Increased legal and regulatory pressures. General Electric is one of the Industry leaders in the area of high technology. The company achieved a sharp rise in revenue across its power segment.
I have looked this chapter over time and time again, I cant find a good over all answer. Can you explain and discuss the different sources of contract risk?
Uncertainty and risk in contract and procurement processes is particularly interesting in that, by its very nature, it is impossible to predict or control. Both the buyer and …the seller simply must plan for the possibility that any number of factors may occur.
Where does uncertainty come from in contract planning? Surely economic factors, both positive and negative, can introduce potential contract risk. Certainly legal commitments, as contracts are, can be problematic during economic downturns. Often times, for example, in the airline industry, bankruptcy and other severe business measures can be the only course of action when business conditions change.
What can you do to structure your contracts to accommodate economic surprises? Of course, most of our planning around economic risk has to do with negative economic environments, but what about positive economic upturns? Do they have any consequences for projects?
For example, what impact might we expect if the U. Might this economic situation make overseas sourcing more attractive? One of the ways a strong economy can affect uncertainty is in the hiring of staff.
In a positive environment, key personnel necessary to achieve project commitments may simply not be available. Or on a related point, the resources may cost more than you have budgeted in the contract. Consider long-term contracts that require resources in the health industry.
Shortages in the industry have made resources simply unavailable - at any price. What problems do these issues cause?
This assumes, of course, that resources are available to the firms receiving the outsourcing contracts. This is not a given in a strong economy - one in which workers may be able to secure employment packages that may be more attractive than those offered by outsourcing firms.
What about pricing as a form of risk in contracts? Can it be a form of risk to both buyers and sellers in contract structuring? Certainly, at first glance, one might presume that the best thing to do would be to set a price and guarantee some limit on price increases.
However, what if the cost of producing the work required by the project becomes less expensive to produce? In this case, profit to the seller may become extraordinary. How would you structure a contract to avoid this problem?
We have discussed the potential uncertainty that scarce human resources can cause in set contracts.
However, what about other types of resources required to fulfill the terms of the agreement? What if your firm provides a service that requires a resource related to oil?
What if a resource required by a contract becomes scarce or totally unavailable? Conversely, what if you enter into a contract dealing with a set price for oil or another resource and prices decrease?
Another resource that is often overlooked is the cost or availability of capital to finance a project. What if the cost of borrowing money on a long-term contract increased above your allocated budget, or if the financial institution could no longer meet its obligation to provide financing for your project?
Conversely, what if you had a long-term contract to finance the construction of several buildings and the cost of capital decreased significantly? Should the financial institution lower the interest rate in your contract?
Another interesting area to manage contract risk is in new ventures. If none of the parties involved have ever performed the work before, forecasting optimal terms will be extremely difficult. Similarly, if one of the parties has a great deal of experience with a certain type of work, and the other party is new to the field, a great disadvantage in contract structure and negotiating may occur.Debevoise & Plimpton, Hogan Lovells, Simpson Thacher & Bartlett and Wachtell Lipton Rosen & Katz have taken advisory roles on the $bn (£bn) leveraged buyout (LBO) of Dell, reported to be the biggest take-private since the financial crisis.
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Its two new business ventures are in the early stage of value creation for its investors and shareholders.