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Contracts are not enough

March 28, 2013

Many years ago, I recall being sent to support an account team in the negotiation of a major opportunity with a large international pharmaceutical company. For that company, it was an important strategic initiative, with Board-level involvement.

During our discussions, we were joined by the senior executive charged with overseeing the project. He looked around the room and then enquired: “Who is going to be my alter-ego from your company? Who will I be speaking with if things are not going to plan?”

We lost that deal and in large part because that executive did not feel confident about the level or authority of the interface. His personal prestige was on the line; he wanted to be sure that this was mirrored in his selected supplier.

I remembered this incident when I was reading an excellent article from the MITSloan Management Review, sent to me by innovation expert Kevin McFarthing. Overall, the article reinforces the points made by IACCM in its push for ‘Relational Contracting’, or those widely espoused in initiatives by Kate Vitasek and Vested Outsourcing. To quote from the article: “An effective leadership pair — one person from the client organization and another person from the provider organization — goes a long way toward invigorating the innovation process. In high-performing BPO relationships, the leaders are experienced and capable, with high levels of credibility, clout and power within their own organizations”.

So does this lend support to those who argue that contracts are not really relevant, that it is relationships that matter? In my view, clearly not, though it does reinforce the point that we must think of contracts in a more holistic way – as a support for the relationship, rather than something independent of it. Dependence on individuals (and their memories) is a very risky approach to any important project or business relationship; they move, they change jobs, they fall out with each other ….. the contract is the only permanent memorial.

The article also points out the importance of what it terms ‘acculturation’ across organizations – and this is where it ties closely with the IACCM work on relational contracts. To quote again:

“innovation won’t happen unless clients and providers implement a more comprehensive process that combines acculturation across different organizations, an engaging method for generating ideas, adequate funding and a system for managing change”.

This is where IACCM promotes a contracting process that ensures the right dialogue, covering areas such as joint working, shared communication systems, problem-solving and escalation models, focus on risk probability reduction …. areas that typically undermine productive relationships if they are not discussed and mutually agreed and funded.

Contracts alone are not enough to generate and support a successful relationship. But important relationships tend not to flourish without the support and discipline of a well-structured contract. Business today demands intelligent integration of these two elements.

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