Responsibility: It's a Two-Way Street

In an earlier post, I wrote about how principles of responsible procurement can support a balanced and collaborative approach to risk management. When risk is shared, all parties have a stake in minimising it. And if risk does materialise, all parties have a hand in remedying it.

So, responsibility is a two way street. We should expect customers to act responsibly in setting the terms on which they procure services. Equally, suppliers need to be responsible in setting or agreeing the terms on which they are prepared to supply their services. That was the balance I was trying to achieve, when I designed the StaffSure standard in 2017.

StaffSure addresses key business integrity and risk elements within contemporary workforce services (RCSA, n.d. “About StaffSure”). Its Financial Assurance section includes specific requirements concerning the acceptance of risk. It does so by asking:

“Does the agency have controls to assure, to a reasonable standard of confidence, that it does not enter into improvident hold harmless agreements?”

NOTE: Such controls may include:

- Insurance cover extending to contractual liabilities assumed under hold harmless arrangements.

- Terms and conditions under which parties remain responsible to the extent of their contribution to claims giving rise to civil liabilities.

Staffsure, 2017

We’ve talked extensively about hold harmless arrangements. The term “controls”, in this context, typically include insurance or self-insurance arrangements, as well as risk management and review, policies, processes, and procedures.

What I meant by “improvident” was simply that risk should not be accepted without providing for it.

StaffSure was designed to help separate the reputable and responsible workforce services providers from the less scrupulous ones. 

The less scrupulous ones were the ones that recklessly sought to win business at the expense of their competitors, and anyone who might have been exposed to harm, by taking on any risk that a client tried to push their way.

The less scrupulous ones were the ones, who took on those risks without any regard to whether they could meet the financial consequences of the promises they made to hold their client “harmless” against loss.

The less scrupulous ones were the ones who didn’t know, and didn’t care, whether their insurance would cover them for the risks they were taking on. Their "Plan B" often relied on "phoenixing" - i.e., allowing their company to liquidate to avoid its obligations, and then resurfacing under a new identity.

Too harsh? I don’t think so. But you might be asking yourself, “What, exactly, is wrong with operating in this way? Isn’t it just a case that different agencies might have different risk appetite?”

Well, you may know that WorkAccord been exploring the uses of Open AI’s GPT-4. So, I asked it that question to check if I was being too “virtuous” in my criticisms of “irresponsible supply”. Anyway, here’s what GPT-4 said:

“The phenomenon you’ve described — agencies taking on an excessive amount of risk through hold harmless clauses to gain an advantage over more cautious competitors — raises several important public policy considerations:

RISK CONCENTRATION: When agencies take on excessive risk, it can lead to the concentration of risk within a few entities. This can create systemic vulnerabilities in the event of a significant adverse event, potentially leading to business failure and negative impacts on employees, consumers, and other businesses.

COMPETITIVE FAIRNESS: If some businesses take on undue risk to gain an edge over their competitors, it might distort the market. The more conservative entities that are trying to operate responsibly could be disadvantaged, leading to an overall decrease in prudent business practices.

CONSUMER PROTECTION: In certain situations, the consumers or clients of the risk-bearing agencies may not be fully aware of the risks that the agency is assuming on their behalf. If something goes wrong, these clients could find themselves unexpectedly burdened with the consequences, which could include financial losses or service disruptions.

ENCOURAGES RECKLESSNESS: If taking on excessive risk is seen as a successful strategy, it may encourage other companies to adopt similar practices, leading to a culture of recklessness that overlooks the importance of proper risk assessment and management.

ECONOMIC STABILITY: Over time, the collapse of risk-laden businesses could undermine the stability of the industry or even the broader economy. This risk becomes more pronounced if several companies within an industry or region are engaging in similar practices.

UNINSURABILITY: When agencies take on excessive risk, particularly through hold harmless clauses, they may find that they cannot obtain adequate insurance coverage. This could leave them highly exposed in the event of a claim, potentially leading to insolvency and consequent economic damage.

LEGAL & REGULATORY ISSUES: Depending on the jurisdiction, the use of hold harmless clauses might be subject to legal and regulatory restrictions. If these are being ignored or sidestepped, this can raise issues of legal compliance and governance.

In light of these concerns, public policy may favour interventions to discourage businesses from taking on excessive risk. This could include regulatory measures, such as limits on the use of hold harmless clauses, as well as efforts to promote transparency and risk literacy among businesses and consumers.”

_{(OpenAI ChatGPT, personal communication, June 21, 2023)}

The AI insights were interesting, especially the points on Risk Concentration and Economic Stability, which presented fresh considerations. But I think GPT-4 has a point. Perhaps some regulatory intervention could help limit the use of hold harmless clauses, promoting a more level playing field and encouraging a balanced, collaborative approach to risk management.

As I say, responsibility is a two-way street.

What do you think?

ACW