Trust, trustworthiness and outsourcing

A TED talk by Baroness Onora O’Neill makes some fascinating observations about trust and trustworthiness. Her premise is that despite public concerns about there not being enough trust, trust should not be given to the untrustworthy. The problem is insufficient trustworthiness, not insufficient trust. Baroness O’Neill goes on to suggest that there are three components to trustworthiness:

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1. competence
2. reliability
3. honesty

So how can this be applied to outsourcing contracts? The purpose of a contract can be viewed as a way of building trust, and by Baroness O’Neill’s analysis, that means building trustworthiness. The theory is that, even if the other party is not inherently trustworthy, having a come-back if they fail to perform makes them trustable. Contracts do this by giving access to a court system that will award remedies if performance is not sufficient (i.e., is competent and reliable) or if the other party does not abide more generally by its side of the bargain (i.e., acts honestly).

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But there are some problems with this theory: parties don’t actually sue under outsourcing agreements. It’s not because projects don’t fail, but there are very few cases because:

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• It can be hard to prove losses flowing from the breach – operations are messy – and the exclusions of liability will exclude lots of potential damages. Often the remedies available are just not big enough to justify the pain of bringing a claim.
• These relationships themselves are messy - both parties may have breached and seemingly clear-cut cases often quickly descend into finger pointing and confusion.
• The customer (and it is almost always the customer that will be bringing the claim) needs the supplier to perform the services. With such a high reliance on the supplier it is natural to want to try to fix the situation rather than go to the wire with litigation. Especially when these contracts are run by operations managers who are hard-wired to solve problems rather than run to lawyers.
• There is often a larger relationship between the parties that overshadows specific failures.

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Given all these reasons why litigation doesn't happen, why do parties still believe that contracts actually change behaviour to the point where they can take the untrustworthy and make them trustable?

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• The parties although they breach specific provisions with regularity (there is no outsourcing contract out there that is being fully complied with) also act in a way that they SHOULD comply with contracts. It has strong cultural weight on behaviour and no one wants to be in blatant breach.
• Threats of dire consequences for failure can drive enough behavioural changes so that relationships limp rather than go really bad.
• There is nothing like a legal team calling down dire threats of imminent destruction to bring people into line, and lawyers all believe strongly in the idea that you really should comply with your contractual obligations.

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All of this is to say that yes, contracts can change the game and help get parties to behave in a trustworthy manner. But they are also a crude tool and not consistent enough in their impact. So what can we do to find more trustworthy partners?

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First, we need to put more emphasis on only working with trustworthy companies. Rather than just relying on a big name. Companies need to do real due diligence to choose partners that are trustworthy.

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Second, we need to act in ways that drive more trustworthy behaviour, such as:

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• treating the other party as trustworthy,
• punishing divergence from the contracted standards quickly, but also forgiving quickly, and
• creating a relationship of give and take where issues are negotiated rather than treated as black and white.

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In short, your contract is necessary, but not sufficient, and won’t always save you; so spend as much time choosing and nurturing trustworthiness as you do negotiating your contract.