In Cambridge, just across the Charles River from Exari’s Boston headquarters, MIT’s Bengt Holmström and Harvard’s Oliver Hart have spent decades researching contracts, both how they look and how they shape our world and daily lives. On Monday, they were awarded the 2016 Nobel Memorial Prize in Economic Science for their research into “Contract Theory.”
Reflecting on the work of Dr. Holmström and Dr. Hart, The Royal Swedish Academy of Sciences, which awards the prizes, explained “Contract theory provides us with a general means of understanding contract design. One of the theory’s goals is to explain why contracts have various forms and designs. Another goal is to help us work out how to draw up better contracts, thereby shaping better institutions in society.”
Dr. Oliver Hart and Dr. Bengt Holmström. Illustration: NobelPrize.org
The work of both economists isn’t merely theoretical, but carries every day, real world implications. Dr. Holmström’s work explores the effects of human behavior on employment contracts, identifying what type of contracts best balance incentives, compensation, and risk. Meanwhile, Dr. Hart takes a more macro view, exploring the actual structure of contracts, concluding that contracts must remain “incomplete” insofar as they should outline how a decision should be made since it’s impossible to develop rules for every eventuality.
By recognizing their seminal research, the Academy has shone a spotlight onto both the universal importance of contracts themselves and the many contracting issues facing businesses as new technologies and best practices revolutionize a generations-old system.
As data has replaced approximation, CXOs are demanding complete and immediate visibility into every corner of their businesses. Risk mitigation. Regulation compliance. Revenue recognition. Spend control. Accelerated sales. There’s no part of a business that isn’t governed by contracts, which have turned enterprise-wide contract management from a “nice” feature into an absolutely necessary one.
In the closing of their announcement, the Academy explains that thanks to Dr. Holmström and Dr. Hart, “we now have the tools to analyze not only contracts’ financial terms, but also the contractual allocation of control rights, property rights, and decision rights between two parties.”
Thankfully, those tools are available. At Exari, we’re obsessed with helping companies understand the vast amount of complex data residing in their contracts. Our patented contract management software is so effective at transforming contracts into data, we consider it providing 100% Contract Certainty™. If you’re interested in learning what Contract Certainty can mean for your company, you can contact us here.