As we move to the Vested Outsourcing world of cooperative, mutually-beneficial, performance- and outcomes-based contracts based on the transforming power of the Five Rules I’d suggest that the oft-used term “Contract Management” no longer really fits the bill.

In fact I believe Contract Management is a bad term. At the very least it’s outdated, larded under decades of contract legalities and precedents that struggle to account for what has happened and what may happen in the real world.

In Vested Outsourcing aren’t we really developing a flexible, anticipatory and collaborative framework and governance structure to manage a dynamic business relationship? This is straight out of Rule 5, Governance Structure Should Provide Insight, Not Merely Oversight. The Vested Outsourcing relationship works best in a framework and culture where the participants work together to ensure their mutual success.

Think of it this way: Marriage is a legal agreement, and certainly a marriage can be difficult to manage. But it is much more than a legal enterprise in which each potential event or scenario can be carefully anticipated and managed, or something that’s inherently susceptible to strict management rules. It’s a unique, vested relationship based on mutual trust, cooperation, flexibility, hope and much more.

A contract, especially a vested contract, is like a marriage in many important respects. It should be the basis of a long-term relationship in which the contract parties work, grow and prosper together.

A marriage based totally on transactions doesn’t sound like much fun for the long-haul; neither is a transaction-based contract.

So instead of Contract Management, perhaps it should be called Economic Relationship Management.

And while you’re thinking about managing that economic relationship think of it also as a flexible framework, not a legal weapon.

We all know that the world of business and outsourcing is not static; it changes and evolves over time. Dr. Oliver Williamson, the Transaction Cost Economics guru, argues that organizations that “all complex contracts will be incomplete – there will be gaps, errors, omissions and the like.”

As such, a contract should provide a framework and (I hope) a process for understanding the parties’ relationship. The framework thus must be highly adjustable or adaptable rather than prescriptively outline the detailed working relations.

Flexibility should be embedded in a contract so that potential maladaptations can be resolved or at least lessened by crafting mechanisms that deal with unanticipated disturbances as they arise.

Creating a detailed contract and associated statement of work puts the outsource provider into a box and forces the provider to stay there. Instead of being a prescriptive document, the contract should provide a flexible framework and process for understanding the parties’ relationship. In achieving this “flexible framework” the contract will never accurately or fully indicate real working relations, unless the contracting team has immense psychic talents. Instead of trying to guess about the future, it is better to indicate a rough idea of the work to be done, while providing methods for ultimate appeal.

This means that this framework/process must be highly adjustable or adaptable. And trusting. And cooperative. Like a marriage.

Stuck may not be the right word actually, it’s more like really impressed and fascinated with how his scholarship dovetails so nicely with the Vested Outsourcing concept of working aggressively, flexibly and cooperatively to achieve mutually beneficial or ‘win-win’ outsourcing agreements.

In a previous post. I talked about the implications of Dr. Williamson’s TCE research for outsourcing at what he describes as the “interfirm make-sell-buy” contract and conflict resolution level. He outlined this in a 2008 article in the Journal of Supply Chain Management (“Outsourcing: Transaction Cost Economics and Supply Chain Management”).

I was reviewing some of his work again, particularly in connection with his description of the three types of hybrid contracts – muscular, benign and credible – and I was fascinated by his discussion surrounding the common economics aphorism, “Never leave money on the table.”

Could it be, as Dr. Williamson suggests, that it’s “better to leave money on the table,” to not win every negotiating point?

Well yes; in the case of a credible, mutually beneficial contract that idea might be just the ticket for a winning and adaptable contract.

Never leaving money on the table has cache, especially in a muscular contracting arrangement, Williamson says, because “money left on the table signifies waste that can be converted to mutual gains by perfecting the bargain.” It’s an important lesson, he continues, but “as with many aphorisms there can be too much of a good thing.”

The economists’ dictum to never leave money on the table has been disputed by some investment bankers and businessmen who advise ‘always leave money on the table,’ Dr. Williamson says.

“But that sounds foolish. How could this be?” he continues.

As sometimes happens good theory (for one purpose) and good practice (for another) can part ways.

