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. This gave me a solid understanding of managing risk in regulated and safety critical industries. 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 obligations, liabilities and indemnities that clients set out in their contracts. Many are onerous (and often inappropriate for a recruitment business). I had to justify to clients why they needed to be better aligned to the business operating model of the professional recruitment sector.
As an independent freelance consultant, SRC’s Value Proposition is "to add demonstrable shareholder value, through a proven international track record of managing risk and compliance for over 36 years, to help clients gain insights into best practice and identify improvements that ensure business is conducted on a sound commercial basis".
What is Contractual Risk
To address the question as to whether it is necessary for recruiters to worry about contractual risk, it is first important to understand what is meant by ‘contractual risk’ in recruitment contracts. Whilst the contracts your business enters into allow you to take advantage of business opportunities and profitable business relationships, contractual risks are issues or problems that inherently arise during the performance of a contract. Such risks have the potential to harm your operations and result in either positive or negative outcomes of a contract. It is critical for recruitment businesses to manage and mitigate these risks to ensure the Risk vs Reward scales tip in your favour.
In this Blog, I will highlight some of the key risks that recruitment businesses face and explore four good reasons why we should mitigate such risks to minimise the potential for such risks to harm your business.
Five Key Categories of Risks
During my risk reviews of recruitment contracts, I have identified five key categories of risks that need to be carefully assessed and considered in contract negotiations:
Operational risk: loss caused by inadequate or failure to follow best practice recruitment processes, for example poor verification of CVs, education, professional qualifications and work experience of candidates.
Financial risk: loss of money, for example as a result of clients not paying invoices on-time or worse, not at all.
Legal risk: from breach of contract obligations or not meeting legal compliance requirements. Potentially the biggest contractual risk facing recruitment businesses arise from the consequences of accepting vicarious liability for the professional work and acts & omission of the contractor personnel / temporary workers we place (this is a significant topic worthy of its own separate Blog in the future).
Data risks: arising from inadequate management of personal data or non-compliance with data protection laws.
Brand risk: negative PR as a fallout from any of the above.
Four Good Reasons to Manage Risk
It is essential for your business to adequately manage these risks for the following four good reasons:
1. Negative impact on the profitability of your business
If the above risks are not adequately mitigated, there is a high probability they will lead to your business and/or your clients suffering financial loss and reputation damage, potentially leading to costly and time consuming litigation.
2. Not all losses are covered by insurance
If you have comprehensive insurance policies, then it is possible such financial losses to your business and/or your clients may be recoverable from your insurer. However all insurance policies have terms, conditions and exclusions which means they may not respond or may not include coverage for certain losses, related for example, arising from vicarious liability. As a minimum, if you make an insurance claim you will need to pay the policy’s deductible, which could be significant.
3. Missed opportunities for lower insurance premiums or enhanced coverage
If your business fails to adopt industry best practice in the negotiation of contracts to minimise the risk exposure for your business and your insurer, then you will not be able to demonstrate to your insurance underwriter that you have a robust contractual risk strategy. This will mean you will miss out on potential reductions in your insurance premiums, lower value policy deductibles and valuable opportunities for your insurance broker to negotiate enhanced scope of insurance coverage for you. More fundamentally, there is a possibility that if your approach to managing risk does not provide sufficient comfort to brokers and underwriters, they may not have an appetite to offer insurance and so coverage may not even be available to your business.
4. Lower valuation of your business
When you come to sell your business, a key component of a Buyer’s legal due diligence is an assessment of your approach to contractual risk management. If you fail to demonstrate that your approach is robust and minimises exposure as far as practically possible, then a potential Buyer will no doubt seek a lower acquisition price to reflect the future exposure to unmitigated risks, or they may even walk away if the processes are poor and raise red flags.
Conclusion
In conclusion, from my own personal experience, having a rigorous approach to client negotiations, a comprehensive understanding of the five fundamental risks and robust processes to mitigate these risk, then you will be able to “put your head on your pillow at night, and sleep easier”, knowing that you have managed your contractual risks to turn the above four reasons to your benefit.
Here to Help
I hope this Blog has provided you with some valuable insights. 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. I would be happy to explore with you how to achieve the benefits I identified above. Please contact me to arrange a chat.
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.
Kommentare