“Do effective contracts build trust, or does trust build effective contracts.”
We have all likely heard the timeless question about which came first, the chicken or the egg. The riddle—for which there is a scientific answer—has become the go-to anecdote for seemingly unanswerable questions. In other words, how could an egg exist without a chicken and vice versa?
When it comes to trust—and more specifically, trust between buyers and suppliers—what role do contracts play in building a solid and dependable relationship?
Today, we will try to answer that question.
In a recent LinkedIn post, author, educator, and the Vested Business Model architect, Kate Vitasek, asked the question: “If you can’t trust someone, can you really rely on them?”
Like the proverbial chicken or egg debate, what was almost as noteworthy as the myriad of responses from readers was the absence of a unilateral mindset in which the onus for building trust falls solely on the supplier’s shoulders. In other words, trust is a two-way street in which the buyer has to work hard to build trust with their supplier as much as the supplier has to build trust with them. Or in the sentiment of the timeless John Houseman commercial, both parties have to do it the old-fashioned way—they have to “earn it.”
Within this context, do contracts facilitate the trust-building process, or do they undermine it?
Referring to the responses to the above LinkedIn post, we keep coming back to Peter Smith’s story about the invention of the upside-down ketchup bottle referenced in the Procurement Foundry article “Moving vendors from order takers to strategic innovation providers.”
The Heinz case is a perfect example of how the “innovation” associated with the now ubiquitous Heinz bottle resulted from the company partnering with a supplier beyond a transactional level.
Of course, before you can partner with someone in the above fashion, you must first trust them beyond the legislative terms of a contract. In other words, if you need a contract to build trust, then you may be working with the wrong partner.
Don’t get us wrong; we are not suggesting that contracts are not needed. We are saying that an agreement isn’t worth the paper it is written on if the trust doesn’t exist. Or, to put it another way, if you need a contract to trust your partner, you are dealing with the wrong partner.
Returning to our question: “Do effective contracts build trust or does trust build effective contracts?” we think that contracts should provide the relational framework that serves as an agile guide to achieving a mutually beneficial outcome—emphasis on the word “agile.”
When you enter a contract with the idea that it is a cast in stone arrangement impervious to changes in the real world, you are setting yourself and your partners up for disappointment. It is a fact that life and circumstances change—sometimes dramatically. The upheaval caused by the pandemic gives testimony to this fact.
While some companies scrambled to enforce what became unenforceable contract terms—the same companies who also sought longer payment terms with their suppliers—others took a more collaborative, agile route.
Instead of sledgehammering supplier adherence to contractual terms, they looked for ways to bolster their networks using innovative approaches such as shortening payment plans. By taking such an approach, these companies were better able to preserve their supply base in exchange for reasonable discounts to their usual pricing schedule.
As a result, they preserved the ongoing vitality of their existing supply chains, thereby providing a more continuous flow of required products during a global disruption of unprecedented magnitude. In short, they built loyalty and trust through contract agility versus contract enforcement.