Agreeing Contracts: Time Matters

África Ariño studies how prior partnerships affect terms

19/08/2014 Barcelona

Professor of Strategic Management at IESE

Time is money in business, and so it follows that agreeing upon the terms of a contract as quickly as possible would be ideal. But, to what extent do partners’ prior relationships condition negotiations? Do long-term partnerships result in slower or speedier contract negotiations?

According to IESE’s África Ariño, Joan Jané of Hewlett Packard, IESE Lecturer Jeffrey J. Reuer of Purdue University and Kyle J. Mayer of the University of Southern California, the length of partners' prior relationships initially lowers negotiation time but then increases it. Plotted on a graph, the effect looks like the letter "U."

This is one of the conclusions that the authors present in their article Contracts, Negotiation, and Learning: An Examination of Termination Provisions, published in the Journal of Management Studies.

To better understand why this happens, the authors analyzed three different kinds of termination clauses among a total of 92 partnerships from 37 of Europe's top 75 logistics providers. When looking at the level of detail contained in certain contract provisions between partners, they discovered long-term partnerships yield more detail in certain provisions, but not in others. Moreover, it seems that previous experiences can lead to contractual caution in some areas.

The origin of the "U"

So why did the length of partners' prior relationships end up increasing negotiation time after an initial acceleration was seen? The authors point to three possible reasons:

  1. Once partners have been working together for a while they are more likely to come across problems that they did not originally anticipate;
  2. The increased trust and understanding built up between partners over time is a valuable resource that needs to be protected and which may lead to putting more time and effort into these negotiations;
  3. As the partners learn more about each other and become increasingly comfortable working together, they often identify new areas where they can work together and decide to expand the scope of the partnership, increasing the complexity of new contracts.

The authors conclude that the negotiation time for a given level of contractual detail may be a new indicator of having learnt from prior relationships. In the end, the study reaffirms the value of partnerships as a driver of efficiency and growth.

For more information, see IESE Insight