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Why the Psychological Contract in Business Is Key

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Why the Psychological Contract in Business Is Key

The technology driven changes in work environment and social translucence will implicate contractual relations, causing a upheaval in the concept of doing business and maintaining partnerships. Co-creation is key.

The advantages of co-creation will only evolve out of perceived loyalty, because this will lead to engagement and an increase of productivity. More and more effective leadership will be defined by the degree of compassion, trust, respect, fairness, empathy and objectivity that organisations radiate. Whether it involves employees, partnerships or suppliers, the psychological contract is an important building block within any ecosystem.

We’re all familiar with ecosystems in the natural world: organisms interacting with each other and their particular environment consisting out of air, water, mineral soil, and/or other relevant elements. This doesn’t differ so much from the atmosphere of businesses in current society. 

Businesses need to join or create ecosystems. In the early phase of this new digital age it seemed to be about business ecosystems, but now it becomes clearer every day that a successful business doesn’t evolve around the business but around the story behind the business.

In other words, about the brand. Recently I shared my vision on contract management as a strategy and why brand ecosystems are best build on the foundation of the forces of nature: the psychological contract.

Why the psychological contract is key

The Psychological Contract Theory was originally developed by Denise Rousseau, in order for one to better specify how employers and employees understand the employment relationship. Informal arrangements, mutual beliefs, common ground and perceptions between two parties define the way people interact and collaborate. In most organisations the psychological contract is yet to be fully defined and understood. It’s far from widespread recognised, let alone used in organisations, although it’s a crucial basis for developing shared understandings. Thus it sets the dynamics for relationships and defines the practicality of the work to be done in brand ecosystems

Every brand is built by a community of fans and ambassadors. The people inside the company are – as ambassadors – an important part of that community. But partners, suppliers, investors, customers,  potential customers, and even competitors are equally valuable. Everyone has their own role to play in an ecosystem. Eventually they will be repaid for their efforts in taking responsibility for the role that was casted for them. How does this relate to the psychological contract?  It particularly relates to the ‘solidarity effect’ on contractual relations.

Growth through nurturing joint goals

The agreements in writing are clear and often leading, while the non-written arrangements are much more powerful in relationships. The way we interact with each other, we collaborate and co-create is paving the infrastructure of the ecosystem. The aim to achieve something that lies beyond the effective scope and capabilities of any individual actor or several similar actors is the reason parties join an ecosystem. It’s the only way they can distinguish themselves to reach a set goal. Take for instance The Global Food Safety Initiative (GFSI). A non-profit organisation that has set an example of global partnering with an extremely wide reach. They strive to ensure safety for consumers, while protecting the reputation of the food industry. Members include many of the world’s largest food producers and distributors. No organisation could have ever realised the set goals on such scale individually. Therefore people need to embrace the power of co-creation, doing stuff together. In order to do that, one has to understand what the influence is of psychological contract. What is the desired behaviour and what moral values endorse that behaviour?

The obligations that result from a psychological contract are subject to the perceptions of the involved parties. Compassion, trust, respect, fairness, empathy and objectivity. The holy ingredients of a fertile psychological contract. Also characteristics of good leadership. Leaders need to create a culture of openness, teamwork, collaboration, sharing of relevant and reliable facts. Not only internally – with employees -, but with every party within the ecosystem. Manage expectations and involve the right people at the right time, holding everyone accountable for their part in the journey. People want to feel respected, involved, heard, well-led and valued. This is not to be underestimated. Integrity, mutual trust and recognition are crucial for maintaining healthy relationship between organisations as well as between people individually. Especially when dealing with change. People fear change.

Engagement strengthens collaboration

The way we define and manage the psychological contract, and how we apply its underpinning principles and values in our relationships defines our humanity. It’s all about building engagement. As I stated in my previous publication on this subject, the psychological contract develops and evolves constantly based on (the lack of) communication and the unwritten expectations of the relationship as distinct from the formal contract. Social connectivity and technological empowerment pose a huge opportunity, as it is enabling scalability and transparency and facilitating intensive interaction in a collaboration. Continuous engagement of all members within an ecosystem means emphasising the importance of alignment of expectations, casting and attitudes.

Managing a psychological contract is about knowing how to read between the lines without perpetuating any obscurities. In the digital era it is becoming more crucial than formal contracts. Businesses need to be ready to step outside of their traditional, corporate behaviour and bet on the more human side of contracts: relationships and partnerships.

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