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One of the most frequent trust questions I get is typically phrased as a dilemma: how can we establish trust-based long-term relationships in a culture that values short-term performance?
But rarely have I had the question posed so clearly and sharply as in a recent discussion with an investment banker. Paraphrasing, he said:
“Listen, I make no apologies for being 100% money-motivated. That’s why I’m in the business I’m in. If the firm changed our incentives tomorrow to a weekly basis, I’d be there in a heartbeat – doing what I have to do, week to week. So when you talk about long-term trust, I frankly glaze over. My timeframe is what maximizes my income – period.”
You can trust investment bankers to cut to the chase. It’s their job, and they’re very good at it.
But here’s what he missed.
There’s an unspoken assumption in his stark phrasing of the issue. That unspoken assumption is:
The best way to maximize short-term income is through short-term behaviors.
And that assumption is dead wrong. Here’s why.
The Disconnect Between Behavior and Results
The point is obvious if you think about strategy. Which approach to corporate strategy is likely to be more successful over the next five years?
- Company A, which revamps its entire corporate strategy every quarter, or
- Company B, which sets its corporate strategy over a five-year timeframe, and occasionally tunes it
Pretty clearly, changing a long-term strategy on a quarterly basis is the recipe for long-term bad results. But notice – long-term bad results happen a quarter at a time. Five years of bad performance shows up in 20 bad quarters.
The basis for strong short-term results (quarterly in this case) is long-term behavior – not short-term behavior.
What’s true for strategy is true for relationships as well. If you manage your client relationships by viewing them through the prism of quarterly (or monthly, or weekly) sales and income reports, those clients are bound to notice.
Few things destroy client relationships like a lame, semi-apologetic request like, “Could you maybe move that sale up a few weeks so I can get credit this quarter?” Clients are not stupid, and there’s no way to dress up such a self-serving request for monetization of the relationship so as to disguise what it really is. Such a request will backfire on you.
So will any such behavior that betrays your true objective – if your true objective is to treat your clients like transactional piggy banks, rather than as the long-term relationships we claim to aspire to.
Former Goldman Sachs senior partner Gus Levy is credited with coining the phrase “long-term greedy.” In typical Wall Street fashion, the phrasing was perhaps calculated to sound offensive – but in fact, it expresses something completely commonsensical, and highly consistent with trust. I endorse it myself.
What Levy meant was that the best way to do well in the long-run – and, by implication, in each quarter on the way to the long run – is to behave in a long-term manner. That means: keeping your word, taking care of clients, acting with integrity, putting clients’ needs first – all the time.
If you behave that way – in the long-term, as a matter of habit and principle – then you will actually do far better in the long run (and by extension, in the accumulation of short-terms on the way there) than someone who is constantly seeking to optimize only the next quarter.
Note this does not necessarily have anything to do with ethics. You can be, as my investment banking friend claimed to be, 100% motivated by money, and still act in ways that are largely indistinguishable from someone whose trustworthy behavior is ethics-based. You just have to not be stupid. And Gus Levy was assuredly not stupid.
The next time you hear someone say. “I can’t do that trust stuff because all the incentives around here are short-term,” explain to them why there’s nothing wrong per se with short-term incentives. The problem is stupidly believing that short-term behavior is the best way to get there.
The best short-term results come about from operating on long-term principles – and reaping the benefits every quarter along the way.
In a word – no.
But the reason why is not the usual critique. Let me explain.
Origins in Distrust
Bitcoin was born of distrust. Its original fan-base was an amalgam of nerds, futurists, libertarians and survivalists. They were enticed by several features of the new crypto-currency:
- a decentralized network, beyond the control of governments and regulators
- a secure payment system, guaranteed by blockchain technology
- a fixed supply (fixed by innate technological design), preventing inflation by printing press.
All of these features were and are attractive to those who distrust central authority (on some level, all of us). But while the first two features are indeed truly intriguing, the third one turns out to be a poison pill in sheep’s clothing.
Success of Bitcoin
Bitcoin has been a wild success story by most metrics, certainly including its exchange rate, which has been meteoric (see graphic). Many analysts and investors are dazzled by its success, most recently including the famed Motley Fool investor newsletter, which has just jumped on the Bitcoin Bandwagon. A few cynics, most famously Jamie Dimon, have called it a ‘fraud’ or a bubble.
But no one that I’m aware of has pointed out a fundamental contradiction at the heart of Bitcoin – one which ultimately makes the doomsayers right.
(Note: I’m not at all criticizing the underlying power of blockchain, of which Bitcoin is merely one instantiation; blockchain has immeasurably great opportunities to transform the world in powerful and positive ways).
