Contractual Dimensions and Buyer-Supplier Perceived Risk, the Role of Information

Whenever there are any two or more entities involved on a matter of mutual coordination and interest, and if it involves monetary collaboration as well then they tend to devise their cooperation channels, modes of cooperation and keep their coordination in a manner acceptable to both each end entities. The memorandum of understanding to draw and define lines of cooperation and responsibilities of all the collaborating entities is called a ‘contract’. This article studies the role of contract in harmonizing the business and trade environment. The study also focuses on the possible role of information technology in enhancing the credibility of contracts. The study also focuses on the problems faced by the collaborating partners. The contract is widely perceived as the way of reducing the trust deficit and disputes. The information technology integration can also provide the ways of making the contract more flexible so as to gain maximum out of the contract for the contracting parties. As a whole the study examines how contracts, risks, perceptions and IT integration are intertwined.

Transaction Cost Economy (TCE) theory describes a firm as an efficiency-inducing administrative instrument that facilitates exchange between parties. Also, TCE stresses on conscious, deliberate and purposeful coordination between partners. The perceived risks undermine the capacity of the contracts and make them too hard to be completed. First of all, it is extremely difficult to define all the relations between the collaborating entities and it is costly to negotiate and write complete contingent claims contracts that fully describe each party’s responsibilities and rights for all future contingencies. This legal discrepancy sows the seeds of cheating, distorting information, misappropriation of resources and misconceptions about each other. This happens due to the fact that each of the enterprises or entities entering into a contract have their vested interests. These entities do their level best to safeguard their interests. The contracts are also subject to the changing of the government policies and economic viability of the projects. The performance is hindered by intensified rivalry, new entrants, demand fluctuations, a lack of competence of the partner firms, and sheer bad luck. With all these problems and discrepancies contract still remains a fundamental part of the inter-organisational relationship. We have seen a race against time

that each firm learns from experiences of its own and other’s to make her next contract more risk free. When studying the stage of renewal of contracts, there could only be two options. One, the contract is modified keeping in view the previous experiences whether good or bad, this is called contingency-based complexity. Two, the contract is renewed under same terms as the previous one, this is called incentive-based recurrence. When the terms and conditions of a contract are very carefully and diligently written and all the contingencies are put into clauses of the contract and even try to accommodate the future renditions, the contract is very likely to be a success. IT integration can affect the nature of contracts at the time of their maturity.

Chinese companies were selected for the purpose of experimentation. First data about the company’s number of employees, the age groups of the employees and the number of IT workers in a company was collected. The survey questionnaire was set in English and then given to professionals to translate into Chinese. The Chinese language questionnaire was then given to the two separate individuals who did not know about the original English language questionnaire. They translated then Chinese language questionnaire back into English language. Both of the English language questionnaires were then compared and upon finding no semantic change the Chinese language questionnaire was okayed for to be used in the survey.

On the basis of the study conducted it was deduced that the managers or the lawyers, one’s who draft the contracts need some kind of training before doing it so. It was observed that a careful selection of vocabulary can decrease the risk perceptions. Instead of using terms which stress punishment or penalty, softer terms which “if x happens, then we agree to do y”

should be used. Any of the terms which highlight surveillance should rarely be used, if done so then it may leave a negative impact. Any clause which refers to the renewal of the contract may also leave a positive impact on the contenders of the contract. Such measures could lead to a long term collaboration between the entities.