Use these steps to help you gain a better insight into the contracts you are signing
For over 20 years, I worked for multinational engineering companies involved in complex projects where the management of safety and risk was of paramount importance. My subsequent 16+ years at the US$2bn global recruiter NES Fircroft, as the Group Commercial & Legal Director, enabled me to hone my skills in managing risk in contractual negotiations with clients and suppliers. These negotiations required me to have an in-depth understanding of the liabilities in recruitment contracts.
During my association with APSCo, I have had the privilege of serving for a total of 8 years on the UK Representative Committee during 2010 to 2022 and twice as the Chair in 2011-2012 and 2020-2022. Now as an APSCo AdvisoryLink Business Advisor, I am using my extensive international experience to help businesses in the professional recruitment sector to mitigate their risks and achieve compliance, so they can enhance shareholder value through the adoption of best practice.
In my last Blog, “Contractual Risk for Recruiters, we don’t need to worry … or do we ? Four good reasons why we should”, I set out the risks that need to be considered in contract negotiations and identified the following four reasons why it is essential for your business to adequately manage these risks:
Negative impact on the profitability of your business
Not all losses are covered by insurance
Missed opportunities for lower insurance premiums or enhanced coverage
Lower valuation of your business
In light of these risks, a number of SRC’s clients have recently asked me to undertake Consultancy Engagements to conduct a Red Flag Contract Risk Review of one or more contracts, to gain a comprehensive understanding of the liabilities within their contracts. To conduct these Reviews, I adapted the methodology I have used for the last 16 years. As my passion is to share best practice in risk and compliance for the professional recruitment sector, I want to use this Blog to share this methodology with you. I hope that you can use it to gain a better insight into the contracts you are signing.
What is the purpose of a Red Flag Contract Risk Review ?
The Red Flag Review is intended to act as an initial screening tool, a sense check. The review identifies risks in client contracts that may be too onerous for a recruitment business, because if any of these risks were to materialise, they could have serious consequences for one or more of the four reasons identified above. Therefore careful consideration needs to be given as to whether it is appropriate to sign the contract, seek to negotiate or to walk away.
I use a 5 point traffic light scoring system” (“RAG Contractual Risk Score©”) to classify the contract as Green / Amber-Green / Amber / Amber-Red / Red. Green represents a standard “Staffing Services” contract with liability for recruitment services only. At the other extreme, Red represents a “Consulting Services” contract where the liabilities are extremely onerous, as they are typically associated with accepting liability for the professional errors & omissions of the contractors placed (known as “vicarious liability”).
SRC’s “8 Step Methodology for Red Flag Contract Risk Reviews©”
The methodology is set out in the Table below. The review will seek to identify risks that are contained in contractual language such as obligations, procure, warranties, guarantees, performance standards, indemnities and liabilities. Having identified these risks (which in my last Blog were grouped into the five categories of Operational, Financial, Legal, Data and Brand), it is necessary to understand whether these are standard for a recruitment business providing staffing services. Can they be effectively managed in the ordinary course of doing business ? However some of the risks may go beyond what should be expected of a recruitment business. Therefore it is necessary to consider the risk exposure, in terms of the probability of the risk occurring and the expected impact on the business if it did occur. This will enable the Risk Score to be determined.
Identification of Red Flag contractual risks and liabilities
Assess risk exposure in terms of probability of occurring and expected impact on the business
Determine RAG Contractual Risk Score
Question the appetite of the business to accept this level of risk & whether it makes sound commercial sense
If not, identify potential risk mitigation options to reduce risk exposure - check acceptability / suitability / feasibility of each option
Determine post-mitigation RAG Contractual Risk Score(s)
Question the appetite of the business to accept the new level(s) of risk, if not repeat Step 5
Recommendations as to next steps - sign (with or without additional risk mitigation actions being put in place) or negotiate contractual amendments
As shown in Step 4, having completed the Red Flag Review, your business needs to consider whether it has the appetite to accept this risk exposure ? Does the Risk vs Reward equation make sound commercial sense ? If not, then risk mitigation options need to be explored. These options include amending the contractual language, adding an appropriate limit of liability, transferring the risk through insurance, changing business processes to ensure the risk is managed or setting aside a ‘just in case’ financial contingency.
The acceptability, suitability and feasibility of each option needs to be considered. For example, is it feasible to negotiate amended language with the client ? Is the transfer of risk acceptable to the insurer ? Are the new business processes suitable, workable, for the business ? To get to these risk mitigation options, it may be necessary to conduct a more detailed review of the contractual language and how your business can manage the risks, to understand their significance. Each option will need to be explored to see if it lowers the probability of the risk occurring and / or the potential impact on the business.
Steps 5 and 6 highlight the need to reassess what the Risk Score would be after implementation of the mitigation actions and the need for an iterative process, if the Risk Score remains unacceptably high. Eventually an acceptable Risk Score is achieved. The decision needs to be made by your business as to whether it is either ok to sign the contract or it becomes necessary to open a dialogue with the client to negotiate a more reasonable contract. If an acceptable Risk Score cannot be achieved as the liabilities are too onerous, then the tough decision to walk away may be the best way forward.
How can SRC help you ?
I hope this Blog has provided you with some valuable insights as to how to review the contracts you are signing. With over 16 years of international experience of reviewing recruitment contracts in jurisdictions across the world, if you are negotiating complex contracts and need help with business-critical Red Flag Risk Reviews or exploring appropriate risk mitigation strategies (including discussions with insurance brokers and underwriters), then investing in consultancy support from SRC can add real value. If you are looking at selling your business in the future or acquiring another recruitment business, then SRC can assist by conducting a Risk Review, as part of an initial legal due diligence, to determine if there are any Red Flags that would be of concern.
I am the Director of Strategic Risk & Compliance Consultancy Limited (SRC), which I set up to support businesses in the professional recruitment sector. I am looking to share the best practice solutions I have developed through my experience and the challenges I have faced. A number of business associates have recently written insightful LinkedIn Recommendations endorsing my work, which I hope will give you confidence in the quality of SRC’s consultancy services and my approach to managing complex business issues as an independent Business Advisor. They are summarised on the Testimonial page of my website here.
I can be contacted via email stephen@srcconsultancy.co.uk or via LinkedIn linkedin.com/in/stephenrookes. Details of the specialised consultancy services offered by SRC are set out on my website www.srcconsultancy.co.uk, and they include:
M&A Transaction & Integration
Compliant Contractor Engagement
Management of Litigation & Mediation
Contractual Risk & Insurance
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