management, architecture, and facilities management consulting firm. He is licensed as both an Architect and an Attorney. He can be contacted at matthew@southerncrosspc.com or 858-395-8657.