CARNIVAL DILEMMA

It was the eve of Carnival, specifically Friday, February 13th—yes, Friday the 13th—when I received a message from a client questioning my opinion on how to conduct an ongoing business relationship, particularly regarding a highly relevant decision-making process.

I step back in time. Ten months earlier, a partner consultant had referred my name to this same client—whom I will identify as Company A—who needed to rebuild a strategic supply relationship. The client had been informed that I approached contracts in a way that was distinct from the conventional method.

The case involved a nearly 20-year relationship for the purchase and supply of a chemical component, a raw material used in the composition of a final product patented and marketed by Company A. The chemical component was regularly supplied by Company B.

Company A had been approached by a large international group that wanted to buy the product on a large scale under a private label system—meaning the product would still be manufactured by Company A but marketed under the foreign buyer's brand.

The concern, therefore, initially resided in significantly increasing the supply volume and preventing any disruption in the continuity of supply. Furthermore, it was necessary to identify the composition of the chemical product supplied by Company B to allow its acceptance in foreign regulatory systems.

Company B, therefore, would have to reveal its trade secret—its know-how—so that the relationship, established 20 years earlier by the founders of both companies, could continue, this time with their successors. Both companies share a similar corporate culture and are currently managed by the founders' children.

After presenting the concepts and the methodology to both companies, they chose not to involve their respective legal departments, accepting my position as a Standing Neutral in the reconstruction of the relationship and the formalization of a relational contract between buyer and supplier.

APPLIED METHODOLOGY AND NECESSARY CONCEPTS

Although I currently work with two methodologies for building relational contracts—Conscious Contracts® and Vested®—since we were dealing with a typical outsourcing relationship (supply and purchase), the methodology applied was drawn from the VESTED [1] concept from the University of Tennessee, specifically the stages known as GETTING TO WE, in order to build a highly collaborative strategic relationship.

Based on pioneering research led by Kate Vitasek at the University of Tennessee, some of the most well-known successful cases of outsourcing relationships in many different areas were studied. The research project, funded by the United States Air Force, deeply investigated the factors that contributed to highly successful outsourcing relationships.

Vitasek and the rest of the research team discovered that one of the most important factors explaining success was a radically collaborative approach known as the “What’s In It For We” (WIIFWe) mindset. The WIIFWe mindset is based on creating social norms with high degrees of trust, transparency, and compatibility between the parties.

GETTING TO WE consists of five steps:

1. Establish the foundation of trust, transparency, and compatibility;

2. Jointly build the Shared Vision and Strategic Objectives;

3. Adopt the Guiding Principles for the partnership;

4. Align expectations and interests;

5. Create a system for governance and continuous realignment (including a conflict prevention and resolution system).

As part of the process, in addition to other aspects that precede negotiations, each party's "deal-breakers" must be identified—the boundaries that cannot be crossed, lest they jeopardize the relationship.

Company A stated that one of its boundaries was information related to billing; they did not want to disclose financial information. Company B, for its part, was more flexible regarding opening its confidential information and trade secrets, though this disclosure was conditioned upon the joint construction of a new business model.

Once the shared vision and strategic objectives of the relationship in its new format were built, we moved on to constructing the Guiding Principles. The UT [2] model identifies six social or moral norms whose combined existence forms the foundation for any business relationship: RECIPROCITY, AUTONOMY, EQUITY, INTEGRITY, LOYALTY, AND HONESTITY.

To refresh these concepts, a social norm can be defined as an unwritten rule that regulates our behavior within a specific social group. Social norms guide appropriate behaviors within a specific cultural or social context. Alignment with social norms reinforces trust, cohesion, and cooperation.

Once transformed into the Guiding Principles of the relationship, these norms serve as a guide for the relationship and the behavior of the parties and, consequently, for their decision-making. They are converted, therefore, into the ethical code embedded in the relationship and embodied in the contract.

THE SEQUENTIAL FACTS OF THE RELATIONSHIP

During the process, before the main contract had been signed, the companies entered into an NDA (Non-Disclosure Agreement). Thus, Company B opened its trade secret, identifying in detail the composition of the product supplied to Company A.