The Role of Bitcoin
The most basic argument for Bitcoin is that it will revolutionize the world of currencies, for the reasons stated above: decentralized, secure – and that third item, a fixed supply of Bitcoin. Never mind the side arguments about gold and international currencies – its stated value is its power as a currency.
At some point in the future, the argument goes, Bitcoin will become accepted massively as a medium of exchange. Note: the value of Bitcoin does not rest on a nation’s economy, or a valued good (like gold); it rests on its future value as a preferred medium of currency. Period.
But what if its value as a currency is, literally, unachievable?
The Underlying Value of Bitcoin
The proponents of Bitcoin – this Nasdaq article is a good example – will tell you that Bitcoin has value because of “the network effect.” The more people use it, the more valuable it will become. The massive volatility that exists in Bitcoin right now will settle down and stabilize as it becomes an accepted means of currency exchange around the world.
Sounds plausible, right? We’ve seen the network effect in technologies as simple as the telephone and as complex as Facebook.
But there is one massive problem, which everyone I’ve seen who writes about it tends to skate right by.
Is Bitcoin a Currency, or an Asset Class?
Most fans will tell you it’s both – and they don’t see a contradiction between the two. But there IS a contradiction, because of one of the core features of Bitcoin – its limited-by-intent supply of Bitcoins (currently 16 million, and capped by design at a maximum of 21 million).
What you want from a currency is a stable level of purchasing power. What you want from an asset class is an appreciating price.
- An asset that has high volatility and a growth rate of 500% is called a great investment opportunity;
- A currency that has high volatility and an exchange rate variation of 500% is called hyper-deflation.
The fact that Bitcoin is limited – by design – to 21 million bitcoin means that, by the immutable laws of supply and demand, the more popular it becomes, the higher the price is going to be. Until it is less popular, when it will drop like a rock.
In other words, the limited supply aspect of Bitcoin guarantees that it will behave as an asset class – and not as a currency. Note this is not seen as a bug – this is pitched as a feature.
A currency that is by nature volatile is a currency that will attract only speculators – and the more volatile, the more that is true. After all – if you expect Bitcoin value to rise, why would you ever use it to buy a car, or to settle debts? You would only be incentivized to hold on to it.
And if you expect Bitcoin value to drop, why would you ever want to hold on to it? You would only be incentivized to short-sell it – or to unload it on a bigger fool. (And as any trader can tell you, the latter is better: the market can stay crazy longer than you can stay liquid).
The only exceptions are, as Jamie Dimon pointed out, international thieves for whom short-term volatility costs are outweighed by the chance to conduct illicit business and not get caught.
Bitcoin is Not a Ponzi Scheme: It’s Worse
The term “Ponzi scheme” gets overused. Technically it’s a situation where the later investors buy out the early investors at inflated valuations. This is not exactly the problem with Bitcoin.
Bitcoin is more akin to the original tulip craze. But even there, everyone saw tulips as an asset class, and the smart money either stayed out or schemed to unload an over-valued asset to the greater fool.
This is worse than tulips. Here the scam is based on a fundamental confusion between assets and currencies. To put it simply, it’s closer to being a little bit pregnant:
You simply cannot be both a currency and an asset class.
Muddled-thinking Bitcoin fans are fond of citing gold as a counter-example. It’s not. Unlike Bitcoin, the supply of gold is not fixed; it varies with price, as known deposits become more or less economically viable. (The term “Bitcoin mining” has had the unfortunate effect of metaphorically linking Bitcoin to precious metals). Gold even has some serious industrial uses; about 10% of it is used in industry of various types. Bitcoin, by contrast, has no stated utility other than as a currency.
To those who say there are traders in all currencies, and there are ebbs and flows of price, yes – but nowhere near this order of magnitude. Currency traders swoon over volatility of a few hundred basis points. And if things were to get really out of hand with your dollar or your renminbi, you can always print more of them to stabilize the price. Not so if your currency supply is fixed, forever, by design.
The Trust Scam: Bitcoin as Snake Oil
Nearly all the talk about Bitcoin lately has been about its stellar performance as an asset class, precisely because that’s how it’s being treated. And, as I’ve argued, it always will be.
The ultimate vision of Bitcoin – the argument that Bitcoin will reach its true value as a currency – is little more than snake oil. It can never function as a currency as long as the supply is statutorily limited, because it will always be subject to the whims of supply and demand; which in turn makes it unsuitable for the most basic function of a currency, which is to serve as a vehicle of exchange. Bitcoin is a trader’s delight – a digital volatility machine – and therefore a currency user’s nightmare.
In the end, Investopedia has it right: Bitcoin only has value “because it is popular.” It may not have a central bank behind it, which some see as a plus, but it also has no economy behind it. Because of its internal poison-pill design, it is doomed to forever be treated like an asset class, based ultimately on how many people have bought into the fiction that a limited-supply currency can ever be anything other than a vehicle for speculation of the greater-fool variety.
