Can You Trust Bitcoin?

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?

Read on.

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.

The Opportunity Cost of Mistrust

We all suffer – some of us more than others – from the fear of getting ‘stiffed’ by our soon-to-be client.

Fortunately – or maybe not – there is a plethora of lawyers just waiting to sell you protection. Of course, your soon-to-be-client has tapped into the same infinitely deep pool of legal imagination.

Maybe it’s just me, but the business of commercial contracts seems to have gotten approximately 250% more complex in the past decade.

What’s the pitfall in taking all these steps? Of course, there’s the lengthy amount of time and money spent on drafting contracts, sending them out, having both sides review them, back and forth again if any changes are requested. But time is just the first thing to go. Because when you lead with so much mistrust, you’re signaling something.

The signal we’re sending is that we are obsessed with one question: How much money would we risk losing by trusting our customers?

It’s the wrong question. 

Case 1.
David Maister
wrote about his service guarantee.  His precise words are, “If you are anything less than completely satisfied, then pay me only what you think the work was worth.”

One commenter on the posting said, “I like the post quite a bit, but I’m surprised that no one has commented on the first thing that came to my mind on the guarantee – those customers who will take the opportunity to stiff you on good work simply because of the opportunity via the guarantee.”

David’s reply:

“It has never, ever happened to me. And if it did, I’d apply that old slogan “Fool me once, shame on you. Fool me twice, shame on me.”
I don’t work for cheats or people I don’t trust. And if it ever happened by mistake, I wouldn’t be tempted to change the pricing policy to accommodate it! A pricing policy designed to accommodate SOBs sounds like a disaster to me.

Case 2.
I have myself on three occasions offered a complete refund of my fees because I felt the result wasn’t good enough. The client refused in each case and paid in full.

Case 3.
Joel Spolsky posts Seven Steps to Remarkable Service. I spoke to him a few years ago.

Step Seven is, “Greed Will Get You Nowhere,” wherein he talks about Fog Creek Software:

I asked what methods they found most effective for dealing with angry customers.

“Frankly,” they said, “we have pretty nice customers. We haven’t really had any angry customers.”

I thought the nature of working at a call center was dealing with angry people all day long.

“Nope. Our customers are nice.

“Here’s what I think. I think that our customers are nice because they’re not worried. They’re not worried because we have a ridiculously liberal return policy: “We don’t want your money if you’re not amazingly happy.”

“Customers know that they have nothing to fear. They have the power in the relationship. So they don’t get abusive.

“The no-questions-asked 90-day money back guarantee was one of the best decisions we ever made at Fog Creek. Try this: use Fog Creek Copilot for a full 24 hours, call up three months later and say, “Hey guys, I need $5 for a cup of coffee. Give me back my money from that Copilot day pass,” and we’ll give it back to you.

Try calling on the 91st or 92nd or 203rd day. You’ll still get it back.  We really don’t want your money if you’re not satisfied. I’m pretty sure we’re running the only job listing service around that will refund your money just because your ad didn’t work. This is unheard of, but it means we get a lot more ad listings, because there’s nothing to lose.

Over the last six years or so, letting people return software has cost us 2%.

2%.

And you know what? Most customers pay with credit cards, and if we didn’t refund their money, a bunch of them would have called their bank. This is called a chargeback. They get their money back, we pay a chargeback fee, and if this happens too often, our processing fees go up.

Know what our chargeback rate is at Fog Creek?

0%.

“I’m not kidding.

“If we were tougher about offering refunds, the only thing we would possibly have done is pissed a few customers off, customers who would have ranted and whined on their blogs. We wouldn’t even have kept more of their money.

“I know of software companies who are very explicit on their web site that you are not entitled to a refund under any circumstances, but the truth is, if you call them up, they will eventually return your money because they know that if they don’t, your credit card company will. This is the worst of both worlds. You end up refunding the money anyway, and you don’t get to give potential customers the warm and fuzzy feeling of knowing Nothing Can Possibly Go Wrong, so they hesitate before buying.  Or they don’t buy at all.

How much money are you leaving on the table by not trusting your customers? That’s the right question.

The Biggest Trust Myth of All Time

A lot of casual bloggers out there – and a few not-so-casual writers, even some famous people – are fond of quipping about trust in ways that at first blush sound wise. 

But often, these aphoristic musings turn out on closer inspection to be untrue.  They are pop wisdom, bubble gum sayings, reflecting a failure to apply critical thinking to the subject of trust.  They belong more to the genre of inspirational wallpaper postings on Pinterest

Case in point: the common claim that “trust takes years to build, and only minutes to destroy.”  It may be the Biggest Trust Myth of All Time. 

First, let’s point out some of the myth-purveyors – then we’ll get to why it’s a myth. 

