The Relationship-Based Approach to Commercial Contracts

Posted on Feb 27th, 2023

Marriage is a fitting example of a relational contract where we focus on the relationship. Commercial contracts often concentrate on ‘what we will do when things go wrong’. In doing so, we miss out on the wonderful relationship we could have created. 

When couples marry, they agree on shared values as well as individual rights and responsibilities. They enter marriage intending personal growth as well as love and support of the other as best they can provide. They work toward relationship health rather than adversarial positions. We do not apply the same contractual rigour, review of performance, or service credits to a marriage (unless we wish to kick start a big argument, that is!). And, instead of ending the contract when the relationship fails, there are remedies available to help rebuild trust.

This is very different to how we contract in business. We seek a supplier to meet a need and our selection uses many factors. These include performance, price, delivery, appearance, and service. We then watch their performance and, if not perfect, they are sacked and replaced. We almost expect things to go wrong from the beginning. We seek remedies that are punitive or even painful to discourage unwanted behaviours.

In reality, we adopt a ‘them and us’ approach that is so common in our society. In Parliament, red lines in the carpet keep the government and the opposition two sword lengths apart. In court, there are prosecutors and defenders and a referee in the middle. Our games are often two opposing sides competing to be the winner.

Business is not so vastly different where companies rely on cost and price-cutting to win the deal instead of physical or debating skills. Sometimes there is more than money at stake.

The Deepwater Horizon Oil Spill in 2010 was the largest environmental disaster in American history. A White House commission blamed BP and its partners for a series of cost-cutting decisions and an inadequate safety system. This led to BP paying around $65 billion in clean-up costs, court fees and penalties (as of 2016, the costs continue to rise).

In contrast, marriage is about developing and growing together in the long term to achieve better outcomes. We each rely on the other’s strengths to make the partnership succeed.

How Can a Relationship-focused Approach Work in a Business?

I recently read this article in the Harvard Business Review: A New Approach to Contracts: How to build better long-term strategic partnerships David Frydlinger, Oliver Hart, and Kate Vitasek. It describes how this approach to longer-term relationships pays dividends to all concerned – these can be both financial and service-based.

Here’s what we need to do to create and sustain long-term relationships:

1. Commitment: if you’re not ready to commit to a long-term relationship, this won’t be for you
2. Shared values: while it’s true that opposites attract, relationships run better when you have common beliefs at the core. Discuss them, decide what they are and write them down
3. Common objectives: as with values, figure out what they are and write them down.
4. Trust: you need to trust each other from the outset. It will deepen as you go along.
5. Communication: do it well and do it often
6. Both Boards need to believe in the relationship. Marriages always work better if the families support the new couple!

So how can we reach this state of nirvana? My approach is as follows:

1. Start with the old-fashioned ways of getting the teams together. Let them chat and relate to each other; friendship and trust will follow.
2. Have a workshop to work out a shared vision.
3. Think about governance and how you will make it work.
4. Joint social events such as five-a-side football matches, or a bowling evening can be a good way to make the other side more human while maintaining an appropriate separation.
5. Plan how you will share data. I am excited about technology and software solutions like Contract Toolkit®. It enables crowd-sourcing of the obligations of a contract and turns that data into meaningful dashboards for both parties to an agreement. Good, real-time data is essential to provide evidence of what is working and what is not.

In practical terms, you’ll want to think about the following:

1. When you create your agreement, set up all the obligations and activities and assign each one to a named individual. This can be someone from either organisation, whoever is best placed to manage the responsibility.
2. Create a shared workspace in the Cloud where you can share the primary data with everyone.
3. Set the system up to encourage the individual to watch the performance on a predetermined basis. For example, you will never need to review the clause that says the agreement is subject to English law. However, you would be concerned if the monthly review meetings did not occur, or if no one checked to see if you were invoicing correctly, or if the escalation clause had not been applied.
4. Provide a dashboard for the contract managers and the Boards to show how the obligations are being met. The obligation status can be colour-coded so that it becomes immediately apparent whether anyone needs to act urgently or not at all.
5. The respective contract managers can discuss any issues once alerted by the shared information and decide on a course of action to resolve the problem. If the problem is serious, they may make a joint recommendation to their respective Boards, considering the project vision.
6. You will need checks and balances to maintain equality between the parties. Thus, you can support communication by recording goodwill in dedicated registers. Goodwill is where one side does something for the other side that was beyond strict contract requirements. If the balance is leaning too far in one direction, this can be rectified through an agreement to an ad-hoc charge. It’s a bit like “it’s my turn to cook as you cooked last night.”
7. Claims and disputes will happen in all good relationships. They need not become serious or threaten the partnership if there is a clear process to manage and resolve them.
8. A calendar of events will enable the Commercial Director to plan future workload and the resources to support it. This will also ensure that contractual events (anniversaries!) are never missed.

As with all life experiences, we want the best of everything. This is what I advocate for your contracts and your supply chain relationships. Using this fresh style of contracting, you will build relationships that seek to achieve successful projects. The shared values and joint objectives free you to focus on what will deliver profit and acclaim to all parties. You will remove the frustration of looking only at the transactions. You want your staff to say that it was a joy to work on a project. When it comes down to it, happy staff are productive staff who will solve issues in a collegiate manner. This is far preferable to working in a ‘them and us’ culture where individuals look for the person to blame.

If you would like to discuss this further or look to introduce it to specific projects, feel free to contact me for a chat at [email protected].