Operational Risk is the Biggest Danger Presented by an Agreement, So Contracting Should Be a Cross-Functional Duty that Goes Beyond Legal


 The Point

  1. Operational risk — the possibility that a business’ efforts might fail in their actual execution — poses the greatest peril to success of a company’s contracts.
  2. Operations take place outside of the corporate law function, so evaluation of the risks they pose should consist of practical judgments by businesspeople — not legal analysis.
  3. Therefore contract creation and management should be a cross-functional — not solely a Legal — responsibility.

This Matters to Your Business

Among corporate functions, Legal is star of the show in the contracting process. At least that’s been the case traditionally.

And, given their law school education and (appropriate) focus on producing agreements that are enforceable in court, it’s only natural for attorneys to think first and foremost of legal risk when drafting contracts.

But legal risk is only one of four distinct risk types presented in an agreement: Operational, commercial, financial — and legal. And legal is not the most important risk category, as it matters only if litigation or an enforcement action arises, or is threatened.

Operational risk is the most important of the four. Will frontline employees be able to actually use what their purchasing department has bought from a vendor? Can the business unit making the promise really deliver the goods or services they have sold to the customer?

If the answer to such questions is “no”, it doesn’t take legal acumen to see that the company has breached any agreement in which such performances have been promised.

Because …

In the contracting process, operational risk management calls for an informed assessment of whether or not commitments made are likely to be commitments kept. For this determination, talents of even the most astute, elite attorney are little better than speculation.

A business requires the best talents of its lawyers to evaluate the legal risk in its contracts. But it requires different talents — the best talents of other corporate functions and business units — to evaluate the operational risk.

A truly informed operational risk assessment calls for nothing less than practical, experience-based judgment by the businesspeople who conduct corporate operations. Contracting’s most important risk category — operational risk — cannot be managed without collaboration between Legal and the rest of the business in a cross-functional effort.

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