The Ubiquity of the Biggest Trust Myth

A simple Google search finds the following:

“It can take years to create trust and only a day to lose it.”Angus Jenkinson,  From Stress to Serenity: Gaining Strength in the Trials of Life    

“It’s [sic] takes years to build trust and minutes to lose it.” @Relationsmentor, with 66,000 Twitter followers

“Trust takes years to build, seconds to break, and forever to repair.”Amy Rees Anderson, Balancing Work and Family Life Blog

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”Warren Buffett, America’s favorite billionaire

“Trust is not something you can take for granted. It takes months – sometimes years – to build. Unfortunately, you can lose it overnight.”...Michael Hyatt, author, virtual mentor, online leadership platforms

“Although [trust] takes a long time to develop, it can be destroyed by a single action.”…Frank Sonnenberg, author, leadership expert

“It takes time to build trust and just seconds to blow it away.”Dunham+Company, strategic marketing and fundraising services provider

“It takes years to build trust and minutes to lose it.”Vontae Davis, 2X Pro Bowl cornerback for the Indianapolis Colts

“It takes time to earn [trust in leadership] but it takes no time to lose it.”Building Blocks of Agency Development: a Handbook of Life Insurance

“It takes years to build trust and a single moment to lose it.”Steve Adams, Children’s Ministry on Purpose: a Purpose-driven Approach to Lead Kids Towards Spiritual Health

All right, you get the idea. Note there are a few respected names on there, along with all the casual opiners. Now let’s see what’s wrong with it. 

Myth Busting: The Relationship of Trust and Time

Let’s chip away at this myth a piece at a time.

First, a lot of trust doesn’t take time at all. Most trust gets created in step-functions, in moments-that-matter, in our instantaneous reactions to what someone says or how they comport themselves. We humans are exquisitely tuned relationship detectors, finely honed over eons of evolution to rapidly assess a host of factors revealing others’ good or bad intentions toward us. We make snap judgments because we’re built to do so (and we generally do them well).

Second, the kind of trust that does take time is just one very particular subset of trust: the kind of trust that depends on reliability, dependability, predictability. Almost by definition, the assessment of reliability requires the passage of time, because it requires repetition – and repetition only happens in time. 

But reliability is far from the only, or even most powerful, form of trustworthiness. There is credibility, the sense that the other party is smart, capable, expert, competent – an expert. There is intimacy, the sense that the other party understands us deeply, respects our innermost feelings, and is a safe haven for personal issues. There is other-orientation, the sense that the other party has our best interests at heart, rather than just being focused on themselves. 

When time-based trust is up against the other types of trust, it is a weak force. When Bernie Madoff’s clients saw a brief hiccup in results, they didn’t lose all trust in him: after all, he had credentials. He understood them (or so they felt). And he donated to their charities. What’s a little blip in his track record, with all that to  fall back on?

When a West Virginia lab reported that Volkswagen’s on-the-road emissions results varied massively from those in the lab, Volkswagen didn’t “lose trust in an instant.” On the contrary: the Great Volkswagen successfully denied the obvious (credibility), and had a long-standing positive consumer image. It took years for that fatal data to be acknowledged. 

Third, time-based trust is relatively thin trust. I trust Amazon in large part because they have a great track record of delivering my packages correctly and on time. But if my trust is solely based on reliability, it can be overwhelmed – one way or the other – by other factors.  Suppose I have a wonderful customer service experience with Amazon: I’m likely to trust them even more, even if they miss a few deliveries. Suppose I have a terrible customer experience with Amazon: my trust will go way down, even if they continue excellent delivery. Time is not the factor it’s cracked up to be.

The Heart of the Matter: It’s Not Time, It’s Quality

The heart of the matter is this: comparing trust gained and lost isn’t a function of time, it’s a function of quality. 

If I have a deep level of trust in you, and you screw up a little bit – I’m likely to forgive you, give you another chance, cut you a break. Of course, if you screw up a lot – enough to use up the reservoir of trust we’ve developed – then that’s another matter entirely. 

Think about your friends. If you screw up a little bit – forget to bring the salad for the picnic, show up late for the movies, do that annoying thing they asked you not to – do you instantly lose all their trust? Of course not. Only if you betray a deep confidence, or gossip about them behind their back, or conspire to keep them from getting that promotion, will you lose their trust in an instant.  

Because it’s the quality of trust gained and trust lost that matters – not the passage of time.

Think Volkswagen; BP; Wells Fargo. Was trust lost “in an instant?”  First of all, the ‘instant’ was more like months or longer, but never mind – that’s a pretty short time if you’d previously had years of good reputation. So how do we describe that?

First of all, reputation is not trust. Having a “good reputation” doesn’t say much about trust. For most of us, ‘trusting’ a company just means we like their products, or ‘trust’ them not to violate laws. That’s a pretty low bar. 

When a scandal emerges, we lose trust in those companies quickly – not because trust loss is quick, but because there wasn’t much trust there to begin with. 

• If I trust you deeply, you’re going to have to do a lot to lose my trust. 

• If I trust you shallowly, you can easily lose my trust. 

• Whether trust loss happens quickly or slowly is a function of how much trust we had, and how bad was the violation: it is not a function of the calendar. 

The next time someone tosses that platitude about ‘trust takes a long time…” at you, try this:

Tell them they’re dead wrong – but that you still trust them. It’s a great counter-example: because if they’re so wrong about trust itself, then shouldn’t their error mean you’d instantly lose trust in them? 

