Handshakes or Contracts?

Handshakes or Contracts?
Anita McGahan is a professor of strategic management at the University of Toronto’s Rotman School of Management

Neighboring fire departments often work together to improve outcomes and reduce the extra firefighters each would otherwise need to ensure enough coverage for all emergencies.

But a new study of U.S. fire departments has found improvements differ for property damage and personal injuries or deaths, depending on whether the collaborations were informal, formal, or based on formal contracts without any prior history of working together.

The differences rest on how these various agreements impact firefighters’ intrinsic motivation — what they are most motivated to do, which is to protect life over property — says Anita McGahan, a professor of strategic management the University of Toronto’s Rotman School of Management. She co-authored the study with Jay Horwitz, a Rotman post-doctoral fellow.

“Fire departments will go to the mat for each other to save lives,” says Prof. McGahan, who is also the George E. Connell Chair in Organizations & Society at the Rotman School. “It’s when you want that extra improvement to performance associated with saving property that you need a written contract.”

That doesn’t mean that saving property in the other department’s jurisdiction is ignored. Data on collaborations among nearly 3,000 U.S. fire departments between 1999 and 2010 showed 340 fewer casualties — a 1.7% cut — and a $3.5 billion reduction in property damage — a 30% improvement — under informal agreements.

But property outcomes improved by 60% when departments with no history of collaboration went directly to formal cooperation contracts. Casualties, however, did not drop, suggesting the formal contract was superior for stimulating less intrinsically motivated performance, but not as good when it came to improving performance on a goal that firefighters were already motivated to achieve.

When departments adopted formal agreements following informal ones, they saw an additional 6% improvement in property loss over the initial 30%. But there was also a slight increase in casualties, again suggesting an impact on firefighters’ inherent motivation to protect people.

The findings show that there are performance trade-offs when organizations choose to have formal policies that may conflict with employees’ intrinsic motivations. Those policies can stimulate performance on organizational goals that employees are less intrinsically motivated to achieve. But, says Prof. McGahan, “you may also have a much more adverse and negative impact on your staff’s motivation to meet other important goals than you initially anticipated.”

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