Is it your contract or your relationship that under-performs?

There is a lot written about the role of contracts in value delivery and erosion. Traditionally, many have argued that value comes from the relationship and that contracts have little relevance, unless things go badly wrong. In many respects, the pandemic can be seen as supporting this argument. In most cases, contracts proved of little practical use in addressing or resolving the chaos that ensued.

But is this due to an innate failure of contracts themselves, or more because of failure by those who develop contracting strategies and standards? Yesterday, I was looking through past editions of IACCM’s Most Negotiated Terms report and was reminded that we had written about this particular issue in 2015, when we highlighted the contrast between contracting for transactions and contracting for relationships. Here is what it said:

“A transaction is a quick, short-lived exchange. It’s about this deal, these terms. Get a signature, and you’re done.

Negotiating relationships is a process with no clear beginning or end. Your goal is to build sufficient understanding, comfort, and trust between parties that you can work together now and in the future, under conditions that enable both sides to prosper.

• In a deal, the counter-party is often treated as an opponent, in that your goal in the negotiation is to ‘win’ by conceding as little as possible and to have them conform to your terms. In a relationship, the other party is viewed more as a preferred partner and you want to gain from their knowledge, experience or special values, so you are interested by their perspectives and their thoughts and ideas on the terms you are negotiating.

• Deals are about getting as much of what you want as you can carry away. Relationships are based on fair division and joint burden-sharing, recognizing that benefits come over time.

• In a deal, you limit interactions with the other party: limiting the information you provide and the people they are allowed to speak with, guarding your responses, pressing your position. In a relationship, you are more relaxed, open, and natural: sharing information, making connections and truly seeking to understand and resolve differences.

• In a deal, you may exaggerate the strength of your position or try to trick the other side into giving in or giving more than you really need (e.g. to satisfy short-term measures of success). Successful relationships are based on honesty, reliability, and follow through – they are thinking about values achieved over the longer term.

• Deals are static, inflexible, with exhaustive contracts intended to guarantee that every term and condition will remain “carved in stone” until the transaction is completed. Relationships are also based on fundamental agreements, but they are more accommodating, less rigidly detailed. Because relationships take place over time, change needs to be anticipated and managed constructively rather than ignored because it falls outside the scope of the initial agreement. Relationships are dynamic, not carved in stone.”

So perhaps one of the big lessons from the pandemic is our need to apply much more thought to what we are trying to achieve in our supply transactions and to design contracts and their terms accordingly.