Five principles for restoring confidence to suspicious markets
by Frank Buytendijk, February 2010
The past 18 months have shown that trust is one of the most critical forces in the global economy—most clearly proven when trust among economic actors was taken for granted, damaged, or destroyed. Perhaps analysts and traders in the financial sector put too much trust in complex products and overly advanced analytical models. Perhaps individual investors put blind trust in the professionals who were managing their money. Undoubtedly, banks stopped trusting each other—halting the interbank lending so critical to economic activity as toxic assets emerged as a systemic threat. And consumer confidence, another trust indicator, became a victim of suspicion as spending retracted and further damaged the real economy.
Indeed the 10th Edelman Trust Barometer, a survey of opinion leaders from 20 countries, found trust in corporations at the lowest point since the inception of the report. A full 62 percent of those queried said they trust companies less than they did a year ago.
Given the chain reaction caused by an economic climate where doubt and uncertainty prevailed, rebuilding the economy must start with something as simple as rebuilding trust. Unfortunately, the relationship between performance and trust is a complex one. Trust is not earned simply through business performance, such as revenue and profit. It is earned by offering new levels of enterprise transparency that reveal to others in the marketplace that you are worthy of trust and expect the same from your trading partners. In fact, the value of transparency is already apparent. Transparency in the value chain is reducing inventory on hand for manufacturers and retailers. According to the Global Reporting Initiative, provider of the world’s most widely used sustainability reporting framework, more than 1,000 large enterprises worldwide have published sustainability reports without any regulatory pressure. Companies that quickly report their financial results are seeing increased shareholder confidence.
Fortunately, modern information systems contain much of the data that can deliver this increased transparency. Although different stakeholders may require different kinds of information, five common business principles can help managers leverage their information systems to regain the confidence of customers, shareholders, and partners to change the suspicious climate that prevails today: adopt early, improve financial data, reduce costs, build goodwill, and know your customers.
What Is Trust? Trust is the basic driver of the economy. If we don’t trust organizations to deliver goods or services when we pay for them, or if organizations don’t have the trust that most customers will pay on time, there is no basis for business. But not all relationships are the same, and not all trust is the same.
Contractual trust is the most basic form of trust. It occurs when all parties involved believe that contractual obligations will be met. In most societies, this is a prerequisite for doing business. Contractual trust is sufficient in transactional relationships, where loyalty is not important and switching costs are low. Think of outsourcing cleaning or cafeteria services, or buying commodities—a service-level agreement (SLA) to manage the relationship suffices.
Competence trust is displayed when parties believe that their partners will not only meet contractual obligations but also have the right skills, technologies, and other resources. Competence trust is needed within relationships when you rely not only on another organization’s products and services but also on their processes and systems. These types of relationships are the norm in industries where value-chain integration is a theme, such as the automotive industry or any channel-oriented business. In this situation, switching costs are high because it is difficult to untangle the relationship. SLAs are important but should be aimed at improving the relationship, not driving transactional behavior.
Goodwill trust exists where involved parties know each will represent the other fairly and will make the same decisions for the other as they would for themselves. Goodwill trust is needed in relationships where parties collaborate to create a new product or service that they could not have created on their own. Each firm offers unique skills to a joint value proposition, and the relationship can be successful only when the parties involved share the same norms and values. Goodwill trust includes sharing intellectual property and resources such as capital, staff, information, and facilities while materials flow freely between the organizations—an intrinsically vulnerable situation.
The nature of these relationships should determine the immediacy and intensity of the enterprise trust efforts you have with your business partners.