Building Relational-contracting Capability

Abstract: How do firms build relational contracting capability? Although there is a burgeoning literature on the benefits of relational contracts, most studies focus on the maintenance and performance of existing relational contracts. Yet there is growing recognition that development of relational contracting capability – that is, the ability to establish relational contracts that are both clear and credible – is difficult. In this qualitative study, we examine the first interfirm relationship established by Hewlett-Packard – its partnership with Canon to co-develop and commercialize the desktop laser printer. Based on interviews with participants in the HP-Canon relationship going back to the early 1980s, coupled with archival information, we document the steps taken to assess the conditions for a fruitful relationship, establish the parameters of a relational contract to support that relationship, and address unexpected events that put strain on the relational contract. These actions are informed by relational contracting theory, and also shed light on the agency problems that can exist in relational contracts when the incentives of managers in the alliance differ from the incentives of executives in the alliance.