Fire departments are responsible for reducing casualties and saving property due to fires and other accidents within their district.
At times, however, they may lack the resources to put out a fire, and require help from neighboring fire departments.
The authors of one study looked at 8,000 pairs of U.S. fire departments. Some had informal agreements with neighboring fire departments, while others had formal contracts that stipulated how they would help each other during a fire.
One finding was that departments that collaborate save lives and save costs – estimated at 340 fewer casualties per year and $3.5B in less property damage annually (2018 figures) in total – compared to departments that do not collaborate.
And this is just from informal collaboration or “handshake agreements” to help out.
The authors then looked at the effect of entering into formal agreements.
Formal contracts are of course more costly to negotiate, implement and enforce than informal agreements.
But it also turns out that they have some unique benefits.
The results show that using formal contracts have either a small positive (1% reduction) or slight negative (3% increase) effect on casualties, depending on whether one goes directly from no collaboration to contracting, or via informal collaboration first.
However, there is a big effect on reduction of property damage: The authors find that there is a 60% reduction in property damage for those departments that move from informal to formal agreements, and for those that first collaborate informally and then move to formal contracting, a 6% additional reduction on top of the gains from informal collaboration.
So why is there such a strong effect for property damage, and not for casualties?
The authors explain that it is related to motivation, and to the way responsibilities are allocated.
Saving lives is more intrinsically motivating than saving property. In addition, firefighters are not mandated to save property outside their own district.
The effect of a formal contract is to align the goals and incentives.
When fire departments enter into a formal contract, it compels workers “to show up to their partner’s fires as if they are their own”, in the words of the authors (p. 413) – and to help put out fires that only damage property and do not pose a risk to humans.
Formal contracts are quite common, not only between external parties (e.g., customers and suppliers), but even between units of the same firm.
When used within firms, too, we see that the use of formal contracts help people clarify expectations, improve coordination, and reduce conflicts.
One participant in a study of internal contracts stated:
What a relief it was once we had formal contracts …It provided a common language that everyone could understand … It also made it easier to have good relationships with people in other units. There were no longer discussions. We knew what to expect and what we were supposed to do, and who was to approve or pay for what … People stopped fighting about things.
So, you may ask, what’s new?
Well, quite a lot, I would say.
Most of the management concepts that we read about on social media and hear about at conferences seem to deal with informal ways of working.
If we can work across boundaries (social networks), remove the hierarchy (bossless organizations), stop using written documentation (agile) and rely on trust instead of control (transformational leadership; the organization as a community), etc. etc., things will be so much better.
These ideas are useful in some situations, but are based on the naive belief that we all share the same goals and interests and that we can just “work together” without a supporting structure. The example of the fire departments reminds us that there’s an important role for formal systems.
Formal systems (including contracts) are useful in situations where units pursue different and potentially conflicting goals yet need to integrate their efforts.
Which is the typical situation for most organizational units.