Managerial Contracting: a Preliminary Study
Abstract: This essay suggests that, in the modern outsourced economy, important types of contractual relationships—among them those related to industrial procurement—are neither fully transactional nor fully relational. Rather, the agreements that govern these relationships incorporate highly detailed written terms that focus not only on what is promised but also on the details of how it is to be achieved and how the suppliers’ actions will be monitored over the life of the agreement. These provisions are not, for the most part, effectively backed by the threat of legal sanctions. Nevertheless they have the potential to add significant value to contracting relationships. Many of these provisions—termed here “managerial provisions”—employ techniques used to organize relationships and increase productivity within firms. Known in the literature as elements of hierarchy, the techniques introduced by managerial provisions are used to provide a roadmap for carrying out the transactors’ work-a-day actions and interactions in ways that are likely to facilitate successful contracting relationships. Interestingly, among the many hierarchical governance mechanisms that managerial provisions import into contracting relationships are eighteen elements of hierarchy that have been closely associated with persistent performance differences across similarly situated enterprises. This raises the intriguing possibility that more fully integrating some or all of these (and other) managerial practices into supply agreements may add as yet unrealized value to these (and other types of) contracting relationships.
