Chinese Contracts

Several cultures contain a fable about a horse, a Farmer, and a wolf. After a time both plagued by the wolf the Farmer and horse agree to work together to defeat their common foe. The horse’s speed and stamina combined with the Farmer’s weapons and cleverness win out. The horse then asks the Farmer to remove the bridle and saddle - their agreement being at an end. “The hell you say.” replies the Farmer, “Giddiyap Dobbin.” as he applies the spurs with a will.

This parable is a warning about deals that don’t work out so well. It’s charming and memorable as such parables are when they are good, but a little hard to work with in real life. Most contracts are not about donning saddles and bridles to hunt down wolves. So, I’d like to offer a checklist for the mechanics of deals that work out well:

Chinese contracts or Avoiding the Cost of Compelling Compliance
Symmetric, temporary controls or Avoiding the Dobbin Problem
Atomic transactions or Avoiding the Wimpy Problem
The never ending story or “It’s a Relationship, Stupid”

Dobbin and the poor Farmer don’t seem very happy in the second half of their story. I think if we keep these four things in mind for the deals we make, we’ll create better deals.

Chinese contracts or Avoiding the Cost of Compelling Compliance

In The Age of Paradox, Charles Handy describes agreements he negotiated in Malaysia and China as a young man. After coming to agreement with his negotiating partner, Handy begins to complete a paper contract. From the book, Handy’s negotiating partner speaks:

“In my culture,” he went on, “a good agreement is self enforcing because both parties go away smiling and are happy to see that the other is smiling.” . . . I had met a culture where negotiation was about finding the best way forward for both parties .

Handy calls these “Chinese contracts” referring to the culture where he learned them. A Chinese contract is a coupling of fates together, making it better for each party that things work out well for the other. A Chinese contract is one in which outside enforcement isn’t really needed, because self-interest suffices. Enforcement is probably a good heuristic for deals, actually. If you have to think through how to enforce the deal you probably don’t want the deal. Enforcement is a lot of work, and a whole different game from simply delivering value.

One principle of economics is called “utility” – what something is worth to me isn’t what it is worth to you. I wouldn’t pay you $ 2.50 for popcorn if the popcorn weren’t more useful to me than the money. You wouldn’t sell me the popcorn if the money weren’t more useful to you. In terms of our personal utility, we both gain from the deal. Dobbin and the Farmer were both happier sans-wolf than either was before hand, even considering lugging around an armed Farmer on Dobbin’s part, or the Farmer sitting precariously astride a running horse. Dobbin and the Farmer are a special case of a Chinese contract, where the same result satisfied them both. So why shouldn’t all contracts be Chinese contracts in Handy’s sense?

The absence of Chinese contracts leaves me confused, doubly so in a free market. My gain in utility is higher when you are in favor of the deal, too. Imagine the Farmer riding a cooperative Dobbin working toward a wolf-free life for them both. Now, imagine the Farmer on an uncooperative Dobbin who sees nothing in it for him to be lugging about this heavy, smelly, armed creature. The Farmer clearly has a better deal – realizes more utility – if Dobbin has reasons of his own to be wolf hunting.

I am skeptical of any “deal” that isn’t a Chinese contract. As anyone who has tried to create an idiot-proof system knows, idiots are very clever. How much more clever is someone trapped in a deal they dislike? If your partner in a deal has something worth trading for, they’re probably clever and effective too. It seems like a lot of work to force someone clever and effective to do anything. Why not apply that cleverness and energy – theirs and yours - to think up something that’s good for both of you, like one less local wolf. If you can’t think up one thing that’s good for you both, you ought to be able to think up independent asks and offers that each have value to one of you.

As for Dobbin and the Farmer, their original deal was indeed a Chinese contract. Fulfilling it, however, changed the power relationship between them. So, perhaps a part of a deal should be how it leaves the power relationship between the partners.

