Strategic alliances are a cornerstone of modern business, offering companies opportunities for growth, innovation, and competitive advantage. The conventional wisdom in these partnerships has long been to draft contracts that are as comprehensive as possible, anticipating every potential scenario. Such detailed agreements, though often complex and resource-intensive, provide critical protection in the event of disputes. The 2015 case of SIGA Technologies, which faced insolvency after a costly legal battle with its former partner PharmAthene, serves as a stark reminder of the risks associated with incomplete contracts.
A recent study published in the Strategic Management Journal challenges this traditional approach, revealing a surprising trend among companies in strategic alliances. Researchers from TU Dortmund University, the University of Groningen, the University of Passau, and Seoul National University have found that some firms intentionally leave gaps in their alliance contracts, thereby increasing their exposure to legal risks. This tendency, as the study suggests, is often driven by cognitive similarity between the partnering companies.
Cognitive similarity refers to the degree to which companies share similar perceptions and worldviews. The study suggests that when companies have similar cognitive structures, they are more likely to trust each other implicitly, leading them to draft less comprehensive contracts. Professor Lorenz Graf-Vlachy of TU Dortmund University, one of the study’s authors, explains, “This means they perceive the world similarly and have similar mindsets, if you will.” Such companies may assume that any disagreements can be resolved amicably, without the need for detailed contractual provisions.
The research involved an extensive analysis of 1,225 strategic alliances in the biotech and pharmaceutical industries—sectors known for their high levels of innovation and uncertainty. Cognitive similarity between alliance partners was measured by comparing their mission statements, which are often reflective of a company’s core beliefs and perspectives. The deliberate incompleteness of contracts was assessed by the prevalence of “good faith” provisions—clauses that are notably open to interpretation and can lead to varied legal outcomes.
The study’s findings reveal a positive correlation between cognitive similarity and the likelihood of entering into incomplete contracts. This correlation is particularly strong in alliances where technological uncertainty is high, suggesting that companies in rapidly evolving industries may find it challenging to account for every potential issue in a contract. On the other hand, the study found that this effect is weaker when companies have extensive experience in forming alliances. Companies with a history of partnerships are more likely to ensure that their contracts are meticulously detailed, relying less on assumed mutual understanding and more on clearly defined terms.
Professor Graf-Vlachy summarises, “Companies that ‘tick’ in a similar way systematically conclude different contracts than companies with different worldviews.” This observation underscores the significant impact that cognitive alignment can have on business decisions, including how companies approach the complexities of strategic partnerships.
The implications of this study are profound for executives and legal professionals involved in crafting alliance agreements. While cognitive similarity between partners might foster trust and cooperation, it can also lead to complacency, where critical details are overlooked, potentially leading to future conflicts.
Ultimately, the study enhances the understanding of why companies might choose to assume certain legal risks and highlights the influence of corporate characteristics on strategic decision-making. For business leaders, the key takeaway is the importance of maintaining a balanced approach—recognizing the benefits of cognitive alignment while rigorously safeguarding against the legal uncertainties that may arise from incomplete contracts.