We can all remember a great meal. Something wonderful that ordinary meals lack -- perhaps a “special sauce” that made the difference! And believe it or not, you can think of this special sauce as a metaphor for trust-based collaboration. It happens when your contracting practices enable suppliers and contractors to maximize their stated business objectives. But I must admit. I’ve often asked myself, how can I add trust to our contracting and commercial relationships? Here’s what occurs to me…
When writing a contract scope, I’ve too often started out describing “what” needs to be done. But in reality “how” will we work together is the first question I must ask and answer. Unless I establish trust firmly, the contract scope might come to mean very little because the relationship and true collaboration was weak or non-existent throughout the contracting process!
I remember a recent Commitment Matters1 article in which Tim Cummins said:
My hope for 2022 is that the commercial community raises its voice and promotes the ethical standards and supporting systems that alone can move us along the path to making trust-based collaboration a norm, rather than an exception.
Build trust-based collaboration -- how?
I recently read an article by Hugh Breakey2 discussing how the last few years of the pandemic have moved trust to the center of our decision-making process. He makes these observations:
- Trust has always been morally important. However, the pandemic moved questions of trust to the very centre of everyday decision-making.
- We all had to make judgements about government, scientists, news, and journalists, "big pharma" and social media. The stance we take on the trustworthiness of people we've never met turns out to be pivotal to the rules we will accept.”
What caught my eye was the following statement:
- One good thing about trustworthiness is that it's testable. Over time, evidence may confirm or refute the hypothesis that, say, the government is trustworthy about vaccine health advice but untrustworthy about cyber privacy protections in contract tracing apps.
This led me to consider the notion of how we measure, and potentially reward, trustworthiness in our commercial relationships. The key is in developing and applying both a measurement approach (the standard) and a formal governance process and commercial terms (the supporting systems). So how should we do it?
Historically, most relational contract measurement systems in contracts fall into one of three categories:
- quantitative (i.e. numerical), easily measured aspects of the contract such as the number of failed deliveries, number of disputes, number of complaints, etc.;
- qualitative measures such as Net Promoter Scores (NPS), which are typically used to measure the buyer’s intent to use the buyer again rather than to use the quality of the relationship noting in isolation NPS has its own issues in accurately measuring performance3/4; or
- simple contract statements stating “the buyer will measure the relationship of the seller” with limited or no detail into what attributes are being assessed.
Unfortunately, while they may provide some insight into the performance of the contractor, these approaches fail to clearly describe what attributes make up a good collaborative business relationship.
In my experience, this is a systemic issue, regardless of whether you are the buyer or seller. In our commercial arrangements, we routinely use words like “collaborative business relationship” and “relational contracting” and potentially put in place collaboration or relational charters. However, we rarely link this to a repeatable measurement process underpinned by a formal governance process and commercial terms. Without an agreed definition of a good relationship, we risk having different interpretations when we get together, which leads to friction between buyer and seller.
Special sauce separates good from great
This result mirrors the World Commerce and Contracting reports titled Overcoming the 10 Pitfalls of contracting,5 indicating that the number one factor leading to contract value erosion is a lack of clarity on scope and goals.
So, as implied above, our special sauce separates merely good contracts from great commercial relationships. So, what does a great commercial relationship look like?
While a range of materials are available to readers, my experience since 2013 in materiel management contracts of the Australian Department of Defence, under the banner of a Generation 3 Performance Based Contract (PBC),6/7 has routinely included definitions of individual and shared (collective) objectives, specification of attributes of a great commercial relationship, and a formal governance process and supporting commercial terms. Recently, although this approach has been reimagined in a book8 by David Frydlinger, Kate Vitasek, Jim Bergman, and Tim Cummins, the “formal relational contract” remains identical in approach.
In future articles, I will look at better practices in measuring relationship health and trust, both in terms of how to define and assess it (the standard) and how to look for it as part of choosing the right commercial partner.
Regardless of the label, the facts are clear. By explicitly addressing the number one pitfall by defining what a good business relationship looks like (irrespective of roles we play – buyer, seller, or even third parties) and ensuring that we discuss and reward it -- the chance of having successful business outcomes and an enduring collaborative business relationship is much higher. And isn’t that we all desire?
- Commercial ethics: reflections on a turbulent year, Tim Cummins, World Commerce & Contracting, 30th December 2021
- Has the COVID-19 pandemic changed our ethics?, Hugh Breakey, The Conversation, 29th December 2021
- “The Dubious Management Fad Sweeping Corporate America”, K. Safdar and I. Pacheco, The Wall Street Journal, 15 May 2019
- “Should You Use Net Promotor Score as a Metric?”, N.T. Bendle and C.K. Bagga, MITSloan Management Review, 27 April 2016
- Overcoming the 10 pitfalls of contracting, World Commerce & Contracting, 2021
- Performance Based Contracting, Australian Department of Defence
- https://performancebasedcontracting.com, Dr Andrew Jacopino
- Contracting in the New Economy, David Frydlinger, Kate Vitasek, Jim Bergman and Tim Cummins, Palgrave Macmillan, 2021