A major focus of this series is on how academics and economists have transformed modern thinking about the nature of the business and outsourcing contract, from its relationship to the firm and how it is used and governed to its relationship on pricing and total cost.
One of the most major of these thinkers is the late contract and legal scholar Ian R. Macneil, who turned conventional views about contracts upside down more than 40 years ago with his ideas about business cooperation. Back in 1968 Macneil observed that most contracts are ill-equipped to address the complexity of business needs in his seminal work Contracts: Instruments for Social Cooperation. He wrote, “Classical law views cooperation as being ‘of little interest’ and external to the agreement. This argues for an agreement framework that encourages cooperation and dialogue.”
Macneil’s work revealed “somewhere along the line of increasing duration and complexity (the agreement) escapes the traditional legal model.” He argued that contracts are tied to the classical contract law approach, crafted to address transactions and provide legal protections such as pricing and price changes, service levels, limitation of liability, indemnification and liquidated damages.
His breakthrough message was that business agreements can be effective and governed efficiently “only if the parties adopt a consciously cooperative attitude.” His idea was that contracts are rooted in relationships and activities that have a large context, rather than as the discrete transactions we usually see written into a contract. Macneil’s work was instrumental in developing a wider view of the contract that today is called “relational contract theory.”
Unfortunately Macneil was ahead of his time and far too many business people (and lawyers!) have ignored his advice. Tim Cummins, chief executive of the International Association of Contract & Commercial Management explains: “Too many contracting and legal professionals either fail or feel unable to alter their negotiation priorities to reflect the potential value or the extent to which its realization depends on cooperation.”
The result is that contracts become exercises in me-first, power-play games, seen as obstacles to value creation rather than as fundamental assets to successful collaborative relationships. This is as true today as when Macneil first made his observations.
But even more frustrating: the contracts community – or at least 80 per cent of those that responded to a recent IACCM survey – recognises that practices focusing on strict legal and transaction-based contract provisions do not result in the best outcome.
I guess the old sayings of “what goes around comes around” and “what’s old becomes new” are true. It has been a long time since Macneil issued his challenge for collaboration in the contracting world. As another famous man said back in the 1960s: “If not now, when?” The good news is that Macneil’s stellar advice is starting to gain traction in the business world. The rise of Vested Outsourcing and its approach to collaborative, outcome-based outsourcing partnerships is firmly based on the concepts articulated by Macneil decades ago. What took 50 years?