When are contracts and trust necessary for innovation in buyer-supplier relationships? A Necessary Condition Analysis

Main stream research predominantly views contracts as being sufficient for (i.e., driving) performance. In contrast, necessity-thinking implies that contracts allow performance to exist: if the necessary condition is not in place (at the right level), the desired performance will not occur, irrespective of other drivers of performance. Statements implying necessity are common in supply management research; yet, to date, an appropriate tool for testing such statements has been lacking. This article makes the case for the newly developed Necessary Condition Analysis (NCA) method, and applies it to data on forty-eight buyer-supplier service outsourcing relationships to explore the necessity of contracts for a specific relationship outcome, i.e., supplier-led innovation. Also, the necessity of trust is explored, as contracts are implemented within a broader context that involves social characteristics of relationships. The results show that successful relationships, i.e., relationships that have high levels of innovation (as observed in the top ten percent of the relationships studied) must necessarily have contracts with at least medium levels of contractual detail, as well as the highest levels of trust. In relationships with low levels of innovation (i.e., innovation levels that can be achieved by about half of the relationships), neither of the conditions (i.e., contracts and trust) is necessary. As such, applying NCA results in a fundamentally different understanding of the relationship between innovation, and contracts and trust. The results indicate that managers should first ensure the right levels of these necessary conditions, before giving attention to other factors that (on average) produce innovation.