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Getting to the right agreement

March 10, 2010

Yesterday I was asked to write an article about Wal-Mart and its ‘de-layering’ of supply relationships (another word for increasing the number of direct supplier relationships). In that article, I commented that it is possible to have collaborative relationships even with a giant like Wal-Mart – but it depends on the supplier’s approach. If you cannot demonstrate value and introduce new and innovative approaches, don’t expect special treatment.

So it was timely today when I discovered an HBS Working Knowledge article on exactly this theme and featuring two very different Wal-Mart suppliers, one the also giant Procter & Gamble and the other a small pumpkin farmer. I will leave you to read the illuminating story regarding how they gained Wal-Mart’s attention and kept their loyalty. My specific interest was drawn to the statement that , in the case of P&G, ‘both sides eventually eliminated elaborate legal contracts in favor of Letters of Intent’. This was seen as one of the break-through moments in creating a positive and collaborative relationship.

Of course, the difference between a Letter of Intent and a contract could doubtless itself keep us engaged for quite some time. But that is not the point. I believe we are going to see a steady increase in the erosion of traditional forms of contract because they simply do not get the job done. As this story illustrates, instead of pulling parties together, they often push them apart.

This is not the result of contracts per se – it is because of the way that far too many contracts personnel are hard-wired to behave. Contracts staff must develop the commercial judgment to know what type and form of relationship agreement will be best suited to their business objectives. They must escape the trap of established templates and standard term checklists and instead become the effective synthesisers and documenters of governance and performance frameworks that support success. We need a wider portfolio of tested approaches and we must develop understanding of new remedial techniques – very much like the medical profession. Today, we are faced with far too many patients who do not survive our treatment; we need to expand the range of treatments that we have on offer.

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