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The Challenge Of 21st Century Relationships

February 1, 2010

Many who emphasize the importance of good relationship management are dismissive of the role of contracts. Even those who acknowledge their significance often take the view that the importance of the contract diminishes over time. For example, an article I read in the Financial Times last week took the line that ‘Contracts matter at the inception of a relationship, but steadily fade over time’.  And in some cultures, the contract is variously seen as irrelevant, purely a legal instrument, or a Common Law intrusion.

I sympathize with these perspectives. After all, many companies have flourished without spending time or money on creating contracts. They built and managed satisfactory supplier and customer relationships without a need for lots of legal mumbo-jumbo.

But times have changed; business models are quite different from the way they were 20 or 30 years ago; organizational structures are flatter and leaner; relationships are more global and frequently more volatile; the demands of society, shareholders and regulators have altered. And whether or not we like these changes, they are forcing us to adapt the ways we establish and govern trading relationships.

Much of the complexity we face today is due to the fact that we are dealing increasingly with the unfamiliar (new markets, new partners, new technologies etc) and also with a greater speed of change. In combination, these factors create fascinating opportunities for success – but they also represent a source of major risk. This blog has highlighted both extremes in recent articles.

There is no question that the quality of relationships and their management is key to business success. After all, trade depends upon some level of trust and this in turn implies an appropriate relationship. I am also firmly of the view that many aspects of the traditional contract do become less significant over time, as a relationship matures. But at IACCM, we have always differentiated between the ‘passive’ areas of contract (the parts such as liabilities, indemnities, force majeure that require no day to day oversight), versus the ‘active’ clauses, such as change management, payment terms, service levels etc. It is in these active areas that the potential for misunderstanding arises; and with the increasing volatility of markets and business requirements, there is always a need for a relationship – no matter how strong it is – to have good governance procedures. These include the need for clarity and communication between the trading partners and within their organization.

So in my opinion, 21st century business depends on more formal methods to establish and oversee the performance and value of trading relationships. Commitments and obligations need to be recorded and monitored far more rigorously than they were in the past. As many of us know, if these activities rely on informal procedures, they do not work well – and tend to lead to either under-performance or dispute.

This is why – in my view – we are seeing a growing integration between relationship management and contract management. Successful business relationships require clarity, mutual understanding and agreed channels for performance and change management. Whether or not we choose to think of the capture, communication and recording of commitments and obligations as ‘contractual’, the truth is that good business relationships depend upon the disciplines that result from sound contracting practices.

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