The Inherent Failures of Long-Term Contracts — and How to Fix Them

HBR IdeaCast

Harvard Business Review

Leadership, Entrepreneurship, Communication, Marketing, Business, Business/management, Management, Business/marketing, Business/entrepreneurship, Innovation, Hbr, Strategy, Economics, Finance, Teams, Harvard

4.4 • 1.9K Ratings

🗓️ 3 September 2019

⏱️ 22 minutes

🔗️ Recording | iTunes | RSS

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Summary

Oliver Hart, Nobel-winning Harvard economist, and Kate Vitasek, faculty at the University of Tennessee, argue that many business contracts are imperfect, no matter how bulletproof you try to make them. Especially in complicated relationships such as outsourcing, one side ends up feeling like they're getting a bad deal, and it can spiral into a tit for tat battle. Hart and Vitasek argue that companies should instead adopt so-called relational contracts. Their research shows that creating a general playbook built around principles like fairness and reciprocity offers greater benefits to both businesses. Hart and Vitasek, with the Swedish attorney David Frydlinger, cowrote the HBR article "A New Approach to Contracts."

Transcript

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0:00.0	If you work with early career professionals, my colleagues at
0:03.8	HPR have a great new podcast for you. It's called New Here. Think of it like the
0:08.4	Young Professional's Guide to Building a Meaningful Career on your own terms.
0:11.9	Share New Here with the Young Professionals in your life. a meaningful career on your own terms.
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0:15.9	Listen for free wherever you got your podcasts.
0:18.6	Just search new here. Welcome to the HBO Ideacast from Harvard Business Review. I'm Kurt Nickin. Writing a business contract is like predicting the future. It's a series of if-then statements.
0:51.8	If this happens, then such and such party is responsible for that.
0:56.4	The idea is that neither side really trusts the other, so a contract backed up by the highest
1:02.0	legal authority gives a company something that it can put its trust in and that's why a firm's lawyers include every little thing they can think of.
1:11.0	But the one thing we know for certain about the future is that it is uncertain,
1:15.8	the most carefully worded bulletproof contracts can fall apart once they hit the reality
1:21.1	of modern business dynamics.
1:23.4	Inevitably, when one side gets the short end of the stick,
1:26.4	since they can't change the contract,
1:28.5	even subconsciously, they try to get even.
1:32.1	Our guests today show a better way to make complex deals
1:35.0	between firms, a so-called relational contract. Instead of trying to spell out every
1:40.0	scenario that could ever happen, this style of contract simply outlines guiding principles of the strategic partnership.
1:47.0	Oliver Hart is a Nobel Prize winning economist at Harvard University,
1:52.0	and Kate Vitassick is faculty at the University of Tennessee.
1:55.2	They're the co-authors along with Swedish attorney David Friedlinger of the
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