My grandfather was a successful farmer in Sicily, without owning a single acre of land. He grew his crops on other people’s land and shared its bounties with those landowners. Equally and honestly.

Without lawyers or legal instruments, the agreements were bound by simple handshakes made by his father and carried down from father to son.

Irrespective of war, pestilence, drought or pandemics, everything was always shared equally.

Those partnerships endured because of the trust forged from upholding the original relationship promises together with their unwritten values.

What is a relational contract?

Relational contracts are fundamentally based upon relationships of trust between the parties to an agreement where the explicit terms of the contract are generally an outline as there are implicit terms and understandings that establish the behaviour of the parties.

Relational qualities like integrity, mutuality, equality, and commitment become an integral and accountable part of the commercial relationship.

Why do relational contracts matter

Business has changed dramatically over the past decade, with supply chains and buyer-supplier relationships dispersed globally and operating with diverse and rapidly changing needs. In a nutshell, the modern economy is Volatile, Unpredictable, Complex and Ambiguous.

Organisations are realising that traditional, power-based transactional contracts struggle to deal with the volatile and dynamic nature of the modern economy. Without knowing the future at the time of their creation, contracts are less complete and effective. In fact, studies show that before the ink dries on a contract’s signatures, up to 40% of its terms are incomplete or outdated.

This common situation has a proclivity to increase the level of friction within commercial relationships, increasing management costs and compromising performance. Moreover, organisations with complex, high-value and long-term agreements are particularly vulnerable.

To overcome this, innovative organisations are turning their attention to using relational contracting strategies to supplement their existing management approaches. That is, get the commercial relationship robust, healthy and with high levels of trust, and less reliance is required on transactional contracting and its less flexible and incomplete instruments

The Characteristics of Relational Contracts

Originally conceptualised by MacNeil and Macaulay over 50 years ago, the relational contract model is characterized by a view of contracts as ongoing relationships rather than distinct transactions.

Some organisations, especially those involved in public-private partnerships or alliances, are showing interest in relational contracting and its application into their management practices. It’s only a matter of time before the enablers of industry get behind it and transform the theoretical into practice.

Which deals should be Relationality transformed?

How we currently fix relationships

Organizations with high-value, high-profile agreements that are dysfunctional tend to receive attention. Such organisations exhibit signs of conflict between the parties, unstable performance, and increased costs variations. Most importantly, key stakeholders are in pain.

Organisations with dysfunctional commercial relationships use a combination of xRM applications and expert advisors to identify, assess and repair the damaged relationships. It’s generally a resource intensive exercise, that may or may not produce intended results.

There is a case where a commercial relationship between a water utility and its supplier for a major and strategic ICT service had regressed to a state where there was little trust or respect between the parties. The workplace was rife with conflict. There where arguments over deliverables and KPIs, every supplier performance report was scrutinised, and there was significant finger pointing if something went wrong. It really was an uncomfortable place to work. Eventually, the buyer CFO and his supplier counterpart had enough, so they jointly engaged a consulting firm to get the deal back on track. The exercise took almost six months that included staff interviews, personality assessments, industry and service benchmarking, not to mention a couple of country retreat drinking fests for leadership personnel. The recommendations were extensive and expensive. The interesting thing is that nothing really improved until four months later when the buyer contract manager resigned, and the businesses negotiated a new, tighter scope of works. Go figure.

How we will fix relationships tomorrow

Early enablers of relational contracting, such as Contract Harmonics, are emerging with tools to exploit and facilitate the benefits of relational contracting. These Relational Contract Management tools can assess the relational qualities of contracts, analyse the results, and highlight opportunities for improvement.

These applications are based on the relational contract model and supported with cases, industry and contract benchmark data with algorithms that assess and provide analysis and recommendations to improve the relationship.

Summary

Strategic, high-value commercial agreements can present significant challenges to businesses. Relational contracting is emerging as a new approach for managing these agreements, with tools that help businesses with their complex agreements, even before they reach dysfunctional states.

In the second part of this article, we will look at the Relational Contract Profile, its six relational  qualities and how to use it to better manage commercial relationships.