Quality reviews typically permit a scale of 3 or 5 stars to rate performance. Everyone is familiar with the Michelin star rating system for restaurants. With one defect, measuring performance with their rating system works well. Michelin has repaired this defect (as explained below).
For risk assessment, this approach is problematic: five stars implies that the three-star option reflects a neutral, indecisive no-choice.
Where 3 stars are problematic
In performance reviews, the 4-stars option means that it was good and nothing was wrong. The 5-stars option is reserved for exceptional experiences. For Americans, this works slightly differently: 4 stars would leave the supplier puzzled (why didn’t we get 5?).
But three stars is the easy option between good and bad. It does not force the risk assessor to decide. And worse, it leaves much uncertainty about whether:
- all aspects were ‘sufficient’ (but taken together ‘not good’) or
- the sufficient aspects balance the insufficient ones.
In risk assessments, an ‘insufficient one’ should not be accepted.
Scales of 3 or 5 stars?
On a scale of five risk levels, this indecisiveness and uncertainty in the risk assessment would be unacceptable. It does not lead to adequately managing risks.
On a scale of three risk levels, the middle option for assessing risks differs: 1 star is unacceptable, 2 stars are insufficient but can be accepted if remedies are put in place, and 3 stars are fine. A level of excellence is not necessarily needed (in the world of risk assessment, there is no apparent need for compliments).
In contracts, 4 stars are needed
In risk management, there should be a clear divide between acceptable and unacceptable risks. The risk manager should not be given the freedom not to decide. On both sides, it is helpful to further qualify the risk assessment as:
- Acceptable (preferred option)
- Acceptable but not preferred (not inconsistent with policies)
- Unacceptable: changes or remedies are required, or a C-level officer must approve an exception
- Unacceptable: it’s a deal-breaker (reflects red-flag option)
Risk classification deepens insights
Weagree’s automated contract risk assessment is by default designed to rate risks on four levels. The admin can configure any other risk rating system (three or four levels) and also classify the type of contract risk. For example:
- operational risk
- financial risk
- non-compliance with laws
- non-compliance with GDPR
- reputation risk
- supply chain risks
Weagree’s AI-driven automated risk assessment allows the same contractual wording to be rated differently based on the own contract position (e.g. customer, licensor, service provider, seller).
Weagree also supports an integral contract portfolio analysis. With the entire contract portfolio being assessed for all possible risk classifications, the end-user can select the contract parameters to be shown in the contracts portfolio overview; and for each contract, the overview lists the applicable (meta) data plus the risk colour indicator.
Read more about Weagree’s automated risk assessment on our roadmap.
Repairing the 3 or 4-stars models
Since 1926, Michelin has revised its star-rating several times. There is no four-star option. Only therefore, 5 stars would be ridiculous. Nonetheless, Michelin added a green star to the system in 2020, signalling a different compliance category: with ESG requirements (so that’s a 1-star option). And indeed, there is always something you want to highlight which does not fit into the system. That could be the dealbreaker or the dealmaker.
In Weagree, that dealmaker classifies as unacceptable but approved by C-level management. All stakeholders in the workflow approval process can communicate with each other. Likewise, the special case approved for the specific contract, as well as any related instructions from senior management are automatically recorded with that contract.
Interesting? Read more about Weagree’s advanced contract approval workflows and the internal communication options.
