A good contract doesn’t sit in the bottom drawer – it’s a playbook for your relationship.

You know the feeling. Things are going well: the relationship is strong, you’re hitting your numbers, and the noise has disappeared.? Then, something happens: a new leader arrives, the strategy changes, or the contract is expiring.? And you begin to sense a change in the relationship: communication slows, transparency evaporates, and collaboration is replaced by friction.?

So, in the hope it will help you realign interests and expectations, you ‘pull from the bottom drawer’ the outsourcing contract that you’ve never used.? It doesn’t help. ??

But why does the contract sit in the bottom drawer in the first place??

Okay, sometimes, it’s just a poor contract.? A hastily assembled ‘cut and paste’ of loosely related documents for outsourced services.? However, often, it’s not because it’s a poor contract.? It’s because it’s the wrong type of contract for the kind of relationship you want.? It’s what we call a “Transactional contract”.? A transactional contract is ideal for one-off exchanges where the scope of work is clear-cut, precise terms and conditions are possible, and risks can be mitigated by explicitly outlining duties, deliverables, and consequences for non-compliance.?

Simple transactional contracts don’t work in complex strategic relationships, like the planning and management of real estate, facilities, and workplace operations.? Here you need a different kind of contract.? What we call a formal relational contract.? A contract that creates a frictionless relationship where the parties align interests and expectations and collaborate to achieve mutually agreed desired outcomes.?

Relational contracts

Extensive research from the University of Tennessee (UT - currently ranked by Gartner as the number one (1) Graduate Supply Chain management program in North America) established that simple transactional contracts don’t work in complex strategic relationships where the parties are highly interdependent, future events can’t be predicted, and flexibility, trust, and transparency are required.

In their Havard Business Review article “A New Approach to Contracts – How to build better long-term strategic partnerships” UT’s pioneer of Vested relationships, Kate Vitasek, Swedish lawyer at UT adjunct lecturer, David Frydlinger, and Havard Professor and co-winner of the 2016 Nobel Prize for Economics, Oliver Hart clearly outline the case for relational contracts.? According to the authors, “Companies have traditionally used contracts a protection against the possibility that one party will abuse its power to extract benefits at the expense of the other.”? And that this “Adversarial mindset creates a downward spiral of negative tit-for-tat behaviours.”? Their solution to this problem is that

“A formal relational contract lays a foundation of trust, specifies mutual goals, and establishes governance structures to keep the parties’ expectations and interests aligned over time.”

How to create a formal relational contract

UT research and implementation by organisations such as BP, Microsoft, Dell, FedEx, Intel, Volvo, JLL, Compass, ISS, and Sodexo established that a formal relational contract is as much a process as it is a document with a set content.? However, when creating a formal relational contract, it’s essential that you use the right sequence in a five-step process.

Step 1:? Lay the foundation for the partnership

Step 2:? Co-create a shared vision and objectives

Step 3:? Adopt guiding principles for the partnership

Step 4:? Align interests and expectations

Step 5:? Governance

Step 1:? Lay the foundation

In the first step we lay the foundation for the partnership by establishing if you have enough trust, transparency, and compatibility to build the kind of relationship you want.

We start by using an online tool developed by the University of Tennessee to measure the strength of an existing partnerships across five dimensions:

1. Focus
2. Team orientation
3. Communication
4. Innovation
5. Trust

We survey every key person from both the buyer and supplier who are directly impacted by the partnership.? Generally, that’s around 16 - 20 people from various roles along the supply chain.? But the more survey participants the better - including individuals with varying responsibilities at various levels of leadership, management, and operations.? The confidential on-line survey is conducted by the University of Tennessee and takes about 15 – 20 minutes to complete.? The link to the survey is kept open for two weeks, and at the end of the survey, we have an anonymous 360-degree view of the relationship.

Each question is carefully crafted, research based, and open ended.? The survey asks individuals for their view on both their organisation and the partner organisation.? Generally, we present the results in a workshop.? One of the presentation tools is a spider diagram that maps the survey results for each of the five dimensions.? In a good relationship, the gaps are small. And the anonymous survey identifies strengths and opportunities and the willingness (or otherwise) of the parties to bridge the gaps. ?????

Extensive research shows that an alignment of cultures builds value, decreases transaction costs, enables broader solutions and agreements, and creates more options for innovation.?

Step 2:? Co-create a shared vision and objectives

In this second step the parties sit down and co-create a shared vision on what they want to achieve and mutually define the strategic objectives of the relationship.

Step 3:? Adopt guiding principles for the partnership

No contract can predict the future.? It will always contain gaps, omissions, and ambiguities.? So, in this third step we adopt six guiding principles for the relationship.? The guiding principles are social norms, and they are often supported within the contract by mutually agreed intended behaviours.?

Co-creating a shared vision and jointly defining the guiding principles and intended behaviours helps shape and change the mindsets of the partners.? The change in mindset means you no longer need to spend huge amounts of time and money trying to stop someone from taking advantage of you.? And it stops you from feeling the need to flex your muscles and contract with multiple suppliers, force suppliers to lock in prices and guarantee savings (when they don’t understand your cost base), use termination-for-convenience clauses, or scope-sweeping clauses to cover those things you might have forgotten.?

Separate research by Nobel Prize winners Oliver Williamson and Oliver Hart (yes, co-author of the HBR article) showed that these approaches only create a sense of distrust, vulnerability, and friction between buyers and suppliers.? And further it leads to retaliatory behaviours where one party stops cooperating, being proactive, or cuts back on performance.

So, by adopting the guiding principles and intended behaviours you deliberately ignore a muscular approach and chose to collaborate and create better results for both buyers and suppliers.?

Step 4:? Align interests and expectations

In Steps one to three, we prioritised the importance of people and created the foundation for the relationship.? In the fourth step, we get into the specifics of the deal and ‘hammer out’ the commercial terms like scope, performance measurement, management, and reporting, transition of services, pricing arrangements, and all the other contract terms.?

Step 5:? Governance – Strategic Relationship Management

Now, in this fifth step, we agree on a clear governance structure and processes for relationship management throughout the term of the partnership.? You will create a tiered management structure with separate service delivery, transformation, and commercial management functions, a process to maintain continuity of resources, and a structured performance management program that includes a proactive problem-solving, decision making, and dispute avoidance processes.

So, ask yourself: Do you want a contract for outsourcing real estate, facilities, and workplace services that sits in the bottom drawer (or a playbook that aligns interests and creates frictionless relationship where both parties collaborate to reach mutually agreed objectives)?

The answer may be closer than you think.