Thursday 19 February 2015

The Carrot & The Stick: Part 2

By Thomas Paiva-Pennick

In part 1 I looked at the stick, in part 2 I’ll be focusing on the proverbial carrot.

The Japanese enjoy long and fruitful business relationships without contracts; instead agreements are based on trust and honour with all elements of performance discussed openly in order to achieve an agreement. That seems a long way from where we are in Europe currently and you could argue our cultural differences mean we will never see that form of contracting in the UK.

But there are steps we can take to building trust with our suppliers that don’t require a great leap of faith and agreeing mutual performance without a contract to rely on...

I would challenge you to find many performance related bonus clauses outside of the construction industry. Common sense would suggest that the stick is most effective when used in combination with a carrot...especially when the carrot is money!

We see incentive clauses in contracts of employment, be they commercial or athletic. They are not however, often seen in commercial contracts. A fact that, I would argue, needs to change.  

As procurement gains influence within businesses perhaps it’s time to focus more on fostering trust with key suppliers, businesses whose wants and desires are aligned to ours or who we can rely on to give us a consistent service of high quality and good price. But it becomes harder to do that if all we offer them is the stick and not the carrot.

Ignoring the obvious legal implications of onerous Liquidated Damages Clauses being construed as penalty clauses and struck down, can one party to an agreement trust the other if he asks for a lot without offering anything in return?

It will never be the case that incentivisation finds its way into all contracts, a large portion of all contracts will always be transactional and that is simply the nature of business. I for one can’t imagine negotiating a bonus clause with a stationery supplier, no matter how important a delivery of pens and post-it notes may be to the future success of my organisation!

However, with larger, riskier procurements that are integral to the success of a business they should be present. In a situation where the supply market is small, building trust with suppliers helps to ensure you don’t find yourself dealing with a duopoly, or worse still a monopoly, of your own creation.

In your personal life you don’t often continue to interact with people who you don’t trust. Why should it be any different in business?

Do you have any good or bad experiences of utilising bonus and damages clauses? Please share your thoughts.

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