It’s ironic that a high level of distrust in national currencies gave rise to the enthusiasm for something so massively more untrustworthy.
Today, it seems nine out of ten stories in the general media are variations on one theme: trust is down. Whether it’s trust in the media, trust in politics, trust in business – it all seems to be heading in one direction.
But wait – what does that even mean?
We hear it all the time. Trust in banking is down. Trust in Congress is down. Trust in the educational system is down. We hear these statements, we say, ‘tut-tut what’s the world coming to,’ and we go on about our business – in large part, because we don’t know what to do about them.
Well, no wonder. These seemingly obvious statements mask a fundamental confusion about the nature of trust – a confusion that prevents us coming up with basic solutions.
The problem is this. When trust in banking is down, does that mean:
a. that banks are less trustworthy than they used to be? Or,
b. that people are less inclined to trust than they used to be?
Those are very different problems. Typical solutions to the problem of trustworthiness have to do with ensuring the behavior of the trustee. Think regulations, penalties, enforcement, behavioral incentives and the like.
We too often neglect the other side of the equation – the propensity to trust. The problem is simple enough to state: you may be the most trustworthy partner in the world, but if the other party is unwilling to trust you, nothing will happen.
The propensity to trust is critical. It amounts to risk taking. Despite Ronald Reagan’s famous quote to the contrary, there is no trust without risk. The dictum to “trust but verify” in fact destroys trust by sanctioning acting on suspicion.
The Hitchhiking Problem
In the 60s, hitch-hiking flourished. By the late 1980s, it was dead. Partly, hitchhikers were afraid to hitch; but mainly, drivers were afraid of hitchhikers. And it wasn’t due to an epidemic of violence; it was due to a fear of violence. We lost a great deal when we lost hitchhiking – economically and culturally. (The move to collaborative consumption, interestingly, is a contemporary resurrection of that idea).
Why is hitchhiking relevant to trust in banking? Because one common response to low trustworthiness – perceived or otherwise – is a reduced propensity to trust. Which will kill trust just as surely as will low trustworthiness.
There is a huge cost to low propensity to trust; look at The Cost of Fearing Strangers by the Freakonomics folks. We are great at articulating the risk of doing something; we are awful at noticing the cost of doing nothing.
Want a really Big Example? Next time you’re in an airport, look at the social cost of us not being able to trust grandmothers from Des Moines on their flight to Fargo.
The Laws of Trust
To people schooled in free-market economics ways of thinking, trust is hard to make sense of. If the propensity to trust declines, you’d think the market would respond by creating more trustworthy offerings. In fact, just the opposite happens. Suspicious people tend to attract con artists; skeptics get sucked in by fakes.
The reason is simple: trust is not a market transaction, it’s a human transaction. People don’t work by supply and demand, they work by karmic reciprocity. In markets, if I trust you, I’m a sucker and you take advantage of me. In relationships, if I trust you, you trust me, and we get along. We live up or down to others expectations of us.
We have been teaching and practicing business according to the wrong Laws of Trust. The solution for low trustworthiness is not necessarily to trust less, but to trust more, and more intelligently. Maybe you’ve heard, “The best way to make someone trustworthy is to trust them.”
We’re Teaching the Wrong Laws
Our public education and culture is loaded with the free-market versions of trust. We teach, “If you’re not careful they will screw you.” We passcode-protect everything. We are taught to suspect the worst of everyone, be wary of every open bottle of soda, watch out for ingredients on any box.
Then in business school, we are taught that if customers don’t trust you, you need to convince them you are trustworthy – partly by insisting on our trustworthiness. You can’t protest enough for that to work: in fact, guess the Two Most Trust-Destroying Words You Can Say.
By teaching distrust and confusing trust recovery with messaging, we are teaching entire generations to be suspicious of anyone and everything. By teaching suspicion and distrust, you can make book on it: what we’ll get is a reduction in trustworthiness. Read the Tale of the Thieving Convenience Store Managers.
This doesn’t mean we shouldn’t teach trustworthiness; much of my career has been built heavily around that. But by itself it’s not enough.
We need also to be teaching risk-taking, relationships, and the values of being connected to other human beings –not just than calibrating the dangers of hitchhiking.
Don’t tell me there’s no data. The General Social Survey has been collecting data on the propensity to trust since 1972. One interesting finding: the propensity to trust is strongly correlated with educational attainment. What does that say about the social and economic costs of cutting educational investment in the name of lowering taxes?
And don’t tell me I’m naive. I recall a trip to Denmark a few years ago. I left my wallet in a taxi. By the time I discovered it, my client had left me a message to say the taxi driver had returned it to their offices, and they’d paid him to bring it to my hotel. Which he did.