Symmetric, Temporary Controls or Avoiding the Dobbin Problem

Dobbin and the Farmer have a problem because the Farmer has spurs, bridle and saddle, while Dobbin has no hold on the Farmer. When there are controls, especially asymmetric controls that persist after a deal a relationship becomes strained at best. Their first deal leaves both Dobbin and the Farmer rid of the wolf, but if it leaves the Farmer with a hold on Dobbin. Dobbin is not in such good shape.

Many years ago I stumbled on a physical analogy about relationships – talking with my first real girlfriend, in fact. You each hold up a hand, left hand to right, palm to palm.

Fingers extended. “This works.”
Bend your fingers over, so you each grasp the other’s hand. “This doesn’t work so well.”
Now one of you extends your fingers, while the other hangs on. “This doesn’t work at all.”

The best deals involve both parties staying in contact voluntarily, because there’s something in it for them. That’s a Chinese contract. The best deals also involve the parties declining to apply controls, especially asymmetric controls, to each other. Short of that, however, a deal that involves controls has to release the controls when the deal is completed.

Controls are hard, and expensive, and don’t work very well. They also create resentment and distrust if abused. If the Farmer forces Dobbin into something, clearly Dobbin would rather be doing something else. Dobbin loses the difference between the utility of what he would be doing absent coercion, and the utility of what he ends up doing for the Farmer. Dobbin ends up with less stuff. If the Farmer’s controls remain in place, Dobbin can expect to end up with less stuff than he might otherwise have, again and again. I think resentment at being coerced is a survival mechanism, wired deep into us, to help us get what we need. It’s hard to live when you don’t get what you need. It’s hard to get what you need when someone forces you into choices against what’s best for you. The Dobbins who learn to avoid Farmers with spurs get more of what they want, and likely live longer and better. Poor Dobbin, certainly, but also poor Farmer. He’d better never let go of that bridle.

The problem is that the Farmer wants more things from Dobbin, and sees controls as a way to get them. How much better if the Farmer were to offer Dobbin something of use for his further trouble? Maybe the Farmer could retain Dobbin’s help in return for board or better hay. If Dobbin continues to have his speed and stamina to offer, how much better to have those applied willingly to the Farmer’s next problem, vs. fighting Dobbin’s gifts to get a field plowed. Controls make sense only when we believe our own offer isn’t worth much or our partner so weak that forcing them is easy. That seems like a losing proposition both ways.

Where did the Farmer’s confidence go, in his own ability to make Dobbin a worthy next offer? How sad for the Farmer to admit that he has nothing better than coercion to offer a horse. Of course maybe he does, but forgot because the saddle and bridle seem direct and near to hand. It is wise, I think, to construct deals so that neither party is left with controls on the other because controls are so tempting.

This is neither theory nor philosophy, but pragmatic reality. For example, asymmetric controls are often part of IT outsourcing deals or technology purchases – it’s called “lock in.” Large-scale outsourcing deals are seldom repeated, in part because of resentment, I think. As for technology lock-in, the world is full of people with an ABM – anything but Microsoft – bias. In both cases, the vendor has the check and can do what they like, while the customer must stick with the software or service or incur a massive cost of conversion or change. In either case the resentment of being forced masks any real benefits the deal might have provided the customer.

Often, vendors deliberately create a lock-in, hoping the customer won’t notice until it is too late. This is ultimately self-defeating, I think, but only the vendor controls the vendor’s intentions. Whether deliberate or accidental, the customer could have seen the lock-in coming, I think, and should have considered the long-term control when forming the deal. This is “the Dobbin Problem”: creating or accepting asymmetric controls that last after the deal is fulfilled. Yet, some deals need controls because the partners are satisfied at different times, by different things.

Atomic Transactions or Avoiding the Wimpy Problem

Wimpy from the old Popeye comics constantly bummed food without money. His line was: “I will gladly pay you Tuesday for a hamburger today.” The Dobbin problem is a special case of the Wimpy problem – a deal that doesn’t stay atomic. An atomic deal includes satisfying both parties, and releasing any controls put in place to manage the deal.

