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Loss Of Trust Carries A Heavy Price – But How Heavy?

December 16, 2010

According to a report for the World Economic Forum, levels of trust have fallen by 44% in the last 10 years.

Whether or not we can rely on the precise statistic, the underlying message is important for anyone engaged in the world of contracting and relationship management. Trust is commonly understood to be fundamental to the health and sustainability of relationships. Its erosion therefore has significant consequences, many of which are in fact already evident in our daily work.

Globalization has been the key factor in the decline of trust. I suggest there are several reasons for this.

  1. As we work increasingly with new and unfamiliar companies and trading partners, often spanning jurisdictional, cultural and linguistic barriers, a sense of caution is inevitable and trust is a casualty.
  2. The networked world has disrupted traditional methods of doing business – in particular, face-to-face meetings are far less common. Many relationships are ‘virtual’ and lack the forms of bonding that are essential to establishing trust.
  3. It is widely understood that different cultures operate at different levels of innate trust. For example, Scandinavia is a high-trust region; the United States and Latin America are not. The dominance of US corporations and contractual models in driving international trade has undermined more trusting, relationship based models. ‘The transaction’ has replaced ‘the relationship’.
  4. Within business, a core reason for the explosion of international commerce has been the incessant hunt for the lowest price. Relational loyalties have been sacrificed in the search for perceived savings.

Among the consequences of this loss of trust has been the rise of the importance of the contract and formalized contract and performance management. During these 10 years, we have witnessed a drive for more and more precision over commitments and their measurement, accompanied by a steady increase in focus on ‘penalty terms’ – or the consequences of failure. Negotiations have become dominated by the allocation of liabilities and indemnities; battles over intellectual property rights, data protection and confidentiality. All principles of ‘my word is my bond’ appear to have been abandoned in the interests of low prices and the destruction of loyalty.

It is right to believe that many traditional relationships were too comfortable and had become inefficient. But it is also very clear that this pursuit of low prices has brought with it enormous additional costs and overheads. We see it in the need for prolonged validation of suppliers; longer lead-times in selection and negotiation; increased claims and disputes; more bad debt; longer payment cycles; growing focus on reputation risks – in fact, all the many costs that accompany more governance and administration. 

Finance executives are typically sceptical about the extent to which ‘negotiated savings’ translate to the bottom line.  They are of course right to be so – because self-evidently, they do not. Yet those executives remain addicted to cutting input prices far more than they seem ready to tackle the consequences this has on output costs. And while they sustain this behaviour, calls from other senior executives for ‘more collaboration’ and ‘improved relationships’ will continue to be frustrated.

The erosion of trust is not inevitable; it is a corporate choice whether or not to build sustainable relationships with its key customers and suppliers. But so far as I know, we do not have the economic data to demonstrate the relative value of trusting versus untrusting trading relationships. Isn’t it time for commercial experts to explore these impacts and to provide insights to the best performing contract and relationship models?

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