High-level deal making is an art. Now, some top entrepreneurs are partnering with a Nobel-winning contract theorist and other academics to combine art and theory into new best practices.
How can we turn such innovation into advantage?
In Deal Making, The Contract Comes Last And Least
Deal making is too important to be left to the lawyers. How many times have you seen a deal derailed, or nearly derailed, by a lawyer more committed to scoring points against opposing counsel than serving his or her own client?
In approaching a deal, a businessperson typically thinks first about his/her own overall business goals. Then, the businessperson thinks about the current and future relationship with the other side (“counterparty”). Finally, in light of the business goals and business relationship, the businessperson thinks about the contract.
In other words, the contract makes up only part of the business relationship while the relationship serves only as a means to an end, namely, reaching the business goals.
Academics Looking For Meaningful Relationships
Much brainpower has gone into understanding “relational contracting.” This means analyzing and reimagining contracts and the contracting process to buttress business relationships and thereby further business goals.
In the words of Oliver Hart, a Nobel-winning economist and leader in the field of relational contracting, “Contract theory can be applied to most economic transactions from shopping in a store to running a corporation.”
Hart’s work explores how contract negotiations can align perspectives, as well as build trust and understanding. Other academics focus on how contracts interweave operations and oversight in complex procurement contracts, as well as why some firms adopt contracting best practices far more successfully than others.
Businesspeople Seeking Fruitful Deals
For many entrepreneurs, contracting advice from academics resembles coaching from someone who has never played the game.
So, how can the theorists come together with the artists/practitioners to help businesses improve contracts, business relationships, and achievement of business goals?
According to Tim Cummins, President of World Commerce & Contracting, a global business association with over 70,000 members (“WorldCC”): “Business thrives on winning and awarding contracts, yet too often the contract is a source of delay, complexity and confusion. Our efforts aim at a major overhaul, bringing the contracting process into the digital age – supporting strong relationships, delivering value, adjusting to changing conditions. ”
“By Their Fruits Ye Shall Know Them”
Last year, the pandemic froze up economies and supply chains worldwide. Virtually every business saw its deals, relationships, and contracts stress-tested.
A second testing will occur as trade and commerce emerge from COVID hibernation.
The new normal is chaotic. For any firm to survive and thrive, its deals and relationships have to be worth more than the paper their contracts are written on.
With upset comes advantage. The winners will scout out new ideas and embrace change. This includes potential new best practices in deal making and contracting.
[NB — I serve as a Fellow of World Commerce & Contracting.]