This year’s Nobel Prize for Economics went to two researchers who specialise in… Contract Theory.
Er, Contract Theory? Yes, I was surprised too.
Although the more I think about it, the more it makes sense that designing contracts could be seen as a science, an art form, even.
Are your contracts anywhere near this level yet? Unlikely as it might seem, the Nobel Prize winners’ work may already have touched your business, and it certainly will in the future.
Professors Oliver Hart and Bengt Holmstrom won this year’s honour for their research on commercial and employment contracts, respectively. The Prize committee pointed out that their work has a direct impact all of us.
“Contracts are essential to the functioning of modern societies,” said The Royal Swedish Academy of Sciences.
“The contributions of this year’s laureates are invaluable in helping us understand real-life contracts and institutions, as well as the potential pitfalls when designing new contracts.”
More than a handshake
So, if you work with Four Business Solutions, will we come at your contract management system brandishing an academic text book? No – that’s just not our style.
But this news has made me think for a minute about the profound importance of contract work. And I’m pleased to see experts recognising that the clarity of a contract is essential to its success.
That’s a message I drive home to our clients every day. And it’s something a good contract management system can help you achieve.
For many years, in business, a shake of the hand, good intent and professional behaviour were all that were needed to make an agreement. These days, things are a lot more documented. Someone’s word may well be their bond, but it needs to be enforced with paper (or screen), detail and a signature that has been witnessed and counter-signed. It’s the evolving world and it means we all need to be more aware of contracts and more legally-savvy.
One of the key things, of course, is that these days the ramifications of getting it wrong are more likely to be enforced in court.
The intentions that you may have when you draw up an agreement with a customer, supplier or member of staff can be strictly controlled by what you’ve written, and it’s important to make sure that it properly reflects your understanding.
This brings us back to the Nobel winners’ work. As the Prize committee reflects:
“Contracts are incomplete instruction manuals. They cannot specify what should be done in every case. Instead, they must stipulate how decisions should be made”.
This is true – a contract should help things to go well, but it also has to guide you when things go wrong. A good contract should be a mechanism for enforcing common sense. But for this to happen, you need true flexibility in your agreements and the way you manage them.
Clearly, that’s easier to achieve in the digital age than it was in the era of pen and paper. And anyone who thinks they can cope they old-fashioned way, I’m afraid, is putting their head in the sand.
to be done. For instance, what happens if someone’s driving on company business and they’re using a mobile telephone while they’re in the car? Well, the directors are responsible, and could go to jail if that driver is involved in an accident.
However, a simple company policy covering how the business handles issues like driving can be enforced via a digital contract management system. It will remind staff, for instance, that they shouldn’t take calls while they’re driving unless they’ve got a Bluetooth hands free set. In this way, the company is protected. Every single contract for every company has some of these “common sense” tasks that should flow through and be adhered too, whether it’s your fire extinguishers or cleaning contractors, whether it’s an employee or customer contract. We offer a mechanism for a quick check across your whole business about what state your contracts are in, what tasks can be aligned to them, and what needs to routinely looked at. These simple things can be a formidable problem if you don’t take them seriously. And the person who hides their head in the sand may learn the hard way.
Contract management MOT
A system that gives your contracts a regular health check is also an integral part of that flexibility I mentioned higher up. A good contract, service level agreement or company policy, to be flexible, needs to be reviewed often. Many contracts will have sections which say that in terms of service level agreements (SLA), we will aim to do “x” and “y” within this timeframe, but with contract management software you can constantly monitor and update these SLA criteria so that client and supplier are both happy.
Ultimately, in my view, good contract management is about bringing parties together. As The Royal Swedish Academy of Sciences said when praising this year’s Nobel Laureates:
“Modern economies are held together by innumerable contracts….. As such relationships typically entail conflicts of interest, contracts must be properly designed to ensure that the parties take mutually beneficial decisions.” In other words, in a fast-paced and ever-changing business world, a contract is precious. It needs to protect us while helping us move forward. It should propel us to success, provide a pathway to conflict resolution and foster relationships with others too. No wonder Nobel Prize winning scientists have turned their attention to these complex mechanisms. Perhaps it’s time you had another look at your contract systems too?
Image source credit: Adam Baker/Flickr