February 27, 2017 | by Matt Warner Print

A few years ago, I was frustrated with a contractor’s failure to meet even the most basic terms of our agreement. I had not heard from him for an extended period despite sending emails to see what was happening. When we finally connected, we were both frustrated (I had stopped payment, which usually gets someone’s attention). As I explained my reasons, pointing out his failure to meet the terms of the agreement, he replied, “OK, well, frankly, I never even read that agreement.”

I was floored.

It is tempting to blame the contractor in this story for failing to read the contract. After all, it was only two pages long. Another way to look at this, though, is from his point of view. He had been advising our organization since long before I arrived, and he had assumed nothing had changed under our new agreement.

I had failed to recognize that I was inheriting a relationship dynamic that had previously served both parties well. Although I was well within my right to reshape that dynamic going forward, it was my responsibility to communicate the new contractual terms clearly with this individual, rather than rely on a few paragraphs in a legal document I had emailed him, hoping it would do that work for me. I learned an important lesson.

Organizational Development (OD) professionals speak of contracting in two ways. One involves the legal documentation of an agreement. The other is less tangible, but perhaps even more important. It refers to the mutually understood terms of the initial and ongoing relationship between the two parties. The art of this second form of contracting challenges us to become our most mindful selves as we seek to both communicate and listen well.

In From Chaos to Coherence: The Power to Change Performance, OD experts Doc Childre and Bruce Cryer offer the following four principles for coherent communication:

  1. Achieve understanding first
  2. Listen nonjudgmentally
  3. Listen for the essence
  4. Be authentic

In Peter Block’s best-selling tome Flawless Consulting, he emphasizes how critical entry and contracting are to a successful partnership. “When consultants talk about their disasters, their conclusion is usually that the project was faulty in the initial contracting stage.”

Fans of Ronald Coase will appreciate the importance of getting this right. The late Nobel laureate economist famously emphasized the “transaction costs” of engaging in the market. In his 1937 article “The Nature of the Firm,” he explained that the reason many of us tend to create organizational structures is because it can be tedious and wasteful constantly negotiating all of the many ways we need to work together. The fact that so many of us work in organizations instead of doing only freelance work is evidence of those costs. Imagine if, before scheduling a staff meeting, you had to negotiate payment for everyone’s time and talents.

That said, not all of an organization’s human capital needs require a full-time hire.

It can sometimes be advantageous to solicit the help of an independent contractor. Working with contractors can provide an organization with unique expertise, a fresh perspective, and an extra pair of hands to carry the workload over a specified period of time.

So, what can you do to minimize the costs of contracting? Block suggests you should start by recognizing that any contractual relationship is a two-way street. Responsibility for success should be shared 50/50. This means that both you and the contractor have a responsibility for the relationship’s success. You should approach the terms collaboratively and with open communication about the process.

To accomplish this, Block encourages direct and open-ended questions to assess the health of the understanding. He specifically suggests questions that can only be expressed in person or on the phone, not via email, such as, “How do you feel we are doing in reaching agreement?” Taking the time to meet in person, or over the phone, will pay off in the long run.

We take these lessons to heart not only with our contractors, but with our grantees as well. About two years ago, we were brainstorming how to fix a problem. We measure almost everything at Atlas Network, and two indicators in particular were lagging behind the ambitious goals we had set for ourselves. One was the percentage of grantees participating in our training programs. The second was the percentage of grantees submitting grant reports on time.

Both of those requirements are articulated in the grant agreements signed by our grantees. So, one attitude we were tempted to express to ourselves in our frustration would go something like this: “Well, they signed the agreement. It is their responsibility to read and understand it. They should know when their reports are due and make sure to submit them on time.” This attitude reflects a legalistic approach to contracting. Technically, it’s not wrong. But we decided to consider a more strategic approach to “contracting.”

Now, we send a grant agreement only after our team has held a virtual meeting with each prospective grantee via Skype. During this meeting we aim to do three things:

First, we review and improve, if necessary, the quality of the outputs and outcomes articulated in the grant application. A great project has a clear and measurable outcome it is working to achieve. While each grantee has sole discretion to determine what they are trying to achieve, we often help to clarify how those achievements are expressed in order to best serve the project and the accountability we all share. As one of our board members aptly puts it, we want it to be clear when we should pop the champagne.

Second, we communicate our enthusiasm and high expectations for the project. This makes it clear that the grantee is not just a number on a spreadsheet to us. We think their project is important. We are inspired by the project’s aims and excited to monitor its progress. We want to be sure the grantee is just as committed as we are, and feels that positive energy from us as they endeavor to achieve big things.

Third, we review the requirements and discuss any concerns or questions each party may have, to affirm a good-faith understanding of the agreement.

What a difference this process has made. By seeing the “contract” not only as a document, but as a mutually beneficial relationship built on good communication, active listening, and a fair measure of camaraderie and respect, the results have been dramatic.

Finally, we have also grown to appreciate the importance of “re-contracting.” This refers to our readiness to make the most of new opportunities and unexpected challenges. This approach asks all parties to maintain continual communication and, at appropriate times, explore a modified understanding of the agreement. Rather than wait for the end of a contract term to explain problems or failure, an attitude of  “re-contracting” involves raising concerns along the way as they happen in real time.

This healthy habit is much more likely to occur when the contract has been carefully and productively initiated, and much less likely to occur if the essence and spirit of the contract is reduced to just a legal document.

It is possible that some contractor relationships will fail anyway, but the good news is that there are things you can do to make success more likely. When that success happens, you can be confident that, like any good steward of funds, you have truly conquered the transaction costs that come with engaging the market.

Matt Warner portrait
Matt Warner is president of Atlas Network, a nonprofit grantmaking organization committed to supporting local NGOs in more than 90 countries. Matt is the editor of Poverty and Freedom: Case Studies on Global Economic Development and coined the term "the outsider's dilemma" to describe the challenge of helping low-income countries develop without getting in the way of their most viable paths to prosperity. Matt writes, speaks, and consults internationally on the topics of economics, institution building, nonprofit management, and impact philanthropy. Learn More about Matt Warner >