Many deals are designed with a current benefit for one and a later benefit for the other. Once the one side has its payoff, there is little incentive to follow through. When the parties get satisfied at different times, often we build controls into the deal to ensure delivery. So, misaligned payoffs can lead to controls. If the controls don’t eventually expire, we end up with “The Dobbin Problem”.

Many IT service deals include outsourcing IT operations at a loss, recovered in new development later at a profit. (The converse arrangement, new development as a loss leader to profitable operations is even more common.) There is an incredible temptation for the customer to try to split the deal once the IT operations are in place. The later business that was supposed to pay for the earlier loss leader doesn’t happen, and the vendor is in trouble. Or worse, it happens but the customer is resentful from being forced into this later deal by lock-in. Meanwhile, the supplier is tempted to under-deliver on the loss leader, which builds-in resentment before the step where the supplier gets their payoff. Deals like these often include controls to ensure that the deal is completed. That’s fine if the controls expire. Often they don’t. Often, the parties lying to each other complicates the loss-leader game. “No, no I like outsourcing operations for you. Really.”

The conversation really has to be about the whole deal or it won’t work: both payoffs and all controls together. A good deal must be atomic in exactly the formal sense of database transactions or critical sections of code – all or nothing. The consequences of non-atomic deals are similar to non-atomic transactions: people left in strange states, bits of the deal lying about here and there, and blocking of other work.

Dobbin and the Farmer had it easy, actually. They were both rid of the wolf at the same time, so they don’t have the problem of sequential satisfaction that Wimpy’s proposal includes. Had they agreed that Dobbin would pull the Farmer’s plow for a season once they were free of the wolf that would be a Wimpy deal. Perhaps the Farmer might ask for some controls, to ensure that his field gets plowed. If the Farmer were clever, he might offer Dobbin a share of the crop that they would work together. The saddle and bridle in this case were things that helped the Farmer and Dobbin work together that happened also to be a control on Dobbin. The Farmer was tempted once the deal was concluded. So, to keep deals atomic look also for accidental controls – things like vendor lock-in – as well as deliberate controls and conditions of satisfaction.

The Never Ending Story or, “It’s a Relationship, Stupid”

Working together is best when the parties have a series of mutually beneficial transactions. The poor Farmer really wants to borrow Dobbin’s speed and stamina for other things. He thinks himself relatively unable to make another valuable offer to Dobbin. With asymmetric controls in place, the Farmer tries to take those benefits. That relationship may last for a while. It won’t be much fun. As a colleague told me during the process of editing this article:

“ . . . contracts are relationships, even if we try to treat them as transactions. ”

Each contract is a relationship and a little, fractal-like image of the larger, longer relationship. When each party in a transaction considers the larger future they might have, this deal becomes a trial run for future deals. If we want something more from our partner, later, we are motivated to make our deal work this time. A good deal builds confidence in your ability to deliver, and mine. If Dobbin was strong enough to be helpful with the wolf this time, why wouldn’t he be just as strong later? If the Farmer had a valuable offer of dexterity and tools, where did his confidence in himself go? The Farmer must not think much of himself at the moment. Poor Farmer indeed.

Unfortunately for both of them the Farmer made any cooperative future unlikely. I think the Farmer’s reasoning is flawed. At best the Farmer has lost the cost of enforcement in any future deal with Dobbin. More likely they have both lost the new futures that they might create together, as Dobbin is unlikely to have anything to do with the farmer after this. I like to think it is Dobbin who proposed that they work together to rid themselves of the wolf. In that case, the least they have lost is any deals Dobbin might propose moving forward – why would he? They both have smaller stories than they might have. If Dobbin has friends, the Farmer has a much smaller story than he might have - word gets around.

The Farmer isn’t showing himself to be too bright in this story. More cleverly self-defeating, I think. The Farmer misbehaved because he forgot that he and Dobbin are both caught in “The Never Ending Story.” They’ll both have offers to make the other, or not, in the future.

