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Relational Contracting

August 8, 2012

There are many reasons why today’s business environment demands an integration of relationship management and contracting. I have described these in previous blogs – the speed of change, the levels of uncertainty, the increase in virtual communication, the physical distances and cultural gaps between many trading partners are just a few of the factors that make it essential to apply increased discipline to defining relationship practice and process.

As I look at the approaches being advocated to increase relationship focus, many continue to advocate a separation between ‘the contract’ and ‘the relationship’. They are perhaps reacting to the perceived dominance of legal perspectives in the the formation of the contract and therefore attempting to develop a parallel process for the formation and management of the relationship. This is a big mistake. First, the contract sets the framework within which the relationship will operate and significantly influences attitudes and behaviors. So it is wrong to accept a contract structure or terms that are not fit for purpose.

Second, ‘the relationship’ and related business terms also require the discipline typically associated with the core contract terms. Indeed, if we review the areas where things go wrong, they rarely relate to the legal terms. They arise because of the failure of ‘the relationship’ to adequately define and maintain joint understanding of goals, scope, shifting requirements, key performance indicators and so on.

It is this integration that we have been working on at IACCM – and with great success. There have been several opportunities recently to work with member companies on implementing complex contracts – situations where we have facilitated discussion between customer and supplier personnel to bring real and sustainable substance to their relationship.

At one recent meeting, a General Manager from a supplier company caught me at the break: “This is exactly what we need to give meaning to collaboration,” he said. “Can we include these workshops into our customer offerings? I would like to add them to the bids we submit because this really can deliver win-win proposals”.

 

2 Comments
  1. John Jorgensen permalink

    Tim

    I fully understand and agree with your perspective on this subject. However, I think the ‘separation’ of the economic contract and the social contract, even if only perceptual, is influential (to the success of relational contracting). Lax and Sebenius expound on this and I believe it’s important to elevate the relational governance to be ‘on a par’ with the commercial contract being formulated – far too often we see the governance back-ended, or we see third party advisers lift something out of the last contract they dealt with when advising clients – you cannot boilerplate how two organisations may operate together in delivering the intended goals of an agreement – however keeping the relational governance within the main commercial agreement tends to subvert the relational aspects, hence the resultant downplay or even dismissal of the subject. This drives the separation in order to elevate the relational aspect to be ‘on a par’. Studying the relational aspect separately (but absolutely understanding the interplay) may drive parties to conclude that actually, this is not going to work (in delivering the intended goals, and thereby not moving to contract) or it may highlight areas for attention, or confirm intentions.

    Ultimately the amount of flexibility (if that is indeed what the parties view as being of benefit to their agreement) is restrained by the ‘self enforcing range’ of the economics of the agreement, indeed understanding this ‘point of elasticity’ between the parties itself requires a level of transparency and trust between the contracting parties, which the relational aspects may govern back on (the economic agreement). I see them as being necessarily separate, but they should be complimentary and flowing in the same directional stream.

    • John
      Thanks for your well-expressed view on this. I think we are in complete agreement. You rightly point out that discussion of these relational aspects is often the true test of compatibility between the parties. It is an essential step on the path towards trust, and thereby diminishes and assists in the management of the (legally driven) risk allocations.

      Like you, i believe the best negotiations are those which look to undertake the relational aspect sin tandem with the more traditional areas of liabilities, indemnities, payment terms etc. But since I recognize that not all organizations have yet reached this level of maturity, I would prefer them to handle sequentially than not at all.

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