For one thing constructive and strategic contractual points are sometimes hard to differentiate. What exactly are the parties’ intentions going into a negotiation?

If there is a strategic, rather than constructive, purpose that skews the contract in one party’s favor “and if real or suspected strategic ploys invite replies in kind, then what could have been a successful give-and-take exchange could be compromised,” Williamson explains.

Asymmetry will rule the day as each party tries to gain and regain the upper hand.

This activity ”could plainly jeopardize the joint gains from a simpler and more assuredly constructive contractual relationship.

“Always leaving money on the table can thus be interpreted as a signal of constructive intent to work cooperatively, thereby to assuage concerns over relentlessly calculative strategic behavior.”

That’s a contract with credibility from start to finish. And that’s where the rubber meets the road for Vested Outsourcing.

In contrast to a one-sided muscular contract or an idealistic benign contract, “credible contracting is hardheaded and wise,” Dr. Williamson says.

The parties are hardheaded because they expressly work out contract commitments “to which mutual benefits can be confidently ascribed.” They are wise if they avoid contract provisions that “invite the escalation of strategic behavior with net negative effects.”

And they are brave and foresighted if they see the value of leaving money on the table.

After all, outsourcing may be high stakes but it’s not poker.

It’s fair to say that collaboration is an essential key to survival and bottom-line prosperity.

Global companies know this but they still struggle mightily with the challenges of integration and collaboration across their increasingly complex and widespread networks.

A new study, sent to us courtesy of Peter Moore, vice president, Government Services of Celerant Government Services Inc. underscores this point. “Most companies know that a global supply chain needs to be in touch with all partners involved,” he says, “but very few companies out there are actually doing it.”

But it’s even more than that: It used to be that collaboration was the innovation – maybe it still is for many companies – but nowadays companies need to collaborate to innovate.

The Business Performance Management (BPM) Forum and the Chief Marketing Officer (CMO) Council released “Greater Innovation Through Closer Collaboration” in early December. Sponsored by Sterling Commerce and AT&T, the 48-page report is based on a survey of more than 400 executives and managers whose companies do business around the world, and about 36 percent of the respondents represent companies with revenues of more than $1 billion.

“Twenty-first century business models are more dependent than ever on complex, cross-company collaboration for business innovation, product and service delivery and customer satisfaction,” said Liz Miller, vice president of the BPM Forum and CMO Council.

The survey illustrates this point: Nearly 70 percent of the respondents say that business partners are essential to their companies’ go-to-market processes, customer experience and competitive position. And more than half say their partner networks are becoming more global and complex.

Yet, only 6 percent of survey respondents believe their companies are highly effective in integrating, coordinating and optimizing their business partner networks.

“Most companies are struggling to collaborate with partners and almost universally believe there is a significant deficiency in the way they integrate information exchange and processes across their partners networks,” says the report.

More findings:

• Only 5 percent of respondents said they have end-to-end data and process integration across their networks, although 51 percent report some level of integration with select partners.
• About 64 percent say they have either no ability or an unsatisfactory ability to extend and leverage their internal systems to selling and service partners.
• Some 75 percent have either no or unsatisfactory ability to extend and leverage their internal systems to suppliers and outsourced service providers.
• Only 30 percent say they effective in sharing customer data and insights with partners to enable innovation.

Those are some pretty lackluster results about the state of collaboration in 2010, especially the last point. It seems that trust is still a thorny hurdle – as in establishing it from the get-go.

Quoted in the report, Lisa Ellram, Professor of Distribution Management at Miami University of Ohio, said: “A lack of trust (in one’s partners) causes companies to insert extra assets all over. For example, they will have extra inventory everywhere and more suppliers than they need.”

Ellram’s thought jibes well with what we talked about last week, based on the research and work of Nobel laureate Oliver Williamson and his Transaction Cost Economics, particularly in coming to terms with supply chain  “maladaptations” and the bounds and rationality of contracting.

That is where Vested Outsourcing can change that game by getting into the ‘What’s in it for We’ mindset from the very start of the relationship.