I expressed amazement at how well it had all worked out. My client said, “Nothing to be surprised at. Anything less would have been surprising.”
And I bet the Danes hitch, too.
We’ve all been faced with that dreaded moment when a potential client – or even an existing one – demands a price cut. While some basics about price cutting are the same, there are unique versions of this problem facing those of us in advisory, services businesses.
Does this one sound familiar to you?
“A long-standing client came to us and said our price was too high for a job we quoted. They said one competitor was priced 20% below us, and another 30% below. We’re seeing this a lot; word is we’re the high-priced firm in this market, and we’ve lost a few big jobs. It seems to be pretty much a question of price. This business is getting commoditized. Particularly in this economy, we need to seriously consider cutting prices. But our margins are already low.”
Have you heard those words lately? Perhaps spoken them? Before you act, make sure you investigate the situation. This article gives you a structured approach to doing so—looking at causes, solutions, and handling discussions.
CAUSES: WHAT DRIVES CLIENT DEMANDS
Before you respond to demands for price, it is useful to understand what lies below such demands. Three things drive the vast majority of client demands:
- Fear—the simple fear of being taken advantageof. If clients perceive that someone else is getting a better “deal,” they can quickly feel abused, and may react very negatively. Clients who feel abused become very creative about attributing causes—your rates, your profits, your margins, and so forth.
- Miscommunication—usually around scope and design issues. The “apples and oranges” problem can arise from many project design issues, including the scope of issues addressed, the leverage of your team, the depth to which issues are explored, timing, and choices about staffing. If the client orders an apple and you price out an apple pie, the client may think you are charging absurd margins on fruit.
- Quality—misaligned assumptions about quality required. Many service providers make an implicit assumption about the quality required for a certain kind of work. Often the client doesn’t perceive the need for the Cadillac/Mercedes solution—they think a Chevrolet/Volkswagen will do just fine. And often, it will.
Clients demanding price concessions don’t present the issue in these neat terms. They simply say, “your price is too high, and you need to cut it.” Listen carefully – this does not mean that your price is too high. Nor does it mean you need to take drastic action. But you’d better investigate what’s going on.
SOLUTIONS: FIX THE RIGHT PROBLEM
When your client demands a price concession, she usually assumes that rates, costs and profit margins are the problem. Few clients (or providers) challenge this assumption. The client thinks she is being taken advantage of by a voracious provider. The provider feels pressured by a callous client playing him off against others. Both then cast the issue in terms of greed and motives, and dig in for tough price negotiations.
But rates and margins are almost never the real problem. The real problems lie in design issues and in misunderstandings. The worst thing to do is negotiate on a total price alone – it makes the client think you’ve been hiding something, and wonder if he should ask for even more. Too often both parties try to negotiate price—when they should be discussing design. To see why rates are not the issue, consider your economic model. The building blocks of a project bid boil down to:
- The firm’s costs—i.e. compensation levels
- Rates—a function of cost, utilization and margins
- Project design scope
- Project design leverage
- Project design quality
Now ask yourself—how does my competitor’s model differ from mine, and what is he cutting to get his prices 30% below mine?
Compensation costs vary hardly at all. The salary market is extremely competitive. Nor do firms vary much on billing rates, utilization and models. None of it is enough to explain a competitor’s 30% discount. That leaves two explanations: either the projects being discussed are just not comparable – or your competitor will lose money on this bid. The discussion you need to have with your client explores both options – in that order.
HANDLING THE PRICING DISCUSSION
Above all, clients want to know they are being treated fairly. Doing so starts with a fair price for work done, and the willingness to be open about how you arrive at that price. Very few clients actually want to pay an unfair price to a provider who has dealt fairly with them. Here’s how to have that discussion. 1. Commit to resolution. Make sure you spend enough time understanding and empathizing with the client’s concerns. Say you’re committed to finding a mutually acceptable resolution—and mean it. 2. Suggest a series of price drivers—from scope and quality concerns to economic drivers—and commit to exploring each in turn.
- Start with scope and design issues. Ask the client to compare in detail your project design with the competitor’s. That means nailing down modules, scope of research, staffing levels—everything that might be different. Then compare. More than half the time, discussion will stop right here. Most fears are simply misunderstandings of design.
- Move on to quality issues. Determine whether quality in your proposal is higher than that proposed by a competitor. If so, then ask whether the client is willing to pay for extra quality—or not. If the answer is “not,” be ready to scale back or walk. Your “standards” may be costing you business.
- If the issue is not yet settled, then put your structural economic cards on the table. Tell the client your billing rate structure, base compensation structure, leverage model and utilization rates. Explain why these numbers add up to a fair profit model for you, and why they probably don’t vary much by competitor—certainly not 30%.
