Column: Risk Management

Beware of Buyers

By: | December 10, 2014

Joanna Makomaski is a specialist in innovative enterprise risk management methods and implementation techniques. She can be reached at [email protected]

Let’s imagine we are looking to hire an entertainer for a children’s birthday party.

We have the infamous “Bobo the Clown,” who enjoys blowing up balloons and artfully making exotic animals from them. Then we have “Blade,” a skillful knife-thrower who performs high thrill acts of hurling knives at the perimeter of child volunteers, barely missing body parts.

Blade’s precision is near-perfect. The children are indifferent to who comes. They love Bobo and Blade equally.

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We ask both Bobo and Blade to give us their best price and contract wording for their services for an eight-hour day.

Bobo presents a colorful quote highlighting that he is adequately insured for third-party liability and is also trained in first aid.

For an eight-hour day, he would charge $1,000.

Blade presents a sharp looking quote as well. He too states he is well insured for third-party liability and knows first aid and CPR.

For an eight-hour day he would charge $500.

In the details of his contract wording, he explains that he also requires that his liability be capped at the value of his contracted services.

So who should we pick? Is it obvious?

The Latin term caveat emptor comes to mind — “let the buyer beware.”

In legal circles, it is a warning to buyers that the goods or services they are buying may be subject to “defects,” so without a warranty the buyer takes the risk.

In the corporate circuses that we work in, we see Bobos and Blades everywhere.

So why is it, with everything we know and all the near misses we experience, do I remain so frustrated?

And am I alone in this frustration?

I get it. Reducing cost is important to all organizations, but let’s do our cost accounting correctly, at least.

Too often, I see corporate procurement groups buying the services (or goods) from the Blades of our world.

Why? Why? Why?

Typical answer: because Blade was 50 percent cheaper. Really? Seriously?

Furthering my frustration is that by the time Blade’s deal reaches the hands of risk management, if at all, it is often too late.

The deal is done and now the organization must brace itself to pay for Blade’s handiwork and sliced body parts for years to come — less $500, of course. What a “great” deal.

All the while, our good-boy Bobo who did everything right is still trying to get his hat in the ring for some business.

I get it. Reducing cost is important to all organizations, but let’s do our cost accounting correctly, at least.

Purchasing organizations have to consider other decision drivers — like risk.

The key decision cost driver should always be the risk adjusted cost of having Bobo or Blade at the party.

Third-party risk is a rising concern for procurement departments.

But the focus tends to be with larger market-based risks caused by the increasingly globalized nature of supply chains or the rising use of outsourcing that could heighten business’ risk exposure.

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But I would like to see buyers sharpen their risk assessment pencils a bit more and procurement teams routinely account for product and professional liability risks when making purchasing decisions.

Quotes need to be calibrated to match all the caveats of vendors’ quotes and cost structures in order to increase transparency to the true cost before vendor selection.

Organizations that implement vendor risk management programs and evaluate third-party risk — where they can actively develop compensating controls or mitigations — are sure to help lessen the ugly business impacts potentially created by your Bobos and Blades.

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