Within most deals there are key risks that can significantly impact margins. There may be risks that cannot be controlled by either party such as commodity prices, legislation, or technology. How can these risks be shared efficiently at the lowest cost? There may be risks that can be managed by one of the parties such as demand, liabilities, or production. How can you appropriately incentivize the other party to manage these risks to protect your margins? There are transactional risks such as moral hazard, dispute settlement, or payment. How can these risks be properly mitigated? If these risks are not properly addressed in contracting, margins may suffer. Consider this:
|“I can’t believe we signed this deal..we need a plan fast”||Risk management begins after the deal is signed|
|“We make decisions about holding risks based on their maximum impacts”||Exaggerated cost of risk|
|“We won’t take that risk at any price”||Risk allocation is about “I will take this risk, you will take this risk”|
|“We’re not certain about the risks or their impacts, so we don’t do rigorous risk analysis on deals”||It’s better to not do risk analysis than do it imperfectly|
Our structuring and negotiation advisory services help clients think through the risks that they are trying to manage in a deal. We are experts in risks and contracting and bring our clients best practice contracting solutions in deal structuring and negotiations.
For our clients, the end result is certain – risk can be managed through contracting. With any uncertainty there is an opportunity to structure and negotiate contract provisions that reduce the cost of risks and realize quantifiable value.