5 Steps to a Contract High

In the mid-2000s, a U.S. computer manufacturer signed a long-term contract with an overnight delivery service to transport its products. By the eighth year of the 10-year contract, both the manufacturer and carrier wanted out. But both companies knew ending the agreement would be a lose-lose.

The result: two years of distrust, retaliatory measures, and frustration.

Finally, the two companies decided to scrap their old contract and replace it with what Michael Wilson, vice president of marketing and packaging for AFFLINK, calls a "relationship" agreement.

"Two years into the new contract, the carrier was able to reduce costs, enhance supply chain efficiency, and eliminate the friction," Wilson says.

Because Wilson believes relationship contracts can benefit distribution in many different industry sectors, he suggests taking the following steps to put one into action:

1. Build a partnership mentality. Most contracts are designed to protect each party’s interests. Put that concept aside. Develop a contract that builds relationships and serves both parties at multiple levels.

2. Have a shared vision. Some contracts are designed to give greater power to one party over the other. Again, toss that aside. The focus must be a shared vision of how the two parties can work together for the benefit of the end customer.

3. Commit to guiding principles. Expect issues and misalignments to occur, especially with long-term contracts. Add a preamble to the contract that emphasizes that both parties are committed to honesty, loyalty, transparency, integrity, and fairness. These become the contract’s guiding principles.

4. Lay out the terms of the agreement. After the first three steps are agreed upon, hammer out the economics of the relationship contract. This is where the responsibilities of all parties and charges are outlined. "Old-fashioned agreements tend to get adversarial at this point," Wilson says. "Relationship contracts handle step 4 as a problem-solving exercise."

5. Create governance teams. Both partners in a relationship contract should have matching teams that address specific issues as they come up. For instance, two "excellence teams" can work together, focusing on continuous improvement and innovation. This breathes life into a relationship contract.

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