The negotiation involved a different economic model: Company A would pay royalties on the sales of the final product, both abroad and domestically. The organization of the new business model with royalty payments created a dilemma: preparing the spreadsheet with sales volume would necessarily imply disclosing the information that had been rigorously protected by Company A from the start—its financial data.

On the Wednesday before Carnival, I received the message:

"Good morning, Ana, how are you? I have a question and I need your opinion..."

"I’m thinking that all the alternatives for organizing the royalty system imply disclosing the financial information that we didn’t want to open from the beginning. What do you think?"

In truth, the question could be translated as a relational dilemma. My suggestion, in the form of a reflective question, was actually confirmatory of the intent that was already taking shape in the client’s mind: to open the confidential financial information as a counterpart and in reciprocity to what had been done by Company B regarding the composition of its product.

"I'm going to talk to the other partner and see what she thinks as well, because I think if we withhold the information, we will be violating our principles of transparency. I'll get back to you soon."

THE RELATIONAL DILEMMA

The concept of a social dilemma is widely studied in social psychology, economics, and game theory. It occurs in situations where individual interests conflict with the collective well-being. Simply put: what is best for an individual in the short term ends up being harmful to the group (including the individual themselves) in the long term.

According to Elinor Ostrom [3], a "social dilemma" refers to a wide variety of situations in which individuals make choices in interdependent circumstances. Transposing the concept of a social dilemma to a relational dilemma, it can be described as an imbalance that may arise when the expectations, needs, or operational realities of the parties are no longer in harmony with the guiding principles or the shared vision originally established.

A relational dilemma is not necessarily a "breach of contract," but rather a choice point, a pure and simple decision-making moment. It can occur in situations such as:

• The parties face a situation not provided for in the contract;

• One of the parties feels that the literal application of a clause violates a Guiding Principle (such as Equity or Reciprocity);

• External changes (economic, political, or social) make previously agreed-upon behavior unsustainable for the health of the relationship (remembering here that any long-term relationship, and therefore a relational contract, must be characterized by flexibility and adaptability).

Rather than being a problem, the dilemma can be seen in a positive light. It functions as an early warning system. Instead of ignoring the tension until it turns into a conflict, the relational dilemma calls the parties to reflection and open dialogue. It is worth noting that, unlike a conflict—which is typically focused on the past—a dilemma is centered on the present and the future.

I do not intend to delve into overly theoretical issues, such as discussing the concept of objective good faith as a foundational element that must even precede the relational path. In fact, this short article was written to celebrate the best Friday the 13th of recent times.

CONCLUSION

I must emphasize my enthusiasm in finding in the relational concept of formal contract building a source of innovation suited to the challenging times we have faced, especially in Brazil, where an endless institutional and ethical crisis contaminates everything and everyone. I often call it “diffuse distrust.” Yes, it is present on all sides and in all relationships.

Rebuilding trust and assisting the parties as a Standing Neutral has been a constant and enriching reflective challenge. Furthermore, no conventional contract could convert a traditional supply-and-purchase relationship into a "quasi-partnership."

On Friday the 13th, before 10:00 AM, I received the follow-up:

Client: "Good morning! After the conversation between the partners, we decided to disclose the information transparently, showing the full billing data, just as they did with their trade secret."

Ana Luiza: "Sensational! You can't imagine how much satisfaction it brings me to see the concrete incorporation of the principles we adjusted together! I believe in the methodology more every day! Thank you so much for the trust, once again!"

Client: "We were well trained..."

I resisted the urge to say that I was going to celebrate by "kissing my team's jersey," as I might break my neutrality by revealing my passion for football. Instead, I transformed that "jersey kiss" into this short account—a way to celebrate a Friday the 13th of relational consolidation.

[1] www.vestedway.com

[2] University of Tennessee

[3] OSTROM, Elinor – Trust and reciprocity: interdisciplinary lessons from experimental research. Elinor Ostrom and James Walker, editors, 2002. Russell Sage Foundation, New York.