Rethinking Third Party Relationships

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In an age of complex strategic relationships where the parties are highly dependent on each other, future events can’t be predicted and flexibility and trust are required, the traditional purchasing contract method doesn’t work very well, if at all.

In our work, we find the most successful engagements are those where we are not in the usual client-vendor relationship mentality, but rather we view our relationship as symbiotic and success is recognized as dependent upon an agreed partnership arrangement. By working jointly where each party builds on the contributions of the other, objectives are more routinely achieved and goals are attained at an accelerated pace.

Traditionally, companies have viewed contracts as protections against the possibility of one party abusing its power to extract benefits at the expense of the other. This adversarial mindset undermines the original intent of the relationship and can create a downward spiral leading to an inevitable termination of the relationship.

In its place, a formal relational contract, laying out a foundation of trust, specifying mutual goals and establishing governance structures to keep the parties expectations and interest aligned removes many of the potential tit-for-tat behaviors resultant from traditional agreements and paves the wave for a strong, long-term and mutually beneficial engagement. A “what’s in it for me?” partnership mentality ensures that the interests of both parties are vested in an agreement that provides for the ability to adjust their behavior (efforts) at operational, management and executive levels in order to meet mutually agreed outcomes.

These type relationships can be highly effective when switching costs are high and the economics do not justify inclusion of disincentives, such as “termination for convenience” or sixty-day breakup clauses which discourage investment in the success of the project. Rather than defining the negative aspects of what could go wrong through legal escape hatches, companies such as Dell and FedEx have found that rethinking their contractual relationship to be more inclusive has resulted in significant savings.

Not all arrangements are suitable for relational contracting. The purchase of commodities, or purely transactional activities, may not be appropriate. But organizations with long-term strategic needs that involve complex third-party relationships for which a vested methodology is well-suited may find this new way of thinking to be highly rewarding.

If the relationship fits this bill, the following steps can serve as a guide:

  • Lay the foundation. Can you establish a partnership mentality? Both parties must create an environment of trust and transparency about high-level expectations, goals and concerns.
  • Create a shared vision. What are the desired outcomes?
  • Adopt guiding principles. Vested methodology is at the core of a relational contract. Reciprocity, autonomy, honesty, loyalty, equity and integrity form the basis of these agreements and provide a framework for resolving potential misalignments when unforeseen circumstances arise.
  • Align expectations and interests. The “deal” still has to be hammered out – responsibilities, pricing and metrics. These must be aligned with the guiding principles. In this way, creation of the contract terms becomes a joint problem-solving exercise rather than an adversarial contest.
  • Stay aligned. Creation of governance mechanisms, embedded in the contract, formalizes the necessity of ongoing communication and review. Regularly scheduled meetings of designated participants from each party validate that the shared vision, goals, outcomes and measures remain in place.

Formal relational contracts will never replace all traditional transactional agreements, nor should they. But in complex relationships, particularly those where specialized knowledge, managed services, business processes, IT or risk management is required, such an approach can not only lead to economic savings but to meaningful competitive advantage.


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