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Building Trust In A Networked World

August 27, 2009

Organizational performance increasingly depends on the ability to coordinate scattered resources and relationships, and to motivate their contribution towards common goals. As highlighted in my previous article, the forces of technology and globalization have combined to destroy many traditional trading relationships and the hard-won trust that accompanied them. This article will explore the factors that are important in establishing and retaining trust and discuss the contribution made by contracts, contract management and negotiation. It will also examine some of the ways that contracts experts – from procurement, legal or commercial groups – may need to adjust their approach and behavior.

Executives are realizing that driving lowest price acquisitions through global competition is not the competitive panacaea that they imagined. It has revealed a new set of risks and associated management costs that they are struggling to contain. In addition, they have discovered that innovation and value-add have a strong correlation with collaborative relationships – and collaboration simply does not happen when there is no underlying trust between the parties (see Collaborating To Innovate).

Simply returning to old supply relationships and trading patterns is no longer an option, even if it were desirable. Companies must instead discover how to develop partnering and collaboration in the networked world. It is clear that their approaches to supplier selection, bid management, contract standards, negotiation and post-award relationship management are each key to achieving improvements.

Fortunately we do not have to find all the answers for ourselves. A growing number of business functions have grasped the need for change, often because of the failure in establishing effective internal virtual teams, especially when these are multi-cultural. Therefore we are able to turn to a range of research that is directly relevant to the challenge for procurement, legal and contract management groups.

One excellent article was produced by Violina Ratcheva, a lecturer at the University of Sheffield Management School. In a study of multidisciplinary project teams, she sought to understand how team inclusiveness was established and the role of trust in enabling positive outcomes. She concluded that ‘the extra ingredient which turns a group of professionals from different disciplines into an effective team’ is the result of the team establishing ‘ a new way of working’ which can only emerge through intense interactions.

The article contains some key messages for those in procurement, legal and contracts. For example, on the question of inclusiveness, Ratcheva found that trusted and valued team members are those who are prepared to allow their knowledge to be integrated with that of others in the group. This means not just demonstrating and imparting knowledge, but ensuring understanding by others . She also found that knowledge and advice must go beyond simple occupational expertise; it must also be sensitive to the context of the project.  Therefore, highly knowledgeable experts who simply state opinions or quote rules will not be viewed as core team members.

Another important finding relates to the perceived value of each individual’s occupational or professional credentials. Inclusion is made more likely if other team members can see that a particular occupational field brings consistency and conformity to the project (for example, is it based on proven methodologies and a broadly accepted set of practices?). They also look for individuals who have access to external bodies of knowledge and extended professional networks – they value facts much more than opinions. Ratcheva summarizes this with the expression “Impersonal trust is based on the appearance of everything (being) in proper order”. And to establish this trust in a multi-cultural team, there must be openly shared discussion and understanding of the expectations generated by each local organizational environment, industry practices and addressing role-based stereotypes.

Sir George Sayers Bain, a past President of London Business School, highlighted the problem that comes from traditional functional education and organization. He describes how many managers see things in the context of accounting problems, legal problems, marketing problems etc. Yet in reality, most things are business problems that require the involvement of several functional areas and the management of the interfaces between them. This, he believes, demands far more focus on path-breaking and implementation and far less on functional rules or positions. Valued skills become those such as negotiation (win-win, not confrontational) and team building. Once again, many from Procurement, Legal and Contracts groups tend to be seen as strongly positional and often adversarial in their style – so once more, not conducive to team inclusion.

Time and again, when I talk with other functional groups about the role of the contracts or procurement or legal function, they say ‘Oh no, they are  too negative’. If indeed we generate so little trust within our own organization, no wonder that our working practices often undermine trust in our trading partners. So how do we address this?

