Relationships: Long tenure – thin contracts

Fifteen years ago management guru Peter Drucker suggested that the greatest change in corporate culture, and the way business is conducted, may be the accelerating growth of relationships based not on ownership but on partnership. Drucker was right. Some 25 to 40 percent of all US foreign direct investment is now made via joint venture, totalling hundreds of billions of dollars each year. The rate of partnership formation is increasing at 25 percent per year. But some two-thirds of partnerships run into serious trouble within their first two years, of which only half recover.
Success factors in business partnerships, like marriage, remain something of an enigma. Various participants and commentators emphasise different factors and there’s no complete consensus. Partnerships are complex and involve commercial as well as social aspects. Over 50 years ago, business partnerships were viewed as single transactions to overcome market failure and industrial constraints. Later work identified the significance of governance structure, partner fit, compatibility and trust. Now the focus is on firms’ own capabilities and readiness to partner with others: something that Harvard professor Rosabeth Moss Kanter calls firm’s “collaborative advantage”.
For my executive MBA research project I interviewed 15 partnering companies based in New Zealand, Australia, China, the USA and the UK. While they reported different approaches to partnership, they had many success factors in common. Surprisingly, no one source, either interviewee or literature, appeared to capture all the tools or approaches of successful partnerships. lot of partnering nous seemed to stem from experience and gut feel. Often company’s partnering capability is innate and unrecognised.
Successful partnerships are as much about the relational as the commercial factors. My study found generally consistent agreement on the need for relationship skills, complementary fit, trust and an understanding of the partner’s business and culture. All the interviewed executives emphasised the importance of good communication, particularly at senior level. Unforeseen changes test the partnership most and these often stemmed from transitions in management. Some consensus was found on the benefits of multi-level communication, the role of shared values and design of the partnership contract to create healthy tension and avoid deadlock.
Cultural differences across partnerships are often overstated. Most of the partnerships examined in this project were cross-border or cross-cultural, and the main challenge experienced by these partners was unexpected. difference in language or national culture was not the major issue in itself – rather the challenge stems from difficult communication, arising from reduced contact time, insufficient contact points (‘zippering’), or time zone differences – and success was found to correlate with activity levels of communication.
The largest variations in partnering approach came from different emphasis between contractual detail and values. Ironically, some of the partnerships with the longest tenure were based on the thinnest contracts. As an Australian executive explained, “Our partnership agreements in China were six pages long and not very detailed – the document signed was more about reflecting on how we would tackle the issues rather than specifying all of them.”
His Chinese business partner added, “In this part of the world things are done less contractually – agreements are less than 10 pages and capture the principles. You don’t need to clearly specify mechanisms for when things go wrong like the western style contract. While our approach seems vague and uncertain, the results are often as good – after all you can end up in court either way. And if things go wrong, suing your partner will not help – they’ll get revenge in other ways and in any case you will lose the value of that relationship. And remember you had reasons to choose them as your partner in the first place.”
In partnership with distant organisation of different culture this ‘thin contract’ approach seems counterintuitive, and the attraction of detailed agreement is apparent. Various partners described the key factors of successful partnership as careful values-based selection process and maintenance of strong contacts at multiple, particularly senior, levels.
Closer to home, similar examples are found in partnerships with Maori organisations. Says one senior iwi executive: “A good partnership is based on values and principles, then goals. Having just profit motives is like prostitution – take the money away and there’s no relationship. The agreement should clearly state the values and principles of what the partnership is all about. This will guide any changes or new business in the partnership; else cracks will open up if the relationship is not developed well at the beginning. The alternative of heavy contract would not value the relationship, as it points to no trust or understanding at the beginning.”
And from their partner: “We write partnership charter in which we acknowledge each other’s aspirations. This stance is more intellectual and philosophical than contract law framework. The charter captures the metaphor of our partnership – that we both live on the same river, we are both paddling our waka on that river. We could have paddled separately in different directions, but by rafting up together we can go further and faster.”
Here the important part of negotiation is the journey, and what is written in the documents will be informed by how the parties are already working together. The contract simply seeks to capture the essence of the courting and engagement dialogue which includes who you are, what you’re trying to achieve and what your values are. The agreements are more values-based than standard joint venture contracts.
There are, however, contrary views. As one senior US executive put it, “Joint ventures would not start around values document. The companies would sign it without ever truly agreeing.” This large US organisation sought thick three-volume partnership agreements not only to satisfy their management but also to protect the venture from themselves.
“We needed the detail in the contract. This joint venture competes with others we have around the globe – if new vice president was assigned to oversee the venture and wanted to make quick unilateral decision then the contract would force that to board decision.”
Other interviewees took middle ground between trust and contract detail in their partnerships. As one veteran of oil and gas exploration explained, “Just like marriage, business partnerships can be formed quickly but then take years to divorce. It should be the other way round… You have to go in with an element of trust. If that’s not there from day one why would you ever do business with them?”
In the construction industry, some players are moving towards more values-based approach. As one interview subject reported: “In construction alliance we form an Alliance Charter to capture the values and ethics of the partners… We deploy our more collaborative managers to alliance contracts and more adversarial managers to the conventional fixed-price contracts.”
Contract detail appears to be substitute for trust in many agreements – to manage the effects of management transitions in large organisation, or for smaller firms to mitigate dominance by the larger partner. One person explained: “We spent lot of effort in developing our partnering shareholders agreement. Being very aware of our minor shareholding we were careful to maintain our rights on important issues, to preserve our value and not be squeezed out.”
If building trust and understanding takes time then it is important to connect people with common values. Leadership New Zealand chair Jo Brosnahan, in July 2008 NZ Management article ‘Savvy about schmoozing’, suggests that business is moving away from processes