Combining rules and relationships
Governments routinely buy lots of products. Some are simple, like paper clips, which are easy to describe and easy to make. Other products are complex, like information technology systems, which are hard to describe and hard to make. Too often, governments treat buying complex products as if they were buying simpler products. Buying an information technology system is different than buying paper clips.
Governments use one of two simplified acquisition approaches to buy products: a reliance on rules or a reliance on relationships. In the rules approach, the government assumes it can clearly describe all the features of the product it wants to buy and writes a highly detailed contract covering as much of the transaction as possible.
In the relationship approach, the government assumes vendors are trustworthy partners who have the government’s interests at heart and will deliver a good product, if for no other reason than because it’s good business for them to do so. Instead of writing a highly detailed contract, the government lays out what it wants the product to do (e.g., organize papers), its capabilities and qualities (e.g., organize around 20 papers for a low cost), and then relies on the vendor’s creativity and expertise to supply a product that meets its needs (e.g., presto! a paperclip!). The two approaches, it would seem, imply that the government must either fully engage in writing a detailed contract to get what it wants, or trust the vendor to come up with a product that fits its objectives.
When it comes to buying complex products, each approach has its weaknesses. For the rules approach, the problem stems from product complexity that makes it difficult to list all the details. There are so many moving parts and performance parameters, contracts cannot address all the ambiguities. The rules approach breaks down in the face of complex tradeoffs and unknown situations because specifying the product’s requirements must wait until the government considers the various and hopefully innovative options the industry can come up with.
The relationship approach, however, can also be problematic. The vendor may not know the government’s preferences, what products would satisfy the government’s requirements and goals, and how much the government is willing to pay. The government may find it difficult to determine what the vendor can do to meet its needs and what it would cost. Facing uncertainties about the product and the preferences, capabilities, and resources of the other party, either side can easily take steps to serve their own interests but harm the other. The vendor can charge the government for products it doesn’t need, and the government can squeeze the vendor by refusing to pay for features it claims it doesn’t need and never asked for. To enter into an exchange under these circumstances means taking a leap of faith that the other side will behave in the spirit of partnership.
Instead of facing a discrete choice between rules or relationships, there are ways to combine the strengths and avoid the pitfalls of both. If the complexity of the product precludes specifying all the provisions for a contract, the answer is not to give up and simply trust market incentives and the vendor, but to focus on the particular rules that will most strengthen the contract and result in win-win outcomes. Governments can write more effective contracting rules for complex products, rules that promote cooperative behavior and discourage harmful behavior in the areas where the contract cannot specify exactly what is to be produced. At the same time governments and vendors can simultaneously take steps to build a cooperative and accommodating relationship when acquiring a complex product. For example, exchanges for complex products that require repeated interactions between the government and the vendor focus each party’s attention on their own behavior. Both the government and the vendor are more likely to be concerned about how the other party, as well as other potential buyers and sellers, will treat them in the future. These arrangements promote cooperative relationships.
This is not to say that crafting the right rules and structuring the right relationships guarantees positive outcomes. Things can still go wrong when buying a complex product and sometimes do. Instead, crafting the right rules and structuring the right relationships improves the chances of a win-win exchange.