The paradox of relational contracting

The belief that collaboration yields better business results is widely accepted and has led to growing interest in the role that contracts play in either supporting or undermining collaborative relationships. As a result, ‘relational contracting’ has increasingly come under the spotlight, with continuing efforts to provide better definition and guidance on what it means and the forms it can take.

Most commentators reecognize that relational contracts – and collaboration more broadly – face a number of significant barriers, one of which is thought to be the traditional hierarchical structure of most large organizations. Yet is this correct? When we think of collaboration, Japanese business has often been held up as a role model, yet it also operates within a strongly hierarchical culture.

Unravelling the Paradox

 This apparent paradox requires analysis and understanding of power and authority in Japanese society. Japanese organizational structures operate with clear lines of authority and respect for seniority. However, unlike in some Western contexts where hierarchy may impede collaboration and innovation, Japanese culture alters the power dynamic through an emphasis on relational bonds, consensus-building, and group harmony.

My research has led to several key concepts, the first of which is “uchi-soto,” which refers to the distinction between insiders (uchi) and outsiders (soto). Within hierarchical organizational structures, there is a strong sense of loyalty and cohesion among insiders, who share common goals and values. This internal unity enables organizations to navigate complex social hierarchies and external challenges while fostering trust and cooperation among members. (I find this interesting, because I recall a Japanese colleague expressing surprise that Western executives make themselves remote by having offices in corners and with windows. He told me that in Japan a ‘window person’ is someone on the way out).

Japanese culture also places a premium on “wa” (harmony) and “nemawashi” (consensus-building), which prioritize the collective good over individual interests. Together, these mean that hierarchical power structures are softened by relational norms that encourage consultation, collaboration, and mutual respect. Even within hierarchical organizations, decision-making processes often involve extensive discussions and consensus-building exercises to ensure buy-in and alignment among stakeholders.

Finally, there is the concept of “amae,” which recognizes mutual dependency and the need for nurturing relationships. This underpins many interpersonal interactions in Japanese society. So while an organization might be hierarchical, superiors are expected to provide guidance and support to subordinates, which fosters and environment of trust and reciprocity – which are the sort of behaviors that facilitate relational exchanges.

So is it the structure, or is it us?

From this, we must conclude that it is not so much organizational structure that impacts the ability to collaborate, but rather the cultural and behavioral norms and expectations that operate within it. Hierarchical power structures can work fine if they are complemented by relational norms and values that promote collaboration, consensus-building, and group cohesion. (And by the way, until Japan engaged more fully in the global economy, it did not need contracts at all!)