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How Globalization Destroyed Trust

August 16, 2009

There is broad acceptance that successful, long-term business relationships depend on trust. Increasingly, there is specific evidence that trust also plays a key role within business negotiations, especially if they are to move beyond a positional (price / risk) focus. Recognizing this point is important for any organization that wishes to build more collaborative relationships, where trading partners work together to create value and to achieve innovation.

In a short series of articles, I will highlight recent research that points to the methods through which trust is created, but this first article will focus on the major factors that in recent years have undermined trust and some of the immediate consequences.

Globalization has had a massive influence. The opening of international markets rapidly led to a belief that there were endless supplies of cheap labor and caused buyers to apply constant pressure on prices. Traditional supply relationships were cast aside; local partnerships were discarded in favor of global agreements; long-term suppliers were threatened with replacement if they failed to match low-cost providers. But having destroyed trust in its traditional supply base, organizations did not rebuild it with their new low cost suppliers. Indeed, they often made clear that they had no intention of remaining loyal and took few steps to understand the challenges of building trust across cultures.

Research increasingly demonstrates the challenge of managing in multi-cultural environments. This ranges from social research, exploring multi-cultural housing environments, to organizational research, such as multi-cultural projects. These studies have shown that developing trust and cooperation requires significant investment in understanding, in communications, in developing harmonized goals and reconciling interests. In the absence of that trust, each side remains suspicious of the other and is committed to the relationship only to the extent that their narrow objectives and self-interests are being met.

Lack of trust also becomes evident in the way that the parties perceive risk. Because they have not established the sort of relationship that inspires loyalty or understanding, they rightly see the potential for added risks. In the business world, this has led to increased emphasis on contracts and in particular on the risk allocation terms – confidentiality, non-disclosure, IP rights, liabilities and indemnities. The Legal community in major corporations has promoted ‘one size fits all’ contract and compliance models which, through their cultural insensitivity, have further eroded any sense of trust or goodwill.

As complexity grew, traditional functions and business organization struggled to keep up. Workload, together with concerns about internal knowledge levels, resulted in increased use of third party advisers – sourcing consultants, external law firms etc. But this trend often made the problem worse, because many groups abdicated responsibility to an intermediary with a distinct and typically incompatible set of motivations. Therefore the chances of trust developing between customer and supplier have been further undermined and, far from increasing the chances of successful outcomes, such interventions are more likely to increase the chances of failure.

Another reaction to complexity was to reign back empowerment and to impose compliance standards. Functions like Procurement and Contract Management are frequently measured on their ability to eliminate deviations, especially in contract terms, regardless of whether such standards make economic or business sense. Judgment is actively discouraged in the name of perceived efficiency and a mistaken understanding of risk management.

Today we find that supply risk has become one of the top concerns in large corporations. Massive investments are being made in acquiring the skills and capabilities to manage in global markets. Spend management, CRM, supplier relationship management and risk and compliance applications are just a few of the software tools. Added to these we see rapid growth in ‘interface’ or coordination functions such as project management, contract management, supply management, relationship management etc. Some are recognizing that the extra cost of these added resources may soon outweigh the savings that come from reduced prices.

Trust has been steadily destroyed and many businesses are struggling with how it can be restored, without sacrificing all the benefits that flow from a global economy. That is the question that my next article will address. (Subsequent articles will also detail an extensive reading / reference list of further sources and academic papers.)

  1. A traditional signal of (putative) trustworthiness has been the following of protocol, ritual, and etiquette. I’ve been mulling over some ‘low-cost’ provisions that could be written into contracts along those lines. I’m looking forward to your follow-on writings.

Trackbacks & Pingbacks

  1. Building Trust In A Networked World « Commitment Matters

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