Risk management in the procurement process
What is a risk, what causes it and how can I manage it in the procurement process? In its simplest form, risk in the procurement process is the possibility the occurrence of an event that would adversely impact the timing of a procurement, give rise to liability, cause harm or result in some other adverse outcome. A risk assessment should include everything from solicitation development, evaluation process, contract award, management and closing. Public bodies generally recognize the importance of risk management during the development of the call for tenders and during the process of selecting suppliers. However, as the process moves into contract administration, risk management usually falls by the wayside. This article discusses four key risk management strategies.
The first mitigating factor is align your agency’s business goals with purchasing. We manage risk every day in the world of procurement. What creates the harm caused by the risk is that your agency does not fully control this event. If you could control the “risk” (i.e. equipment not being available due to components stuck in a supply chain), you would of course remove it. The “risk” would therefore not exist. This is the most ideal option, to remove it correctly. Unfortunately, this is not always an available option. Therefore, the key to managing risks when they cannot be eliminated is to mitigate the risks possibility to occur. The available option is to ensure that your sourcing (including the complete cradle-to-grave process) is aligned with your company’s business goals. That the described purpose of your procurement matches your agency’s purpose. This alignment will eliminate most unnecessary risks.
The second mitigating factor is ensure that stakeholders are included at every stage of the decision-making process. Stakeholders are generally divided into two categories – internal and external. Your internal stakeholders include budget owners, finance, legal, and senior management. It also includes end users who are impacted by the supply. When purchasing software or a new process that will impact end users on a daily basis, make sure they are included in the decision. Your external stakeholders are your suppliers and other partners. When a procurement requires integrations with existing infrastructures (i.e. hardware integrations) from other manufacturers, these external stakeholders must be involved. Without these stakeholders, expensive change orders (if they’re even an option under your state’s procurement laws) are inevitable.
The third mitigating factor is use subject matter experts (SMEs). While not a silver bullet, SMEs are a great resource for gaining insight into an otherwise unknown industry. SMEs can provide information that is only available through years of experience. An overlooked resource for SMBs comes from the suppliers themselves through a structured request for information (RFI). It is common in the public procurement process to prohibit a supplier from participating in a contract that participated in the writing of the request for proposals (RFP). However, soliciting industry expertise through an RFI generally solves this problem when handled in accordance with applicable law. Using vendors as SMEs can also be achieved by structuring your RFP so that vendors can demonstrate in their proposal their industry expertise and how that expertise aligns with your agency’s goals.
The final mitigating factor is ensure strong contract administration processes. It is typical for an agency, during the RFP development phase and vendor evaluations, to have industry standards at the forefront to select the most beneficial vendor. Two years after the start of the contract, industry standards may change. If proper contract administration procedures are not practiced, this shift in industry best practice will be missed. The original contractual terms are generally no longer aligned with these new industry standards. With changing technology and industry standards, you must continue to monitor the occurrence of risk over the life of the contract.
The risk mitigation strategies described are by no means exhaustive. However, these are a great starting point to ensure that your agency is not exposed to unnecessary risk. Appropriate risk mitigation strategies allow your agency to focus more on what is important, achieving its stated objective and managing the risks it may impact.