![]() ![]() Each lacked trust and confidence in the other, yet neither could afford to end the relationship. Dell’s attempts to lower costs, including bidding out the work three times during the eight-year relationship, ate into FedEx’s profits.īy the eighth year, the parties were at the breaking point. ![]() Dell felt that FedEx was not proactive in driving continuous improvement and innovative solutions FedEx was frustrated by onerous requirements that wasted resources and forced it to operate within a restrictive statement of work. For nearly a decade, FedEx met all its contractual obligations-but neither party was happy in the relationship. The 100-page-plus document was filled with “supplier shall” statements that detailed FedEx’s obligations and outlined dozens of metrics for how Dell would measure success. When Dell originally selected FedEx, in 2005, to handle all aspects of its hardware return-and-repair process, the companies drew up a traditional supplier contract. They are especially useful for complex purchasing arrangements, outsourcing, strategic alliances, joint ventures, franchises, public-private partnerships, large construction projects, and collective bargaining agreements.Ĭrafting a formal relational contract involves five steps: laying the foundation, cocreating a shared vision and objectives, adopting guiding principles, aligning expectations and interests, and creating systems for staying aligned. These contracts, which are legally enforceable, specify mutual goals and establish governance structures to keep the parties’ expectations and interests aligned. The remedy is to adopt a totally different kind of arrangement: a formal relational contract that creates a flexible framework designed to foster collaboration in complex strategic relationships over the long term. They often undermine the partnerlike relationships and trust needed to cope with external uncertainty. In an era when businesses increasingly have to depend on their suppliers to lower costs, improve quality, and drive innovation, traditional contracts don’t work.
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