Now you can face the competitor 30% discount head on. Confirm the project design is comparable. Say to the client, “I believe their economic model is similar to ours – and we could not sustain a 30% discount. How long do you believe you will continue to get that discount? And are you willing to switch again if and when they move to sustainable prices?”
If the client would be willing to switch yet again to find yet another discounter, then you should probably walk away and find a relationship buyer. If so, walk away smiling – your competitor just lost money, and you didn’t. Price negotiations don’t have to be about power and control; trust and openness go a very long way. Most clients are happy to pay a fair price to a provider they trust. Just give them the information with which to trust you.
Should you ever cut price? Yes, in two cases. The first is for a volume discount, including existing-client discounts. In these situations, your cost of sales is genuinely reduced; that’s real money, and can be shared. The second reason is to buy your way into a new business or client. Don’t do it lightly. Eventually you will have to raise rates to sustainable levels; and a client who switched to you on price is prone to switch again.
We don’t usually think of trust and freedom as existing in a trade-off relationship. But in an important sense, they do. Thinking about the two factors this way allows us to view trust from an unusual perspective.
Kathy Sierra has a great post on the degree to which software designers should design in user freedom – there are limits.
On the face of it, freedom is good. More freedom is better. In fact, if it doesn’t threaten us bodily harm, then more freedom is way better. Isn’t it?
Not so. Sierra offers a 2×2 matrix relating payoff to effort. The payoff is good for things like Amazon. But digital home thermostats and new stereo systems give us too much freedom for the payoff. They’re just a pain.
There is a limit beyond which freedom of choice generates shutdown. Barry Schwartz’s The Paradox of Choice explores it well. After a while, complexity overwhelms the desirability of choice.
Sierra and Schwartz happen to illustrate the economic relationship between freedom and trust. In a nutshell, we give up freedom of choice in return for more efficient use of our time. We do it with trust.
Branding is the corporate version of trust. Rather than analyze every brand of bottled water, every version of jeans, or every make and model of HD-TV, we abdicate our freedom to do so in return for the security of a brand name. We trust Sony, or Coke, or Amazon, to make acceptably acceptable selections for us—so are freed to make other decisions.
But trust is about more than branding.
The last two centuries of global economic development have been driven by the search for division of labor. Adam Smith’s pin-makers organized around 19 specialized operations; it was far cheaper to assign individuals to distinct operations than to have each operator do all operations.
The transaction cost of coordination was well below the benefits of specialization.
At a corporate level, transaction costs remained high at the turn of the 20th century; early US auto companies made their own tires rather than incur the cost and risk of buying tires from others.
As transaction costs declined, it became more feasible to contract work out – the history of the auto industry is one of moving from integrated manufacturers to contract assemblers.
In recent years, we’ve seen diverging trends: lower unit transaction costs, and higher volumes of transaction costs. The net effect has been driven more by volume than by unit cost. Transaction costs as a percent of GDP have been going up. By one estimate, they now exceed 50% in the US.
We are reminded constantly of the internet’s effect on lowering unit transaction costs; but we don’t notice that the total of such costs is rising.
Here’s what it means: for further economic efficiency, the ability to reduce transaction costs is going to become more critical than further division of labor.
The more technically and globally integrated we get, the more freedom of choice we get. But at some point, freedom of choice becomes overwhelming.
If I want to make and sell jeans, I probably have dozens (hundreds? thousands?) of ways to contract the work out. Past some point, I don’t want more options—I want someone I can trust to make that decision for me.
In other words, I’ll give up freedom in return for lower transaction costs. The currency of that exchange is trust.
In an economy where half the costs are transaction costs, the currency of trust is massively valuable. Think of the transaction costs between auto producers and their suppliers: lawyers, agreements, contracts, specifications, bonus systems, QC, compliance, etc. Suppose they were 100% obliterated by trust. What kind of marketplace cost reduction would that provide?
Trust is not soft stuff. In a world that is getting massively more connected, greater trust has a very real economic role to play.
Giving up freedom for trust can be, paradoxically, a very freeing thing.
It may be the dirtiest little secret in professional sales. The lie we all love to tell ourselves. The truth we just hate to face up to. What secret/lie/truth is that?
The myth of the subject matter expert as key to sales success.
Sources of Mythology about Subject Matter Experts
There is no shortage of prognosticators about the increasing importance of subject matter expertise. You’ve probably seen a lot of it:
- You may have heard from The Challenger Sale folks that if you’re not coming up with new insights about your customers’ business, then you’re a relationship wimp.
- You may have seen the article Top Ten Trends in Sales and Business Development, which lists the rise of the subject matter expert as number one on the list.
