The Contractual Relationship Diagnostic

Contracts are an indispensable tool in commercial relationships, providing crucial legal and operational detail.

However, there is an increasing awareness of the limitations of contracts.

Most basically, for non-legal people, contracts usually aren’t easy to understand, leading to practical challenges and conflicting interpretations.

But whilst initiatives like contract simplification and visual contracting then have their place, the problems with contracts are far more fundamental:

• Contracts can’t capture and help manage the crucial subjective Things That Matter which primarily determine the success of the relationship.
• Contracts can’t anticipate or respond quickly to unexpected developments, creating gaps and a rush to try and renegotiate or redefine terms.

In other words, contracts only capture a specific point in time and, even then, they don’t (and cannot) capture that point in time adequately, and this typically means they are of limited practical use at the front line – especially where quick decisions are needed.

Whilst much of this has been recognized in research – e.g. the 2016 Nobel Prize for Economics was awarded for work on the incompleteness of contracts – there has so far been little change in practice, unless it has been to:

• Try and ever more exhaustively cover every potential eventuality.
• Attempt to mitigate against the risk of uncertainty by pushing liability as far as possible onto the other party.
• Increase penalties for issues and failure.

In all cases, the false assumption of control over a Complex world persists, working against reality – rather than with it – and hobbling more enlightened approaches (e.g. relational contracting) that seek to try and focus on outcomes and the quality of the relationship as a way to better handle today’s challenges.

The research of our friends at WorldCC bears this out, where they produce a regular report that shows the huge discrepancies between what contracts focus on and what is instead most crucial to success.

Except in the most straightforward and transactional relationships, then, contracts – at least on their own and as currently used – are not fit for purpose, and this is a major contributor to the shocking rate of relationship failure.

An alternative approach is needed – one that recognizes that contracts remain indispensable, but that replaces them in addressing those areas where they are currently overreaching so inappropriately and ineffectually.

The solution

This is where the Contractual Relationship Diagnostic comes in:

• Focusing attention on critical Things That Matter that contracts either cannot cover or where they do so particularly inadequately…
• ….as a first step to effectively widening the focus of relationship management beyond the contract.

The diagnostic recognizes that there are three broad “classes” of Things That Matter in a contractual relationship when it comes to the contract:

1. Things That Matter that are usually adequately covered in contracts – typically more traditional and objective areas, such as governing law, dispute resolution, payment terms, etc – and these either don’t require ongoing measurement (they just “are”) or traditional KPIs generally cover them.
2. Things That Matter that contracts do often cover, but often not clearly or effectively, and especially when it comes to measurement – these are often significantly subjective, at least in their application, e.g. risk allocation/management, roles and responsibilities, rewards and liabilities, etc.
3. Things That Matter that typically don’t feature in the contract at all, but which are often most crucial when it comes to how the relationship operates in practice and thus its overall success or failure – these are primarily subjective, such as the degree of strategic alignment between the parties, how leaders conduct themselves, attitudes to sharing information, etc.

On the assumption that 1. is already in hand, the diagnostic primarily focuses on 2. and especially 3. – a complement to existing contract management in a way that in no way “threatens” or “competes” with it – and it covers 24 of the most common areas that make a difference to the relationship.

Grouped into four sections that start with the value of the relationship and work “through” to its outcomes, these 24 areas each have detailed evaluation statements for consideration.

Consistent and familiar relationship-related themes run through these 24 areas, including behaviors, governance, communication, consistency, etc.

The diagnostic therefore provides a powerful opportunity to comprehensively, holistically and accurately take stock of the current state of the relationship and how it is being managed.

How It Works

The Contractual Relationship Diagnostic is presented in a fully secure online environment, where no technical knowledge is required, and where all information and data is held securely (and not shared with any third party).

Upon submitting their response, each respondent receives a personalized report that presents back and highlights aspects of what they have said. 

When all respondents have submitted responses, a more detailed report is generated that synthesizes and analyses all the data to identify:

• Overall trends.
• Specific areas that seem agreed to be problematic (and areas that are going well).
• Areas with a diverse spread of opinion, suggesting division or perception gaps to resolve – within the parties, between the parties, or both.
• Patterns amongst the issues that have been found.
• Frequent terms used, which can be the beginnings of a shared language.
• Recommended next steps.

Sometimes, an individual might want to trial the diagnostic first, and sometimes a trial group might “pilot” it – in both cases, this is with a view to engaging both parties in the relationship by first considering the perspective of one of the parties (to gain its own insights, to generate evidence for the need to engage, etc).

The Benefits

In all cases, the Contractual Relationship Diagnostic will clarify where your thinking is really at – including how aligned (or otherwise) you all are – and establish a benchmark which you can return to later, to track change and evaluate the effectiveness of actions taken.

If you uncover that everything is plain sailing for now, you will have thoroughly substantiated this…

…but more likely, given the gaps in contract management, is that you will uncover areas of difficulty, where you will have:

• Provided a constructive outlet for clearing the air, surfacing any feelings of powerlessness, voicelessness and frustration, and preparing to reorient around solutions.
• Developed a new way of thinking about the current situation – where previously “subjective” areas can now be considered “objectively” and where specific solutions can be found.
• Engaged a set of people with the “reality” of the relationship – some possibly for the first time, granting you new insights and expertise to access.
• Seen if there are individuals that seem to want to take a lead in understanding and making progress in these areas.
• Clarified where to focus, which may include discussing and resolving different perspectives.