HBR IdeaCast The Inherent Failures of Long-Term Contracts — and How to Fix Them
Sep 3, 2019
Nobel Prize-winning economist Oliver Hart from Harvard University and Kate Vitasek from the University of Tennessee delve into the flaws of traditional long-term contracts. They discuss how rigid agreements often lead to dissatisfaction and conflict, especially in outsourcing. Advocating for relational contracts, they highlight the benefits of fairness and open communication in fostering better business relationships. Through examples like Dell and FedEx, they illustrate how a focus on collaboration can transform corporate culture and enhance mutual trust.
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Contract Limitations
- Traditional contracts struggle to encompass long-term business dynamics.
- Behavioral factors like fairness significantly impact contract effectiveness.
Island Health Example
- Island Health and the Canadian government's contract with hospitalists did not account for a new law.
- This caused disputes about workload and compensation, highlighting the need for adaptable contracts.
Relational Contracts
- Acknowledge that contracts cannot cover every scenario.
- Establish clear procedures for situations not explicitly addressed in the contract.