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Contracts & Intelligence: A Powerful Combination

June 29, 2010

It takes intelligence to trade.

As a recent article in The Economist pointed out, societies that become isolated not only stop innovating, but over time they actually regress. This is because the drive for specialisation is directly related to the complexity of human interactions.

Complexity and opportunity in trade both come from the free flow of goods and services. By eliminating borders, we maximise the range of goods and services that are available as well as enabling specialisation based on comparative advantage. “The success of human beings depends crucially, but precariously, on their numbers and connections” says economist Matt Ridley in his book “The Rational Optimist: How Prosperity Evolves”.

In order to succeed, we need not only to innovate in the products and services we produce, but also in the ways that we make their acquisition possible. Today, the erosion of borders means that we are competing both to sell and to buy in almost every corner of the world. As was observed in the recent IBM Global CEO Study, this has resulted in unanticipated levels of complexity, as we try to make sense of the best ways to structure and manage our business relationships.

Trade depends on communication – and the purpose of that communication is to establish consensus and consent between the trading parties; to ensure clarity and reduce ambiguity; and to agree appropriate mechanisms that result in trust and confidence. These roles should be achieved through the contracting process, which in turn results in appropriate records and the adoption of the processes necessary to support performance.

As IACCM research has shown, the nature and quality of communication has a direct effect on the quality of the contract – and therefore its success in delivering these attributes of consensus, clarity and confidence. Many of today’s contracting practices run counter to the concepts of a free flow of ideas. Instead, they represent a spirit of protectionism that is mostly  determined by the relative power of the parties. After all, it is easy to react to complexity by claiming everything is ‘too risky’ and, rather than seeking ways to manage that risk, simply seeking to avoid it.

It takes intelligence to trade and it takes intelligence to take risks. That is because complexity requires innovation and progress depends upon us learning and re-using that innovation. Those who are charged with the contracting process must become better at identifying and promoting the innovative commercial ideas that assist in managing increased complexity. We must resist the temptation to stick with the tools of the past. Our future is indeed exciting – if we choose to make it so.

One Comment
  1. rationaloptimist permalink

    Those interested in Ridley’s very good book might also wish to know about my own book, THE CASE FOR RATIONAL OPTIMISM (Transaction Books, Rutgers University, 2009), which makes quite similar points and arguments, but develops the case for optimism over a rather broader range of subject areas. It goes into some depth on topics such as globalization, trade, and capitalism. See http://www.fsrcoin.com/k.htm

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