An excellent paper written by Michael Pirson and Deepak Malhotra of Harvard Business School identifies key ingredients – and reaches conclusions that may surprise many. In ‘Unconventional Insights For Managing Stakeholder Trust’, they observe “Customers who perceive a breach of trust are more likely to switch to a competitor. When trust is lacking in supplier relationships, more resources need to be devoted to contract enforcement and monitoring, the result of which is increased transaction costs.” So having highlighted the importance of trust, they are encouraged to find that executives generally understand the need to manage stakeholder trust -but their research then shows that “many of the trust-building initiatives and approaches that organizations invest in may be of questionable value. Others may actually destroy trust”.

In summarizing below the major ingredients for trusting relationships, I have also attempted to suggest ways these may apply to contracts and negotiation practices. However, these are simply illustrations and high-performing groups should consider these attributes as they undertake their service planning and contract design.

Transparency is increasingly seen as important to trust. Yet Pirson and Malhotra found that this was not true. In fact, enforced transparency has in many cases undermined trust. They offer excellent examples that should certainly cause regulators to pause; yet we must also think about the impact of enforced disclosure within contracts.  Do rights of audit or Most Favored Customer clauses lead to open and honest communications, or tend to suppress them? Can we rely on imposed metrics or obligations to reveal significant changes in business circumstances? Negotiators must think carefully about mechanisms that support honest disclosure and open discussion of critical risks, problems or changes during the life of a relationship.

Integrity is important to everyone, but the authors discovered that it is a reputational entry card. If you do not demonstrate integrity, you will not get in the door, but over time, trust and loyalty depend on visible care for the results of what you are doing. Operating to the contract or to the letter of the law will not win hearts and minds. “Being right and maintaining your integrity is not always enough …. you need to demonstrate concern for the wellbeing of (the affected parties)”. So while our contracts must be sensitive to issues of integrity, it is in fact through the quality and sensitivity of negotiation practices and our post-award contract management that we will win over time. An obvious example during negotiation is when Sales make one set of promises and the contract attempts to place limits or may even contradict the commitments on offer.

Competence is another critical attribute. For external stakeholders, the key issue is apparently less to do with managerial competence and more based on technical capabilities – the ability to produce goods and services of high quality and to deal effectively with the supply chain. But companies that lack either of these attributes will eventually fail. The article offers some great examples that ultimately undermined customer service and commitment. For many contracts professionals, it is clear that we often struggle to build positive internal perceptions of our competence, in part because we appear too narrow or too judgmental and not sufficiently concerned about eventual outcomes.

Trade-offs represent an area in which our community should excel. The article points to the importance of balancing stakeholder needs and perspectives. As an example, it recites the story of Mattel and its 2007 product recalls. Pointing fingers and allocating blame to others misfired disastrously. For those in the world of  contracts, this need to understand and reconcile stakeholder perspectives to ensure alignment is perhaps the greatest value we can bring to our role. It is certainly an area that IACCM emphasizes strongly within its Managed Learnign program and our research of the top performers in negotiation indicates that many of the leaders are very good at analyzing stakeholder perspectives and ensuring they have been addressed, not only during negotiation but also in the post-award phase. This quality becomes highly visible through metrics such as the frequency and resolution of claims and disputes.

Value congruence   is the final area – by which the authors mean the perception that values are common and shared. I believe this is an area which most negotiators fail to address. It has become more complicated – and more important – as we venture increasingly into global markets and cross-cultural relationships. Typical bid and negotiation processes often seek to build alignments that do not really exist and frequently fail to identify or explore misalignments. We do this to our cost, because many such relationships prove to be unprofitable and may fail. This is simply because our true values and approaches to business, as well as our real expectations, will become evident once the deal is struck. I believe that sophisticated (and profitable) companies will increasingly ensure that there is  ‘cultural fit’ with their trading partners. How that is done – and the ways it will change the role of conracts professionals – will be the subject of a future blog.

This article has only been able to highlight a small number of the valuable research contributions that are relevant to our community and its continued evolution. I will continue with this periodic series in future blogs. Readers may also be interested to refer to the expert perspectives of  IACCM member D C Toedt, who has recently written on this issue of trust and offers an immediate tool for improved management of disputes.  

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