- You may have read the Canadian Professional Sales Association article The Rise of the Subject Matter Expert, which says B2B organizations are increasingly turning to subject matter experts.
What all of those pieces have in common is an underlying view of the buying decision as rational, calculating, value-based, and economically driven. And that’s Just. Not. True. That’s the dirty little secret.
To be precise, it’s not that buyers are irrational. Nor are economics or rational thought irrelevant. But the role we ascribe to such thinking is profoundly mislabeled by an awful lot of sales “experts.”
So, let’s get it right.
There are two types of thinking, there are two stages in B2B buying (which largely correspond to those types), and there are two logical roles in the buying process (necessity and sufficiency). When we get it right, those all drop into place, including the role of subject matter expertise.
Two Types of Thinking
Daniel Kahneman, in his book Thinking Fast and Slow, outlines two types of cognition. The first, System 1, is fast, is intuitive, and jumps to instinctive reactions or conclusions. System 2 is the slower, logically deduced, careful check. His book (and his life’s work) consists of showing over and over how much our lives are controlled by System 1, contrary to popular belief.
A similar point is made by Jonathan Haidt in his brilliant book The Righteous Mind: Why Good People Are Divided by Religion and Politics. He uses the metaphor of the elephant and the elephant driver. The latter thinks he is in charge, but in fact the elephant pretty much does what the elephant wants.
If you prefer the same idea in a far more accessible and practical manner, read Josh Waitzkin’s The Art of Learning, in which he explains how he became a junior globally ranked chess champion and then a world champion in the martial art Tai Chi Chuan.
How’d he do it? He learned the link between thinking fast and slow thinking; he learned when and how to use the elephant and when to use the elephant driver. He drilled over and over the most minute movements, strategies, and counters until they became subconscious and he could trust them with “fast thinking”—thereby reserving his “slow thinking” to focus on that one, single differentiating move.
The point is not that one is right and the other wrong. They are both necessary to human functioning, but they play different roles.
Two Stages in B2B Buying
David Maister originally observed that most B2B buying processes proceed in two stages: screening and selection. In the screening process, staff people typically “round up the usual suspects,” putting criteria on spreadsheets and evaluating who should be in the “final four.” That is a prototypical rational process—think spreadsheets, analysis, and quantitative tools—which is why it’s delegated to junior staff.
Then there’s selection. Selection is heavily instinctive, intuitive, and non-rational. Selection is done by senior people who are experienced, have confidence in their judgment, and have the track record to back it up. But of course they don’t claim clairvoyance or rely on gut feeling. No, they rationalize their instincts. To put it prosaically, people decide with their hearts, then rationalize the decision with their brains.
Two Logical Roles: Necessity and Sufficiency
Some things you must have in order to get other things. On the other hand, some things are all you need. Writing a term paper may be necessary to get an A in the course, but writing a paper alone isn’t sufficient to get that A. We often mistake necessity for sufficiency. And subject matter mastery is a classic example.
In B2B sales, it is pretty much necessary to have and demonstrate subject matter expertise. In fact, such expertise is specifically looked for in the screening process assigned to junior staff. The absence of subject matter expertise is often justification for being removed from the final list of firms invited to present.
But subject matter expertise is far from sufficient (the same is true of low price). You’ve seen plenty of cases where neither the lowest price nor the highest technical ability got the job. Instead, the job frequently goes to the seller who is “good enough” on technical (and price) terms, but who clearly has a better trusting relationship with the client.
Interestingly, often this is not stated. In fact, it’s even denied. Selection decisions, which are made with the intuitive, “fast thinking” mind are often rationalized by referring back to the “slow thinking” rational criteria that were employed during the screening phase.
Putting It Together: Revealing the Dirty Little Secret
The dirty little secret is that subject matter expertise plays two important, but precise and limited roles. The first is to screen out uncompetitive offerings up front, so that time is not wasted on providers that are least likely to win. This role is finished once the finalists are selected.
The second role is to rationalize the decisions that are made by the “fast thinking” mind, the “elephant” mind, the subconsciously competent mind that has absorbed experience and can trust its own intuition. Here the rational mind is the handmaiden of instinct and experience.
The buyer may tell you and everyone else that you won the job because of your expertise and credentials and that competitor B lost it because they weren’t as brilliant as you. But don’t you believe it.
You won because you were good enough on the expertise side of things and the client loved you. That means they felt you had integrity, they could get along with you, they could be honest with you, you’d be straight with them, and that if there were problems, they could work them out with you—and not with those other folks.
The dirty little secret is the same thing that popular girl told you in high school when you invited her out and she said, “Oh, I’m so sorry, I’m busy Friday night.” She wasn’t busy; she just didn’t want to go out with you. “Busy” was the socially acceptable excuse of high school dating. “Expertise” is the socially acceptable excuse of B2B buyers.
