A New Approach to Contracts

In an era when businesses increasingly have to depend on their suppliers to lower costs, improve quality, and drive innovation, traditional contracts don't work. They often undermine the partnerlike relationships and trust needed to cope with external uncertainty. The remedy is to adopt a totally different kind of arrangement: a "formal relational contract" that creates a flexible framework designed to foster collaboration in complex strategic relationships over the long term. These contracts, which are legally enforceable, specify mutual goals and establish governance structures to keep the parties' expectations and interests aligned. They are especially useful for complex purchasing arrangements, outsourcing, strategic alliances, joint ventures, franchises, public-private partnerships, large construction projects, and collective bargaining agreements. Crafting a formal relational contract involves five steps: laying the foundation, co-creating a shared vision and objectives, adopting guiding principles, aligning expectations and interests, and creating systems for staying aligned.