Contracting in the new economy

This is an excerpt of the original article. It was written for the May-June 2023 edition of Supply Chain Management Review. The full article is available to current subscribers.

May-June 2023

If you were dropped onto this planet and landed at McCormick Place in the heart of Chicago in the middle of March, you would probably conclude that planet Earth had been overrun by robots. Everywhere you turned on the ProMat conference floor, there was a robot lifting something, putting something away, or carrying something to another location. But, despite a conference hall overrun by technology, the on-the-ground reality is a bit different. Not so long ago, commercial real estate firm Prologis estimated the number of facilities with any type of automation at about 10%. But that is changing—quickly. A recent report from JLL found that one-in-two…

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The phrase “the new economy” was popularized in a 1983 cover article in Time, titled “The New Economy,” which described the transition from heavy industry to a technology-based economy. More than 40 years later, the phrase is still used to describe recent business trends and evolutions affecting how organizations do business. If the global pandemic taught us anything, it is that the phrase “business as usual” has been replaced by “business happens.”

Today’s new economy is characterized by faster, more complex, and intertwined trading partner relationships. The need for flexibility is paramount. But so is the need for innovation and sustainable supply chain solutions. In truth, supplier relationships are crucial to a company’s long-term success. Yet today’s business leaders are facing a dilemma—traditional purchasing approaches and contracts don’t work in complex strategic relationships where the parties are highly dependent on each other, future events can’t be predicted, and flexibility and trust are required. Conventional approaches undermine—rather than promote—the partnership-like relationships needed to cope with uncertainty.

The contracting paradox

Of all the many traps and possible pitfalls in negotiating a complex contract, one of the most insidious is the “contracting paradox.” The contracting paradox is the delusion that we write contracts to make plans, but we cannot actually plan accurately. And, as a nice twist, we trick ourselves into believing we can plan.

Why is the contracting paradox such an easy trap to fall into for contracting, procurement, and outsourcing management experts? As experts, their task is to write forward-looking contracts that attempt to cover every risk and limit every possible liability. In short, they strive for the complete contract that addresses every “what-if” possibility. But despite their best efforts and contracts, they are not bulletproof—and never will be.

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