Conventional purchasing contracts can devolve to the point that signees are engaged in a zero-sum war of attrition, each trying to force concessions from the other. Even if one “wins,” neither is better off because of time lost in conflict, ill-will, fatigue and burned bridges that linger after the battle.
In a paper recently published in the Harvard Business Review, Kate Vitasek (a professor with the Global Supply Chain Institute in the University of Tennessee Knoxville’s Haslam College of Business) and co-authors David Frydlinger (Partner with Cirio Law Firm) and Oliver Hart (a professor at Harvard University), propose a new approach to contracting that focuses on the relationship between each side.
The paper, “A New Approach to Contracts: A better way to build long-term strategic partnerships,” suggests using a five-step process based on more than 15 years of UT research into what Vitasek calls a “Vested” methodology. This method identifies mutual goals and establishes contractual arrangements that keep each party’s interests aligned over time.
The Vested methodology has a proven track record for getting negotiating parties unstuck and in alignment, Vitasek says. She cites as an example Canada’s Vancouver Island Health Authority and the South Island Hospitalists, a partnership of administrators and doctors who work in British Columbia.
“Island Health and the hospitalists were deadlocked in 2016 when they asked the University of Tennessee to pilot the Vested methodology to create a formal relational contract,” she says.
Vitasek explains that the Vested methodology is designed to flip the goal of negotiations away from “the deal.” Instead, it guides the parties to make the central focus negotiating the relationship.
“A key reason parties fail at negotiating long-term and strategic relationships is that they are focusing on the deal instead of the relationship,” Vitasek says. “They jump into tough topics without the needed trust to get them over impasses.”
Vitasek summarized the relational contracting process as including the following five steps:
Step 1. Lay the foundation. The entities establish a partnership mentality, being honest about aspirations and concerns.
Step 2. Co-create a shared vision and objectives. To maintain and clarify expectations, both parties articulate their vision and goals for the relationship.
Step 3. Adopt guiding principles. To counteract potential discord after the contract is signed, parties commit to six guiding principles – reciprocity, autonomy, honesty, loyalty, equity and integrity – that contractually prohibit opportunistic, tit-for-tat moves.
Step 4. Align expectations and interests. Having set a baseline, parties craft the deal’s terms and conditions, which must square with the guiding principles, so that the contract is a joint problem-solving exercise rather than an adversarial contest.
Step 5. Stay aligned. The parties establish governing mechanisms within the contract.
Through this process, the Island Health administrators and the hospitalists laid the foundation for their relationship, which helped build much-needed trust between the administrators and the hospitalists. The process proved essential in helping them get through the negotiations impasse.
A before-and-after snapshot of the relationship reveals the stark contract in trust levels and relationship health stemming from applying the Vested methodology. Surveys conducted before the process began and one year after the relational contract was signed show an 84 percent increase in trust and positive attitudes between the parties. Administrators and hospitalists who called their relationship “toxic” and “dysfunctional” now described it as “collaborative,” “trusting” and “supportive.”
The contract has delivered more than just a healthy relationship. The administration and the doctors have replaced friction and tension with a collaborative working governance that is producing real results, including efficiencies that have resulted in projects coming in under budget and innovations that are improving patient care.
Island Health is one of more than 50 companies that have successfully piloted the Vested methodology. Vitasek notes the Dell and FedEx case study in the article as another example and encourages readers to download other case studies from the Vested site.
“A New Approach to Contracts: A better way to build long-term strategic partnerships” was published in September 2019 in the Harvard Business Review (paywall protected). An accompanying podcast is also available.