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Contracting as a source of learning

February 4, 2014

I read recently some research on the role of contracting in organizational learning. It confirmed the importance of an effective contracting process in driving successful relationships. In particular, it emphasized how the process informs not only internal decision-making, but also improved understanding between the negotiating parties.

It seems to me that a core value of contracting is in the context of communication. Healthy and successful relationships appear to depend upon the quality of communication. “Good” contracting provides substance and structure to that communication, not only to support formation of the specific relationship, but also for its on-going evolution. It ensures a depth of mutual understanding that reduces the subsequent likelihood of unpleasant surprises.

The contracting process must encourage and enable communication; the contract must accurately capture and reflect what was discussed and agreed.

Communication for contracting may be physical or virtual; it may also be mutual or unilateral. For example, I might receive a contract as a click-through screen and have no opportunity to negotiate, but this contract potentially tells me what to expect from my counter-party and the process creates no illusions with regard to the relative power of the contracting parties.

On the other hand, “bad” contracting is ineffective at communicating anything. It may be incomplete (often deliberately so) or it may be obscure (e.g. the resulting contract is written in language that is hard to understand). It may also be “bad” because either the contract or the contracting process is not designed or used as a basis for further communication. For example, in my experience many of the most complex relationships result in long negotiation and development of a contract, which is then neither distributed nor explained to those who are involved in its execution or delivery.

A key piece of the problem may be the fragmentation of discussions. “Contracting” often involves a multitude of stakeholders and there are many conversations taking place. Those who are responsible for creating “the contract” are frequently not present at many of those discussions. Therefore, they either rely on partial records or individual memory; or alternatively they produce a contract designed to protect against these uncertainties and which actually seeks to exclude many of the conversations that led to, or will in future affect, the relationship.

Since it is unrealistic to expect the physical presence of a contract writer during every relevant discussion, organizations instead need to focus on how to design a less porous contracting process. Part of this is education; but surely another key part of the answer must be more effective use of technology to ensure that “learning” is not lost.

However, a critical start point in most organizations would be to recognize the need to think of contracting as a process. In other words, much of the fragmented discussion and loss of learning is due to the fact that no one has responsibility for designing an integrated approach. As a result, contracts are rarely a good reflection of business intent and learning; they are mostly instruments of business control and frequently reflect an absence of knowledge.

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