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Co-operation’s role in long-term contracting

Co-operation’s role in long-term contracting
Kate Vitasek
  • On December 5, 2012
  • http://www.vestedoutsourcing.com/

I’ve talked at length in this series recently about how academics and big thinkers have buttressed the importance of trust and collaboration in outsource deals. While it may seem like an anomaly, or at least a new idea, to mention cooperation and contracts in the same breath, it’s neither.

In fact cooperation is vital to the long-term success of contracts, as David Campbell and Donald Harris pointed out in 1993 in the Journal of Law and Society. Campbell is a British professor who specialises in English contract law; Harris is a founding director of the Oxford Centre for Socio-Legal Studies.

The article says there is a “fundamental shortcoming” in the way classical law addresses long-term contractual behaviour. “Efficient long-term contractual behaviour must be understood as consciously co-operative,” they wrote. “We see a long-term contract as an analogy to a partnership. The parties are not aiming at utility-maximisation directly through performance of specified obligations; rather, they are aiming at utility-maximisation indirectly through long-term co-operative behaviour manifested in trust and not in reliance on obligations specified in advance.”

My translation of that mouthful: for a partnership to function successfully over the long term, it’s vital to move away from a transaction-based mindset to that of a flexible, collaborative, outcome-based and trusting approach. These are essential elements for a solid long-term relationship; they are embodied in the Vested business and outsourcing model.

It’s always invigorating to come across academics and economists who were thinking Vested long before the term became the growing movement it is today!

Campbell and Harris draw a distinction between the “cooperative mechanism” of the effective, useful long-term relationship and that of a short-term, highly specific contract.

Flexibility and open-mindedness is the key. “The precise conduct required by future long-term co-operation is necessarily unable to be specified in advance and the shares in the joint product of that co-operation are equally often not specified in advance,” they write. “The parties accept a general and productively vague norm of fairness in the conduct of their relationship.”

A “productively vague norm of fairness” in conducting the relationship is bit of puzzle to me. Is it really that way? If the parties are on the same page in communicating their intentions and desired outcomes within the context of a flexible “business happens” governing framework, as in Vested, then it seems to me that productivity increases while vagueness – which might also include uncertainty – is somewhat mitigated.

But then the authors are spot-on when they say, “as bluntly as clarity requires, that the explanation of long-term contracts requires the rejection of immediate individual self-interest as the measure of economic rationality and its replacement by common interest as this measure.”

They continue that the “adequate form of self-interest in long-term contracts is co-operation.” They further assert an emphasis on individual self-interest in the long-term contract “as a rationally discussable theoretical concept is now so unproductive that it must be rejected in the explanation of long-term contracting and in this there is entailed a very strong criticism of the heart of the classical law.”

That, it seems to me, is a politely academic way of saying they want to blow away the “heart” of classical law – especially when dealing with strict risk liabilities and extra-legal strategies when liability occurs – as applied to long-term contracting. The degree of flexibility that results through long-term cooperation “seems to make the classical law more or less irrelevant to these contracts.”

The authors’ model draws heavily on the transaction cost economic analyses and flexible framework insights of Oliver Williamson and Ronald Coase, and in the ideas on contracts as instruments of social cooperation expressed by Robert Macneil.

That’s heavy company to travel in. Their densely written treatise is a worthwhile addition that further buttresses the Vested principle of replacing self-interest with common interest and collaboration as the basic measures of “economic rationality” in contracting.

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