Bad Business and Good Deals

I have become clearer about my visceral distaste for some business practices, especially job practices in recent years. The language is all about getting all you can from a partner in distress. In the current job market, it’s: “We’ll underpay them because we can.” “We’ll be extra demanding because we can.” “We’ll be obnoxious because we can.” Some of this is backlash. As the dot-economy was booming employees were obnoxious in exactly these ways. Neither businesses nor employees have been paying attention to good deal mechanics lately, and we are seeing the results: mistrust, no loyalty, controls, legalities, and anxiety. It’s a much thinner story because of past deals with bad mechanics. I wonder how much of the hesitation in the economic recovery, especially in technology, comes from both sides keeping their best offers to themselves.

Maybe we ought to track another economic measure the way we track idle factory capacity or losses due to sick-time: “Losses due to treating your deal partners like dirt.” There are direct costs, like enforcement and monitoring. Harder to measure is opportunity cost – the great ideas, deal adjustments, or thousands of little offers that don’t happen along the way. Employees who practice sharp dealing train their deal partners just as surely as employers do. Maybe we need four measures, to track each kind of loss, based on who’s sharp dealing is involved. Maybe we need eight measures to separate losses and lost opportunity within a company from those across companies (to capture the cost of sharp dealings between vendors and customers.)

I think good deals are simply good business - utterly pragmatic for individuals, individuals in organizations, and organizations. Everybody ends up with a richer future when we practice good deal mechanics. So, I have thought about what makes a deal that works well, and written it down, as much for myself as for anyone else.

Good Deals

A good deal has these deal mechanics:

Ideally, it is a Chinese Contract, avoiding “The Cost of Compelling Compliance.”
If there are controls it uses Symmetric, Temporary Controls, avoiding “The Dobbin Problem.”
It is an Atomic Transaction, avoiding “The Wimpy Problem”
It leaves the deal partners ready to invent a richer “Never Ending Story.”

These mechanics are all, in the end, votes in favor of your own competence to offer more value later, your partner’s to do the same, and a rich world where you can find an offer that benefits you both. I’m for that.

Good deals pass some hygiene checks as well, that others can explain far better than I:

Congruence. Use the Satir congruence model to check that the deal takes care of your self, your partner and the context.
Mindset. If you need a deal to happen more than you need the contents of the deal, you can get all tangled up. So check on what you are really trading for. Is it self-esteem? Is it money?
Intention. Is the deal creating something you want? The best deals will make a richer world for yourself and your partner.

The best deals satisfy all these mechanics, and hygiene checks. A good deal can be a wonderful thing, which suggests one last hygiene check:

Celebration. You should want to celebrate your deal. Otherwise, check the deal mechanics and hygiene. Something needs fixing.

I think Dobbin and the Farmer celebrated their first deal, but I’m not so sure about the second.

References

The Age of Paradox, Charles Handy, Harvard Business School Press, 1995 (paperback)

Getting to Yes, Negotiating Agreement Without Giving In, 2nd Edition, Roger Fisher and William Ury & for the 2nd Edition, Bruce Patton, Second Penguin Edition, 1991

The Win-Win Negotiator, Ross R. Reck, Ph. D., and Brian G. Long, Ph. D., Pocket Books, 1987

The Armchair Economist, Economics & Everyday Life, Steven E. Landsburg, The Free Press, 1993

The Satir Model, Family Therapy and Beyond, Virginia Satir, John Banmen, Jane Gerber, Maria Gomore, Science and Behavior Books, 1991

Understanding Computers and Cognition, A New Foundation for Design, Terry Winograd, Fernando Flores, Addison-Wesley, 1987

The 7 Habits of Highly Effective People, Stephen R. Covey, Simon & Schuster, 1990

Wimpy is a character in the Popeye comic strips created by E. C. Seger. Wimpy has his own tribute page here: http://www.theneitherworld.com/popeye/wimpy/main2.htm

The NeverEnding Story is a feature film by Barret Oliver.

The story of Dobbin and the Farmer appears many places. It is found in Aesop’s Fables as The Horse, Hunter and Stag. Find that version here: http://www.pacificnet.net/~johnr/cgi/aesop1.cgi?2&TheHorseHunterandStag