BMP Book Reviews

Book Review: Contracting in the New Economy

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“Simply put, business happens. Things change, including the underlying deal covered by the contract.”

 - Contracting in the New Economy, p. 46

 

I’ve read most of the Vested books, so I came to read Contracting in the New Economy Using Relational Contracts to Boost Trust and Collaboration in Strategic Business Relationships by David Frydlinger, Kate Vitasek, Jim Bergman, and Tim Cummins with a solid understanding of their philosophical perspective on building strong buyer supplier relationships. And yet – there was still a surprising realization for me very early in this book.

No, it was not the fact that things change constantly over time. Anyone who made it through 2020 is very familiar with that reality. It was also not the idea that traditional contracting often falls short of what parties need from it.

The most surprising idea from the book is much simpler: you can’t create a different kind of contract if you don’t think differently and follow a different process. That should be obvious, but I appreciated the clarity with which they explained it and then reinforced the idea with evidence from real companies and projects.

Relational contracting accepts the reality of change and unpredictability and strives to balance the need to document/formalize an agreement without attempting to protect both parties against every eventuality or risk. Not only is this a fool’s errand, it often creates unintended inefficiencies, risks, and constraints that limit the value of the agreement. Instead, relational contracting puts the basic transactional details in writing and then seeks to preserve their applicability (as an instrument of ”expectation management") by establishing a framework that helps the agreement change over time.

While this approach to contracting isn’t appropriate under all circumstances, it is well-suited to complex agreements where there is a high degree of inter-dependency between the parties and where changing conditions are likely to affect the agreement. And those changes aren’t just external forces such as markets and regulations, but also internal developents within one of the involved parties: new corporate structures, leadership teams, business models. Relational contracts document rules and guiding principles through transparency as much as they solidify transactions: they build trust.

You won’t want to miss the descriptions of ”shading,” a fascinating set of passive agressive behaviors parties are tempted to take on when they are not happy with the agreement and are looking to hurt the other party as a result. It actually sounds a lot like ’ghosting’ someone you are dating when you’re hoping they will take the step of breaking up with you rather than vice versa.

As I would expect from any book involving the Vested team (and friends), there are lots of concrete case studies and real-world examples, one of which even shows how a relational contract helped a complex agreement survive the challenges of the COVID-19 pandemic. Any approach to contracting that can do that is worthy of consideration.

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