Downturn Risk Management
When the market is most challenging, risk management costs can’t be short-cut
Risk comes with any business and is present in all business cycles. It is essential to remember that investments in contracts, insurance, employee management and quality can provide their most value during downturns.
Glass and glazing have their cycles like all industries. In good times, costs and overhead can prove less concerning. Leaner times often lead to expenses being carefully monitored. But it is precisely when the market is most challenging that risk management costs can’t be short-cut. It is essential to remember that contract, insurance, quality and employee management can provide their most value during downturns.
Downturn cost-cutting can be especially problematic with respect to contract review. Limiting—or skipping—appropriate and thorough review of job agreements often happens due to a desire to limit seemingly extraneous legal or internal time costs. And while cost control is necessary, downturns often give rise to agreement terms that can lead to bet-the-company positions.
Payment terms include the best examples of clauses that become more aggressive when business slows. With money tighter, “paid-if-paid” or “paid-when-paid” clauses become more structurally enforced. Retentions increase and months-long payment terms are not uncommon. Where little attention is paid to these clauses during contracting, the ability to negotiate fairer payment terms is lost. And if problems arise in the future, contractual leverage is lost and can leave glaziers without an effective remedy to ensure they are rightly compensated for their work.
What to do: Contract and legal review can be essential tools to help ensure that timely and proper payments are available, even when market conditions are adverse. It is essential to understand the payment terms of agreements, and then strictly observe the technical requirements for any contract adjustments to help minimize the potential that payments or adjustments will be denied.
Softness in the market can also lead companies to extend their offerings to reach additional revenue streams—in either services or products. Practically, this kind of flexibility is good and can help companies weather more challenging times. Unfortunately, we regularly see these additional offerings made without the controls to help shield the primary business model from the risk of these new ventures.
Putting aside issues of learning new technical proficiencies, new business offerings often present the most risk due to a lack of due diligence and insurance coverage. Moves into new markets as a downturn hedge tend to include shifts into interiors and more decorative products. Issues of intellectual property rights for designs and patterns, as well as specific hardware, need careful examination and sourcing or this lack of diligence risks infringement litigation. Likewise, business offerings that are not at least tangential to the core operations risk a lack of insurance coverage because the new operations can provide an insurer a policy exclusion or defense to damages resulting from the new work.
What to do: Coordinating with insurance carriers and brokers helps maximize new offerings and protects against doomsday losses and later claims. Carefully consider the nature of any business change to ensure that gaps for specialty insurance like professional liability or errors and omissions are filled.
Even if business offerings remain in core competencies, downturn risk management must also focus on employees and quality. In slower periods, companies often make meaningful efforts to retain those employees who show the highest performance standards, while less-essential personnel are furloughed or simply let go. Risk comes with any adverse employment action, in good times and bad. The risks are especially pronounced, however, when times are lean and employees have less readily available employment opportunities. Following established personnel policies, and properly documenting human resources decisions, are essential risk mitigation concerns when markets turn south.
What to do: Human resources and employment-related expenditures help ensure smooth operations and avoid situations jeopardizing companies, whatever the market conditions present. Reviewing and updating employee policies and handbooks may seem like a needless effort in a downturn, but proper use and enforcement of established policies help defend against allegations of retribution and wrongful termination.
Quality can suffer during downturns too, even where the most experienced employees remain. Having to do more with less is essential when times are tough. The key is to know when “doing more” leads to cutting corners. Quality work and products must remain paramount concerns even when fewer people are being asked to do even more. Maintaining a crucial focus on quality maximizes the revenue from each project by limiting cost bleeds through warranty service or customer accommodations due to less-than-quality work.
What to do: Quality costs retain value in-house by limiting post-completion expenses and nurturing business partner relationships to help maximize future opportunities. With fewer opportunities during slower periods, maintaining positive working relationships with those doing work can be the best mitigation strategy of all.