Gaps In Relationships and Contracts in Eastern and Western Cultures

In this second post, I summarize additional insights that several of our speakers put forward at our recent SCRC meeting on Dec 1-2, 2011. We were lucky to have Tim Cummins, CEO of IACCM, speak on the subject of relational contracts in a complex global environment.

Tim made a very good point that Western companies typically have contracts which DO NOT FIT with the way the rest of the world does things. In particular Eastern thinking leans economically more towards flexible relational exchange and towards collaborative high context styles. For instance, Chinese companies never pass on contracts to their subcontractors – and Western companies struggle on how to make them do it!

There is a real cultural gap in the role of contracts dominated by a legal community, and the way the rest of the world sees it as a process…In China, executives note that they prefer to begin with doing business (a transaction), and a relationship will follow. Western organizations we want a relationship (contract) prior to a transaction!

Furthermore, Westerners are often biased against doing business with Eastern suppliers, and view them as untrustworthy…..Not surprisingly, Chinese vendors feel the same way towards Western companies. For instance, they claim that “The West say they want contracts with us – but don’t honor them!” Billions of yuan in bad debts exist from Western companies who have done business China and haven’t paid their bills. Western companies are notorious for doing business with small suppliers, driving them down in price, and then walking away when they get a lower price down the road. Tim also questions whether the extent of IP theft is as prevalent as we hear? The issue of honor and trust here is a game on both sides – and is it is “okay for us to breach contracts, but not them…”

Tim spoke about Where things go wrong with contracts. The top two issues – disagreement on contract scope and the requirements…should be no surprise. Many formal lines of analysis start in our own company – and procurement gets involved too late – and people don’t come soon enough…and are left scurrying to put together a contract quickly, with and requirements that are not that accurate and properly scoped out…

Tim concluded with the point that change management has become a major stress point, as there is often limited engagement after the contract is signed! Organizations need to adopt a life cycle to contract management, beginning with good requirements statements, sustainable outcomes, and measurement of change. This is particularly important if we are to stay agile in this environment.