Monday, 15 September 2014

Briefing for a descent into Holistic Management - corporate decisioning

Let us imagine you have been contracted to review the business systems of a company that buys overseas to sell locally.  Initially the brief is narrow – looking at standard risk issues (effective audit arrangements, inventory control and the chain of supply).  

Suddenly, out of field left, you are asked for advice about an alternative source of goods.

One moment, you are doing the job you agreed to do - the next, you are being asked to do someone else's job, and take on their risk.

Welcome to the new world of corporate decision making.

Liability for advice

Senior executives sometimes seek to transfer the legal consequences of risk from themselves to external advisors.

We observe a gradual trend towards senior executives (including managers and boards) becoming generalist.  As generalists, they are more adaptive to change.  However, they are less familiar with the specifics of the market they are working in, they are less willing to accept risk.  They have become more reliant on advice.  They may actively seek to mitigate the cost of advice and to hold the advice giver as liable for damages flowing from wrong advice.

Standard consulting contracts sometimes attempt to restrict damages that might flow from breaches of the contract.  However, contractors may remain liable in tort for negligent, reckless or direct misstatement, whether made under a contract or flowing from conduct outside the contract.  (Note also the apparent broadening of liability under statutory extensions to consumer contracts in relation to the supply of services.)  While a contract may restrict contractual damages, an action in tort might be successful for any advice given (within or outside the terms of a contract).  The impact of damages can be ameliorated by insurance, but caution needs to be exercised in ensuring that the cover extends to this class of damage.

Giving your client what they need rather than what they contracted for

Consulting contracts can sometimes often settled before the issue to be determined is fully understood or settled.  Part way through a contract to advise on ‘A’, a senior executive might seek advice about ‘B’.

Contracts can be drawn to permit this type of flexibility, and to allow changes in scope and payment to be renegotiated on the run.  These types of contracts are generally drawn in circumstances of trust and long term relationships.

In other circumstances, being asked to move outside a contract poses a number of risks.  Firstly, you may not get paid for the advice.  Secondly, there is the possibility of damage to the relationship – a consultant must be alert to an attempt to move beyond scope and be prepared to discuss how it can proceed (by variation to the contract).  Thirdly, it changes the liability equation – advising about dangers and possibilities may be within the competence of the consultant but advising about revenue possibilities may require a different skill set.  Giving advise outside scope may transfer risk from the executive to the consultant.  Finally, it may leave the consultant outside the terms of their own business insurance.

Skill sets – moving from dangers/possibilities to revenue enhancement

Risk equations often involve balancing expenditure against vulnerabilities to meet challenges.  Reductions in costs sometimes entail greater exposure to those challenges (and greater risk).

Being asked to give advice about something outside a consultant’s skill set exposes both client and consultant to risk.

How do you avoid these risks ?

1.       Listen to your client.  Frame the scope of a project carefully.
2.       Make sure that your client understands the scope and either adopts a flexible contract or understands that the contract will need to be amended if work outside scope is requested.
3.       Restrict scope to the skill sets of those undertaking the work.  Ensure consultants understand their limits.
4.       If requested to work beyond scope, be prepared to reiterate (2), and to propose a variation or engagement of someone with the right skill set.
5.       Ensure that your activities as a consultant are covered by insurance.

Peter Quinton
September 2014

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