Sande and Haugland<\/a> examined the effects of misaligned formal contracts on two outcomes: end-product enhancements and cost reductions. They also explored the mediating role of relational contracting in these effects. Using survey data from 305 buyer-supplier relationships in the Scandinavian wood industry, the authors found that contract misalignments can hurt both outcome types, with particularly negative effects on end-product enhancement performances where firms experienced losses up to 10%.<\/p>\n\n\n\nEnd-product enhancements mean making things better about the final product, like making it higher quality, more useful, or easier to use. This is important for making a company special compared to others. It’s harder to write these improvements into contracts before they happen and ensure they happen after, so when contracts aren’t written correctly, it can have a bigger bad effect on making the product better than saving money.<\/p>\n\n\n\n
THE IMPORTANCE OF RELATIONAL CONTRACTING:<\/h3>\n\n\n\n
Relational contracting is a type of contract that focuses on the relationship between two parties rather than just focusing on legal obligations. It emphasizes trust and cooperation to ensure successful outcomes for both sides involved. Relational contracts are often used when there is uncertainty or complexity surrounding an agreement; they provide flexibility by allowing changes over time as needed while still maintaining mutual understanding and respect between all parties involved.<\/p>\n\n\n\n
The study by Sande and Haugland (2015) found that relational contracting plays a mediating role in the effects of misaligned formal contracts on performance outcomes. These informal agreements can often supplement or replace formal contracts and help mitigate misaligned contracts’ negative effects. The authors suggest that relational contracts may provide an additional layer between formal contracts and transaction attributes, helping to bridge any gaps or misalignments. This is especially important when the formal contract may not accurately reflect all relevant transaction attributes.<\/p>\n\n\n\n
CONTRACT MANAGEMENT AND RELATIONAL CONTRACTING:<\/h3>\n\n\n\n
Contract management and contract management software can be useful tools in effectively managing relational contracting and maximizing the benefits of these informal agreements. A robust contract management system can provide a centralized location for all formal contracts, making tracking and managing these agreements easier. This can help ensure that all relevant transaction attributes are accurately reflected in the formal contract, which is an important step in effectively managing misaligned contracts and minimizing their negative effects on performance outcomes.<\/p>\n\n\n\n
In addition, a contract management system can help facilitate communication and collaboration between parties involved in a contract, which is an essential aspect of relational contracting. Contract management software can help build trust and strengthen the relationship between parties by providing a platform for communication and collaboration.<\/p>\n\n\n\n
Finally, a contract management system can help automate tasks related to relational contracting, such as contract renewals or amendments. This can free up time and resources for parties to focus on more strategic aspects of the relationship.<\/p>\n\n\n\n
MANAGING MISALIGNED CONTRACTS:<\/h3>\n\n\n\n
So what can businesses do to manage misaligned formal contracts and minimize their negative effects on performance outcomes? In addition to utilizing contract management and contract management software, there are a few other steps companies can take:<\/p>\n\n\n\n
Ensure that all relevant transaction attributes are accurately reflected in the formal contract. This may involve regularly reviewing and updating contracts to ensure they align with current business needs and practices.<\/p>\n\n\n\n
Work to strengthen relational contracts with suppliers. This may involve building trust and communication, establishing clear expectations and goals, and working to resolve any issues that may arise.<\/p>\n\n\n\n
Actively manage informal agreements and relationships. By actively managing these relationships, businesses can better mitigate the negative effects of misaligned formal contracts and maximize their performance outcomes.<\/p>\n\n\n\n
CONCLUSION:<\/h3>\n\n\n\n
Misaligned formal contracts can significantly impact a company’s performance outcomes, particularly in end-product enhancements. However, the study by Sande and Haugland (2015) suggests that relational contracting can mediate these effects, helping to bridge any gaps or misalignments. To effectively manage misaligned contracts and maximize performance outcomes, businesses should focus on ensuring that all relevant transaction attributes are accurately reflected in their formal contracts and work to strengthen their relational contracts with suppliers.<\/p>\n\n\n\n