Risk is the potential for a chosen course of action or unexpected external or internal events to lead to an undesirable outcome. ISO 31000 defines risk as ‘effect of uncertainty on objectives’. This definition mentions uncertainty as the cause of risk, and includes events that may not happen, as well as perceiving risk as creating both negative and positive impacts, rather than simply negative outcomes. Risk and uncertainty are related concepts. If a supplier agrees to fix the price of bananas for 12 months at $10 per kilo, both buyer and supplier have certainty about what the price will be in 11 months time. The risk for each party is different: if the market price of bananas is $5 per kilo in 11 months time, the buyer risks incurring unnecessary cost; if the market price of bananas is $15 per kilo in 11 months’ time the seller risks losing potential profit. Risks in the procurement process can occur in a variety of dimensions: the operational risk of non-performance, the technical risk of poor quality performance, the commercial risk of uncompetitive markets and the reputation risk of unsustainable practices by suppliers are just a selection of potential operational risks. Portfolio Analysis is a key tool used by buyers to develop procurement strategies as the approach incorporates an understanding of the key risks and opportunities in developing these strategies for different categories. The key stages of risk management are risk analysis, risk assessment and risk treatment, and in procurement terms the treatment of risk by transferring risk to suppliers is a key part of the procurement practitioner’s role. The buyer needs to understand the risk, identify which party is best able to manage the risk, and then allocate the risk appropriately and at a cost that secures best value and appropriate behaviour. See also Portfolio Analysis.
Risk Analysis & Management – Procurement & Contracts training is available at Academy of Procurement.« Back to Glossary Index