Commercial Special Sauce – Trust

In a recent Commitment Matters article, Tim Cummins said:

My hope for 2022 is that the commercial community raises its voice and promotes the ethical standards and supporting systems that alone can move us along the path to making trust-based collaboration a norm, rather than an exception.

But how do we achieve trust-based collaboration?  When discussing nuclear disarmament discussions with the then Soviet Union, former US President Ronald Regan often quoted the Russian parable, “Trust but verify”, separating trust from faith.  Yet, a different US politician, Lincoln Chafee, is more relevant here who said, “Trust is built with consistency.”  

This led me to consider the notion of trustworthiness in our commercial relationships.  Some of you may be familiar with the work that I have done with the Australian Department of Defence in terms of defining what a “trusted business relationship” is and putting in place a measurement approach to assess whether the standard has been met linked to commercial consequences.

I recently read an article discussing how the last few years of the pandemic has moved trust to the centre of our decision-making process, stating, “Whether it be trust of governments, scientists, newspapers and journalists, or social media, trust, or our perception of trustworthiness, is central to our decision-making process.”  What caught my eye was the following statement:

“One good thing about trustworthiness is that it’s testable. Over time, evidence may confirm or refute the hypothesis that, say, the government is trustworthy about vaccine health advice but untrustworthy about cyber privacy protections in contract tracing apps.”

The key is in developing and applying both a measurement approach (the standard) and a formal governance process and commercial terms (the supporting systems).

Some of you may believe this approach is not very relational or collaborative given the potential linkage to commercial consequences, considering it is more representative of a conventional buyer-seller relationship.  However, in my experience, regardless of whether you are the buyer or seller, we use words like “collaborative business relationship” and “relational contracting” and potentially put in place collaboration or relational charters, but rarely link this to a repeatable measurement process underpinned by formal governance process and commercial terms.  Without an agreed definition of a good relationship, we risk having different interpretations when we get together, leading to friction between buyer and seller.

This result mirrors the World Commerce and Contracting (formerly the International Association of Commercial and Contract Management (IACCM)) reports into Overcoming the 10 Pitfalls in Contracting, indicating that the number 1 factor leading to contract value erosion is a lack of clarity on scope and goals.  Unfortunately, we typically think of contract scope as the “what” needs to be done or delivered rather than the “how” we will work together or behave.  This “how”, as one colleague put it, is the “special sauce” that, like a hamburger, separates the good from the great.  In our case, our special sauce separates merely good contracts from great commercial relationships.  So what does a great commercial relationship look like?

While there is a range of materials available to the reader, my experience since 2013 in materiel management contracts of the Australian Department of Defence, under the banner of a Generation 3 Performance Based Contract (PBC), has routinely included definitions of individual and shared (collective) objectives, specification of attributes of a great commercial relationship, and a formal governance process and supporting commercial terms.  Recently, this approach has been reimagined under a different banner by David Frydlinger, Kate Vitasek, Jim Bergman and Tim Cummins (see Contracting in the New Economy), the “formal relational contract”, but remain identical in approach.

In future articles, I will look at better practices in measuring relationship health and trust, both in terms of how to define and assess it (the standard) and how to look for it as part of choosing the right commercial partner.

Regardless of the label, the facts are clear; by explicitly addressing the number 1 pitfall through defining what a good business relationship looks like (irrespective of whether buyer or seller or even third parties) and ensuring that we discuss and reward it, the chance of having successful business outcomes and an enduring collaborative business relationship is much higher.  And isn’t that we all desire?

This entry was posted in Behavioural Economics, Behaviours, Collaboration, Collaborative Contracting, Formal Relational Contract, Relational Contracting, the What and tagged , , , , , , , . Bookmark the permalink.

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