By DAVID HOLME – Chief Executive Officer / Founder
With v1 ‘Asian crisis’ behind us and now looking at a v2, what take-aways are there about true contract management and understanding risks from geo/political and dynamic ever-changing economic climates.
Image by Carlos ZGZ
As I write this, the Chinese main Shanghai Composite index dropped 7.6% today, wiping out billions and at the same time the European markets are bouncing back – it all seems to be very unpredictable at the moment. It does however beg the question: do you really know your contract liability and where your contract risks lie?
Just how much of your risk is truly exposed in Asia right now? There are two ways you may be exposed, directly and indirectly with your lead suppliers.
One clear view, quickly
How does this crisis affect your Asian assets, in as much as, what is the value of them now be they property, mines or shares? And more to the point, can you identify them quickly, if at all? Equally can you benefit from the fluctuation in currency or are you in fact at even more risk? Risk management at all stages of your contracts needs understanding.
Your risk may not be directly exposed. It may be hidden in other ways including your portfolio or where you have Asian assets used as collateral. And, here’s the potentially bigger problem – it’s about things that you have no direct exposure to, like your suppliers and your suppliers’ supply chain.
Protecting YOUR supply chain
You get to start thinking about just how secure is your agent/supplier. Normally your lead supplier of say door handles will have a network of companies he works with to deliver all the things he needs to get you your order. He manages that risk ultimately for you. What happens if his network is exposed to risk including this crisis and fails to deliver to the principal supplier? Perhaps your lead supplier now can’t raise the capital needed to get you your door handles.
Historically we would react by saying: “well, that’s your problem, not ours” – which really it isn’t. You need to have a clear commercial view of all of the supply chain because right now you know visibility of the risk. Over the last few years there has been increased emphasis on supply chain due diligence; well how effective that has been is about to be tested I suspect.
Lessons learnt
What have we learnt post Asian 1997 financial crisis, when we saw foreign debt-to-GDP shoot up beyond 180% as well as billion $ programs to stabilize multiple currencies?
I’m afraid not enough. Many contract processes have not been tied to the due diligence process and in many cases, little has changed in contract management regarding managing geo-political. These have not evolved very quickly – witness the scramble to assess risks during the Greek crisis.
We potentially have been too narrowly focused and need to have learnt the lesson that the world is changing all the time and the need to understand and include geo/political risk. As ever, extracting and aggregating data is the first step to assessing the true level of risk. Tying together diligence processes reflecting those in the contracts and measuring risk are the three key steps. We may be about to find out how much the processes have changed; I hope I am wrong and the fallout will be negligible.
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