If it seems like I’m a little stuck lately on Oliver Williamson’s Nobel Prize-winning research on Transaction Cost Economics (TCE), and specifically how he has tied outsourcing contracts and supply chain dynamics to his TCE research, it’s because I am.
Stuck may not be the right word actually, it’s more like really impressed and fascinated with how his scholarship dovetails so nicely with the Vested Outsourcing concept of working aggressively, flexibly and cooperatively to achieve mutually beneficial or ‘win-win’ outsourcing agreements.
In a previous post. I talked about the implications of Dr. Williamson’s TCE research for outsourcing at what he describes as the “interfirm make-sell-buy” contract and conflict resolution level. He outlined this in a 2008 article in the Journal of Supply Chain Management (“Outsourcing: Transaction Cost Economics and Supply Chain Management”).
I was reviewing some of his work again, particularly in connection with his description of the three types of hybrid contracts – muscular, benign and credible – and I was fascinated by his discussion surrounding the common economics aphorism, “Never leave money on the table.”
Could it be, as Dr. Williamson suggests, that it’s “better to leave money on the table,” to not win every negotiating point?
Well yes; in the case of a credible, mutually beneficial contract that idea might be just the ticket for a winning and adaptable contract.
Never leaving money on the table has cache, especially in a muscular contracting arrangement, Williamson says, because “money left on the table signifies waste that can be converted to mutual gains by perfecting the bargain.” It’s an important lesson, he continues, but “as with many aphorisms there can be too much of a good thing.”
The economists’ dictum to never leave money on the table has been disputed by some investment bankers and businessmen who advise ‘always leave money on the table,’ Dr. Williamson says.
“But that sounds foolish. How could this be?” he continues.
As sometimes happens good theory (for one purpose) and good practice (for another) can part ways.
For one thing constructive and strategic contractual points are sometimes hard to differentiate. What exactly are the parties’ intentions going into a negotiation?
If there is a strategic, rather than constructive, purpose that skews the contract in one party’s favor “and if real or suspected strategic ploys invite replies in kind, then what could have been a successful give-and-take exchange could be compromised,” Williamson explains.
Asymmetry will rule the day as each party tries to gain and regain the upper hand.
This activity ”could plainly jeopardize the joint gains from a simpler and more assuredly constructive contractual relationship.
“Always leaving money on the table can thus be interpreted as a signal of constructive intent to work cooperatively, thereby to assuage concerns over relentlessly calculative strategic behavior.”
That’s a contract with credibility from start to finish. And that’s where the rubber meets the road for Vested Outsourcing.
In contrast to a one-sided muscular contract or an idealistic benign contract, “credible contracting is hardheaded and wise,” Dr. Williamson says.
The parties are hardheaded because they expressly work out contract commitments “to which mutual benefits can be confidently ascribed.” They are wise if they avoid contract provisions that “invite the escalation of strategic behavior with net negative effects.”
And they are brave and foresighted if they see the value of leaving money on the table.
After all, outsourcing may be high stakes but it’s not poker.