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Is past performance a good indicator for the future?

February 5, 2014
Trustworthiness is a critical element in business relationships and research (see reference below) has shown its importance in generating successful results.

That research also explored the role of contracts and found – perhaps not surprisingly – that the contracting process and contract terms are of very real importance in creating trust within new relationships, but less so in environments where there is a history of working together. It highlighted the difference between environments that benefit from ‘contractual safeguards’, compared to those where there is an established ‘clan culture’.

So does that mean we can forget about the contract in situations where there is past history of success? And to what extent should good negotiators be thinking about contractual safeguards that contribute to the creation of a clan culture?

Traditional contractual safeguards tend to be those of negative incentive (i.e. bad things will happen to me if this fails), together with ‘intrusive’ performance oversight. And while this may in some percent of cases be effective, in others it will create an environment of secrecy and blame. In fact, the whole idea of negative incentives and performance oversight sends a message that ‘this partner cannot be trusted’ and discourages collaboration. This innate lack of trust seems to be present in many corporations; indeed, there is a strange phenomenon I am encountering where people seem to associate collaboration with a threat to their jobs.

So contracts that focus instead on creating an environment of positive interaction are much more likely to breed success. And even if the parties are familiar with each other, this investment in contractual mechanisms probably remains worthwhile. The reasons for this are a) even though we worked well in the past does not guarantee the future: needs and circumstances change, business strategies alter – so continued alignment cannot be taken for granted; and b) the fact we work well with one group or on one contract does not mean it replicated: other research indicates the point that working with the same company in different locations may generate major variations in performance – what works in one place may not be replicated in another, so it is risky to assume that ‘clan culture’ is pervasive in its effect.

This article is based in part on research published in the Strategic Management Journal, 2013: SOURCES OF ALLIANCE PARTNER TRUSTWORTHINESS: INTEGRATING CALCULATIVE AND RELATIONAL PERSPECTIVES by Oliver Schilke and Karen S Cook

One Comment
  1. Tim, Another important dimension which drives the tone of contracts is the period during which each is being signed off. Parties with great history of positive and collaborative relationship may tighten the knots are their end during times of economic downturns, irrespective of whether the downturn affects the relationship or not. This is mostly attributed to our inherent nature to safeguard our interests during times of scare. Many a contract have thrived similar situations through history, and are examples which reinstate the importance of trust and confidence in each other’s organisations rather than individuals alone.

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