You gotta have it, but don’t kid yourself that it’s enough.
Michael Lewis’s new book Flash Boys goes on sale at Amazon this morning, March 31. The headline, as he put it in Sunday’s exquisitely timed CBS 60 Minutes – “The stock market is rigged.” And it’s rigged in favor of high-frequency traders.
Complaints about high frequency trading are not new. What is new, to nearly all of us, is the story of an unlikely trust hero that Lewis profiles, and the amazing response to HFT that he is developing.
Brad Katsuyama, a Canadian employee of Royal Bank of Canada, ran the New York trading desk for RBC. He noticed that the trading action was as if someone was constantly front-running him, causing him higher prices to fill orders, and thus higher costs to his customers. He soon found the problem was endemic in the industry.
He teamed up with an Irish fiber networks expert. The two of them and their team figured out how it all worked. Firms like Spread Networks had figured out how to lay enough fiber cable to allow just milliseconds of advantage – enough to notice an order from someone like RBC, then quickly get in front of that order at other exchanges, and buy-then-sell the same stock before the victim’s trade, running on slower networks, could get filled.
It is, as Lewis says, “legalized front-running.” And it was clearly worth billions.
Now comes the trust part. Katsuyama and his team figured out how to beat the front-runners by spreading their orders to all arrive at the same time at different exchanges. But he wasn’t done yet. He wanted to change the rigged market. Why? “Because it just didn’t feel right. Customers of pension funds and retirement funds are getting bait-and-switched every day.”
Katsuyama quit his million-plus job and set out to found a new exchange. What motivated him – the chance to earn multiple millions more, in good capitalist fashion? No. In his words, “It felt like a sense of obligation; we’ve found a problem affecting millions of people, blindly losing money they don’t even know they’re entitled to.”
They founded IEX, a competitive exchange; using 60 kilometers of cable to disadvantage the HFTs, they beat them at their own game. The exchange is off to a good start, though with lots of powerful enemies.
Katsuyama himself is a bit giddy. “To think that trust itself is actually a differentiator in a services business – it’s kind of a crazy idea.”
Of course, it is anything but crazy. As Michael Lewis says, “When someone walks in the door who is actually trustworthy, he has enormous power. And this is about trying to restore trust to the financial markets.”
Exactly. As anyone who’s been reading this blog for years knows, trust sells. Trust scales. Trust creates value. Trust is an enormous competitive advantage.
If you can drag untrustworthy practices out into the sunlight, customers overwhelmingly prefer trustworthy practices. Key investors like David Einhorn agree; Einhorn figures IEX is a winner.
More power to Katsuyama and to IEX. It’s good to have someone you can trust on Wall Street. I would not bet against him.
This is an abridged version of the opening chapter – “The Business Case for Trust” – of the just-published Trust, Inc.: Strategies for Building Your Company’s Most Value Asset.
The book is a collection of 30-plus articles by diverse authors on trust in business. Edited by Barbara Kimmel of Trust Across America, the book covers issues ranging from measuring trust, diagnosing its presence or absence, managing trust and increasing trustworthiness, to improving people, companies, industries and societies.
Barbara and I co-authored the opening chapter. Other authors in the book include names like Steven M.R. Covey Jr., Ken Blanchard, James Kouzes and Barry Posner, Peter Firestein (investor relations), Laura Rittenhouse (financial candor), Jim Gregory (branding), and Linda Locke (reputation). And more.
Have a taste of the book, below. And click through here to see a complete table of contents and authors list. Whatever your interest in business in trust, you’ll find something here the addresses it.
The Business Case for Trust
by Barbara Brooks Kimmel and Charles H. Green: from Chapter 1 of Trust, Inc.,publisher Next Decade, November 2013.
Trustworthiness — once exemplified by a simple firm handshake — is a business value that has suffered erosion. We see this in how the public has grown increasingly cynical about corporate behavior—with good reason.
The PR firm Edelman found in a recent “Trust Barometer” survey that trust, transparency, and honest business practices influence corporate reputation more than the quality of products and services or financial performance. And yet, scandals and bad behavior continue to pile up.
Our view is that a company seriously interested in its reputation must increasingly focus not just on “business performance” as it is traditionally understood, but on being seen as trustworthy too.
We believe there is an important, material business case for trust. This doesn’t mean that trust isn’t or shouldn’t be justified on moral or societal grounds. Of course it should. But trust makes for good business as well. This essay will put forth the business case for trust by exploring the gap between low- and high-trust organizations’ performance. We will also offer a framework for assessing corporate trustworthiness, and point the way toward strategies for creating a trust-enhancing business model.
First, let’s look at the costs of low trust.
