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Creating a formal relational contract
No matter how hard we try, no contract can predict the future. So, trust, transparency, and an alignment of interests are essential in delivering better business outcomes. A formal relational contract is a flexible, outcome focused, and collaborative framework for long-term relationships that share risks, build trust, and reward success.
In 2017, Boeing Defence Australia (Boeing) and the Indigenous Defence and Infrastructure Consortium (iDiC) – a supply chain aggregator of Indigenous companies – entered into a Memorandum of Understanding to strengthen indigenous education and employment opportunities in Australia.
But Boeing’s leadership team wanted to take its partnership further. We gave them a copy of the 2019 Harvard Business Review article “A New Approach to Contracts – How to build better long-term strategic partnerships” by University of Tennessee (UT) Faculty member, Kate Vitasek, lawyer David Frydlinger, and Harvard Professor and Nobel Laureate in Economics, Oliver Hart, and they decided to explore the idea of formal relational contracting.
UT has long been recognised for pioneering work in creating highly collaborative win-win formal relational contracts with larger and complex deals. And, as graduates of the UT's Certified Deal Architect program, we were retained by both Boeing and iDiC to help co-create a formal relational contract.
We helped Boeing and iDiC follow a five-step methodology developed by UT researchers to co-create a formal relational contract that fosters trust and collaboration, specifies mutual goals, and establishes governance structures to keep the Boeing and iDiC’s expectations and interests aligned over the long term.
Five steps
First, we helped Boeing and iDiC lay the foundations of their relationship. A partnership of mutual trust where they are transparently share their high-level aspirations, specific goals, and concerns.
Second, we guided the partners through a structured process to co-create a shared vision and strategic objectives for the relationship that will ensure expectations remain aligned as business needs and conditions change. For Boeing and iDiC, the shared vision was:
“One team delivering sustainable operational expertise built on a culture of trust and innovation, driving first-time quality and Black Excellence”.
Adam Goodes, the CEO of iDiC, helped define the Black excellence as:
“The mindset, backed by continuous action, to look within ourselves and act in ways that progress our communities without discrediting the effect of forces outside of our communities. This includes someone who is black and portrays great qualities and abilities that make Community proud.”
Third, we discussed and Boeing and iDiC adopted six social norms that became the guiding principles for the life of the agreement (reciprocity, autonomy, integrity, loyalty, honesty, and equity) and defined five intended behaviours that form the foundation of building trust, transparency, and compatibility in daily interactions. Together, the guiding principles and intended behaviours become the framework for resolving potential misalignments when unforeseen circumstances occur.
Fourth, having created the foundation for the relationship, Boeing and iDiC them collaboratively ‘hammered out the terms of the deal’ – accountabilities, pricing, and performance metrics. As the independent expert in relational contracts and a specialist in real estate, facilities, and workplace, we were able to dig deeply into the details, question assumptions, and leverage our strategic, tactical, and operational experience to help Boeing and iDiC craft a better performance-based agreement.
Fifth, we embedded a formal governance mechanism into the contract – including a tiered series of governance meetings at the work site, contract management and senior leadership levels. Given the organisational importance of the Boeing and iDiC relationship, the agreement also has a separate Relationship Management committee responsible for monitoring and enhancing the relationship between the parties.
The result
The relational contract won Supply Nation’s 2022 Supplier Diversity Partnership of the Year. According to Forbes Magazine, “Boeing and iDiC signed what is believed to be the world’s first formal relational contract to advance sustainable acceleration within the Indigenous sector, with a formal shared vision for delivering Black Excellence”.
iDiC Director, George Mifsud, said “The relational contracting process was a critical step in raising our partnership to another level. It gave us a structured way to engage in more strategic discussions with Boeing. Together we created a formal shared vision and agreed on guiding principles for how we would work together to meet our combined goals and objectives.”
“The process also established joint governance mechanisms to manage the day-to-day operations and support initiatives to grow the business. These foundational elements have given the partners confidence to double-down on supporting the partnership.”
What’s next?
Having created the relational contract, the next step for Boeing and iDiC could be to shift from the output focused, performance-based agreement to an outcome-based “Vested” agreement.
A Vested® model is a hybrid relationship that combines a relational contracting model and an outcome-based economic model.
Vested is based on award-winning research conducted by the University of Tennessee (UT) College of Business Administration and funded by the U.S. Air Force, Vested enables organisations to increase innovation and value in their business relationship. By working together and aligning interests, buyers and suppliers work to create a bigger pie, rather than spending time fighting over the existing pie.
First Contact is one of a globally select group of Vested Certified Deal Architects. We help buyers and suppliers of Real Estate, Facilities, and Workplace Management services navigate the entire transformation journey - from assessing if Vested is right for your relationship, through to creating and living a collaborative contract.
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