Relationships versus Contracts: Challenging the Myth
How often have you heard that ‘it’s the relationship that matters?’ Either by inference or quite explicitly, ‘the contract’ is pushed into the background as having either little significance or, in some cases, being a downright impediment to that all-important relationship.
Steadily, the evidence is mounting that this widely-held view is a myth. ‘Relationships’, according to leading sales authority Dave Kahle, are often used as an excuse for poor selling. In a recent article, Dave observes that the claim of “”great relationships” is too often a veil that sales people hide behind to keep from exposing the weakness in their sales skills”. He goes on to point out that businesses must remember that their goal is to sell things and generate revenue. Whereas with friends or family, your primary objective may be a strong relationship, that is absolutely not the case with customers – unless it is visibly leading to strong growth and increasing penetration.
So the fact that ‘the relationship’ is not really so important does not of itself alter the proposition that contracts also have limited – perhaps negative – significance. So what evidence is there to challenge this element of the myth?
First, we certainly know that contracts can have an extremely negative effect. There are many connections between contract terms and important issues such as trust, integrity and ease of doing business. We know, for example, that contract terms and their negotiation frequently undermine the promises made during the sales or marketing process. We know that unfair or unbalanced risk allocations often result in negative behavior. It is in organizations that work this way that the tendency to emphasize ‘the relationship’ is strongest – and that is hardly surprising. I once worked for a company where Sales were trained to tell customers “It’s not what the contract says that matters, it’s what we actually do”. Inevitably such statements undermined trust – and suppliers who were ready to make stronger commitments started to win more contracts. So certainly contracts are a potential differentiator.
But there is more than this. One IACCM member recently reviewed several thousand customers and they discovered that customers with a formal contract were almost twice as satisfied as those without. Their subsequent research confirmed a point that IACCM has been promoting for some years – that good contracts define and set expectations and therefore represent the framework for a relationship. In this case, customers were indeed happier because they knew what to expect; there was discipline to the way the organizations worked together. Indeed, it was almost the opposite of the loose management through a ‘great relationship’.
Best practice does indeed lead to a conclusion that ‘relational contracting’ is the right way forward – an embedding of relationship principles into the contract and a refocusing of negotiations to establish structure to the way that organizations will work together. Top performing organizations are edging towards this approach – re-thinking the timing and connections between Sales and contracts / commercial staff, developing centers of excellence for ‘relational negotiation’, re-designing contract structure and content to emphasize collaborative performance and governance.
So it is time that all of us challenge the myth of ‘contracts don’t really matter’.