How low trust affects stakeholder outcomes
Low Trust in Society
Business operates in a social context; because of that, low trust in society-at-large costs business. Indirect examples include the TSA airport security program ($5.3 billion, not to mention the impact on tens of millions of business travelers), and the criminal justice system ($167 billion in 2004). Both of these examples are funded by taxes on individuals and business.
Businesses also shoulder direct tangible losses from crime ($105 billion), where they are often the victims.
A more obvious social cost for business is the cost of regulation. Economist Clyde Wayne Crews releases an annual report entitled “The Ten Thousand Commandments” that tallies federal regulations and their costs. In 2010, the federal government spent $55.4 billion dollars funding federal agencies and enforcing existing regulation. In 2013, The Washington Post reported that “the federal government imposed an estimated $216 billion in regulatory costs on the economy (in 2012), nearly double its previous record.”
Doing business in a low-trust environment is costly. Whether or not you believe that companies can, or should directly impact social conditions, one thing is clear. In aggregate, business bears a lot of weight for the cost of low-trust in our society.
Low Trust in Business Practices
Social costs on business, however, are just the tip of the iceberg. Far bigger costs are exacted by simple business practices. Consider the
need for detailed financial audits. The Big 4 accounting firms’ aggregate global revenue is $110 billion5, of which about one quarter is made up of audits in the U.S.
Consider lawyers: there are over 1.2 million licensed attorneys in the United States, more per capita than in 28 of 29 countries (Greece being the 29th). The cost of the tort litigation system alone in the United States is over $250 billion—or 2% of GDP. It’s estimated that tort reform in health care alone could trim medical costs by 27 percent.
All these are examples of transaction costs: costs we incur to protect or gain (we hope) larger economies of scale, markets, or hierarchies. Transaction costs add no value to the economy per se; they just foster favorable market conditions so that other economic factors (e.g. markets, scale economies) can add value.
But there comes a point at which the addition of more non-value-adding transaction costs ceases to be positive and becomes burdensome. It’s clear to us today that we are well past this point. A Harvard Business Review article from 8 years ago (Collaboration Rules by Philip Evans and Bob Wolf, July 2005) suggests that nearly 50% of the U.S. non-governmental GDP was, as of 2005, comprised of transaction costs. Imagine the impact of redirecting even a small proportion of these monies to value-adding actions.
Their research goes on to say that, in such an economy, the most productive investments are often not those that increase scale or volume, but those that reduce transaction costs. And the most viable strategy for reducing massive transaction costs? Trust.
Low Trust and Employee Disengagement
Disengagement occurs when people put in just enough effort to avoid getting fired but don’t contribute their talent, creativity, energy or passion. In economic terms, they under-perform. Gallup’s research places 71 percent of U.S. workers as either not engaged or actively disengaged. The price tag of disengagement is $350 billion a year. That roughly approximates the annual combined revenue of Apple, General Motors and General Electric.
According to The Economist, 84 percent of senior leaders say disengaged employees are considered one of the biggest threats facing their business. However, only 12 percent of them reported doing anything about this problem.
What does disengagement have to do with trust? Everything. In a Deloitte LLP ethics and workplace survey, the top three reasons given for employees planning to seek a new job were:
- A loss of trust in their employer based on decisions made during the Great Recession (48 percent);
- A lack of transparency in leadership communication (46 percent); and
- Being treated unfairly or unethically by employers over the last 18 to 24 months (40 percent).
A lack of trust in the employer is at the heart of each of these reasons. To the extent that plans to find a new job are a proxy for disengagement, the case is clear. Lack of trust drives away employees.
In discussing the survey, Deloitte LLP Board Chairman Sharon Allen notes:
Regardless of the economic environment, business leaders should be mindful of the significant impact that trust in the workplace and transparent communication can have on talent management and retention strategies. By establishing a values-based culture, organizations can cultivate the trust necessary to reduce turnover and mitigate unethical behavior.
The survey also provides some interesting data on the business case for organizational trust. When asked to rate the top two items most positively affected when an employee trusts his or her employer, employed U.S. adults made the following top rankings:
- Morale (55%);
- Team building and collaboration (39%);
- Productivity and profitability (36%);
- Ethical decision making (35%); and
- Willingness to stay with the company (32%).
As Mary Gentile eloquently states later in this book, “Very often the most visible, most costly challenges to the public trust in business are fairly predictable: deceptive marketing practices; falsified earnings reporting; failure in safety compliance; lack of consistency in employee relations; and so on.”
In other words, the ability to manage the costs of low trust –whether arising from society, from business practices, or from management practices—is to a great extent within the control of the corporation. And yet, it is largely not being done—with sadly predictable results.
How high trust improves stakeholder outcomes
A framework for assessing trustworthiness
Trustworthiness in Action