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Metatrend 2: From recovery after loss to prevention of risks

Author: Arjen van Berkum

· Insights,Contract Management

In my previous metatrend blog I talked about a J.A.R.V.I.S-like technology to help people in the field of contract management. The second metatrend I’m addressing is ’from recovery after loss to prevention of risks’. This trend sprouted from the insurance field of play. When you have an insurance policy for your house, the insurance company pays you after it burned down. Today insurers are shifting their strategies from a purely defensive one to a preventive approach.

Another example. Healthcare insurance pays your medical expenses after you got treated for a medical condition, but are looking more and more into data and analytics solutions that can help prevent people to get sick to avoid healthcare expenses. This phenomenon is also happening in contract management; the fundamental shift from “after the fact” to “preventing the fact”.

Moving away from risk-based price element as a busines case

Today every good or service that is sold or procured contains a risk-based element in the price. If you demand your supplier or consumer to mitigate risks for you, for instance in a service level contract, there will be an (insurance type) premium included to recover from potential losses. This is not just a margin, but a serious part of any good sellers’ business case. Now how about we move into the next level? How can we integrate stop-loss procedures in a smart way to mitigate the risks of financial loss? How do we apply the lessons from the insurance industry to the day to day business of contract management?

Open, or at least shared, data to create the universal truth

It starts with creating an open mindset which leads to an open dataset. Information sources where both parties can derive the universal truth. This will leverage the convergence of machine learning, ubiquitous sensors and robotics to prevent risk and thus jointly reduce loss. This will lead to lower prices whilst at the same time keeping margins intact. This might sound too good to be true, but I firmly believe that this is one of the ways to go forward.

Focus on driving value

Next to creating an open mindset it is vital that organizations start to realize the value of being in an ecosystem. Being a part of a healthy ecosystem requires a focus on driving value instead of putting efforts in optimizing profit, reducing loss or deleveraging risk. It is an imperative that understanding your total supply chain is an integral part of this. Also, organizations need to understand where they need to manage which risk (including supplier or vendor locks). Rethinking how they want to approach their risk management is important. It helps if you have a good fundamental grasp on what you are doing, why you are doing it, what objectives you want to realize and therefore what you expect from a partner in a collaboration. This is for me why the fundamental shift from pre-award to post-award realization is crucial within organizations. In a structured, methodical and scalable way.

Not just in the pre award phase…

It is vital to understand that price and value are not elements you only source before the signature is in place. Therefore all parties should agree to a common set of objectives that they want to realize. Realizing value over time requires a continuous approach on the delivery of today and the relation of tomorrow.