Transactions or relationships – what does the future hold?
Almost 60% of contract practitioners expect contracts to become more ‘relational’ and less ‘transactional’ in the next few years. That’s according to the results of a worldwide survey on ‘The Future of Contracting’ that IACCM has been conducting since last November.
Why do they feel that this is the way forward? The answers vary, as do the motivations, but key factors include:
- for buyers, there are various pressures suggesting that transactional behavior is no longer a good idea. Since the late 1990’s, Procurement has focused on driving down prices at the expense of relationships. Supplier loyalty was a thing of the past. However, that approach carries risks and longer-term costs. The loss of supplier loyalty is one example. The difficulty of overseeing quality and performance is another – and this is especially the case in an area such as regulatory compliance. Frequent supplier switching also carries direct costs in administration and management, which can undermine the savings from a lower price or charge.
- for suppliers, there is generally little attraction in transactional business. Certainly in the b2b environment, it is disruptive, makes planning hard and is linked to commodity pricing. So the transactional pressures from buyers have forced many suppliers to re-think their business model, to seek ways to differentiate and bring added value. An example of this is a readiness to accept more risk, to take greater responsibility for outputs or outcomes.
Together, these factors have been reflected in the steady shift from pure product sales to an increasing volume of packaged solutions or services (indicated in the growth of indirect procurement and the percentage of world trade in services). However, this growth has exposed real weaknesses in ‘relationship management’, until now a rather woolly, sales-led activity.
Hence the scale of interest now in ‘relational contracting’. There are many myths about relational contracts, top among them being that it introduces a ‘softness’ to the contract that creates legal doubt or threatens enforceability.
The reality is very different. Relational contracts are fully recognized by the courts and subject to a growing body of case law and precedent. It isn’t vast – but that is because relational agreements are less likely to fail and lead to litigation. And in a business context, they actually reduce doubt by creating greater discipline and clarity in the relationship, its governance and performance. They introduce positive measures rather than relying on negative incentives – in other words, more control, less need to use the stick!