——-

By the way, Barbara Kimmel has a similar take on this issue: see The Quote that Does Trust a Disservice.

Why You’re So Predictable

On the one hand, it seems the world is getting less predictable. On the other hand, looking at the successes of Big Data and AI, haven’t we all at the same time become more predictable?

Isn’t that how those kids in Macedonia made thousands of dollars running fake articles on social media? Isn’t that how James Corden got famous enough to host the Grammys?

As I thought about this, I remembered that I’d thought about this before. About 11 years ago. Let’s see how 2006 sounds from the vantage point of 2017.

————————-

Fortune talked about recommender systems a few years back.

What’s a recommender system? Well, take Amazon’s “if you liked The Da Vinci Code, you’ll love Blink.” Now move from book-to-book relationships into book-to-other relationships: “If you liked the Da Vinci Code, you’ll like a Jura Capressa espresso maker.” That’s a recommender system.

Fortune’s example was www.whattorent.com, helping slackers save time at 10PM Friday night at what was the local Blockbuster by predicting what movie they’ll love. [Remember Blockbuster? Just eleven years ago…]

Fortune interviewed whattorent’s two founders at a coffee shop, and put them to the ultimate test: pick two strangers in this restaurant, and—just by observing them—guess their favorite movie.

They settled on a guy and a young woman. After much clever psycho-babbling, the founders guess: Starship Troopers for Joe, Roman Holiday for Renee.

And wouldn’t ya know it—they were dead right.

You can hear Fortune cuing up the PGA graphic—“these guys are good!” And indeed that’s our reaction—wow, how could anyone pull that off?

But wait. What if we’re mixing up cause and effect? Maybe it’s not that two twenty-somethings are great predictors. What if we’ve just all gotten way more predictable?

Everyone had their favorite Beatle. If you preferred John to Paul, it said something about you—to everyone. Because everyone had a common reference point. The Fab Four were global litmus tests.

Since then, culture got way more global. Africans wear Arizona t-shirts; Valley Girls know Tibetan monk choirs. The weapons of mass dispersion are well known—iPods, MySpace, YouTube, Hollywood [can you believe – this was only 11 years ago…the iPhone was still a year away…]

Everyone wants to be different—but we share referent points from which we diverge. Jeans, music, hair, slang… Take five variables with five values each: five to the fifth power is 3,125 combinations. Sounds like a lot, but it’s based on a small set that’s easy to reverse-engineer.

People don’t predict us: we self-identify, and the code is easy to read. Marketers love this stuff.

Ironically, it also makes it easier to trust others. When a British Stones fan meets a Jagger aficionado from Beijing—the world shrinks.

The question is: can we keep the diversity while enhancing the trust?

———————

Well, that was my question then. My question now is similar, but updated: can we keep the authenticity while mechanizing the means of connection?

This is most evident in commerce. You still know, in your bones, when you receive a mechanized spam email, trying to pass itself off as personal. I suppose scams may be getting more sophisticated; but a ton of people aren’t even bothering to be sophisticated. They confuse the ability to target and segment with the desirability of doing so. Just because you can doesn’t mean you should.

We’re all pretty predictable. That’s OK. Go ahead, predict me – just let me know there’s someone behind the prediction machine, someone who cares enough to add the whipping cream topping by making it personal.

The difference between being sold to by a person and being sold to by an algorithm is the difference between talking to a person who used a robot to find me, and talking to the robot itself. I don’t mind being predicted – just don’t insult me.

Innovation: The Critical Link to Trust

Innovation has been much in the news for more than a few years now. Not as evident is the connection between innovation and trust.

Got problems with innovation? R&D not giving you much bang for the buck? Suffering from same-old service offerings? Product un-differentiation got you down? Read on.

Observation: Pessimists Don’t Innovate, Nor do they Trust

In Why Victims Can’t Invent Anything, Michael Maddock and Raphael Louis Viton suggest a simple test for the ability to innovate: the old glass is half full, half empty test. If you are optimistic, you are a creator.  If you are pessimistic, you are a victim. Guess which one wildly out-innovates the other?

Now marry that up with the profile of trusting and non-trusting people from Eric Uslaner, arguably the world’s leading academic expert in trust. Paraphrasing, high-trusting people believe that life is good, and that they are in control of their lives. Non-trusting people believe life is fundamentally unfair, and that other powers are in control of their lives.

You want to increase innovation? Hire optimistic, high-energy people; shun conspiracy theorists. And why does this work? Because they trust each other.

Diagnosis: More Trust Yields More Innovation

Let’s follow this logic further. Trusting each other means people are open to each others’ ideas. Robert Porter Lynch explains the link.

Creativity happens, he says, very little by sitting around contemplating. Rather, it comes about from our interaction with others. In particular: people different from ourselves, who think in fundamentally opposite ways from the way we think.

If we’re not open to others—if our fundamental approach to others is fear-based, if we come from anger or ego or fight/flight responses—we shut ourselves off from the creative forces that come through sharing those different perspectives. We see them as threats.

The bridge is trust. If we can trust the other person, then we can hear and consider their perspectives, as they do ours. Net: communication, creativity, new ideas, innovation.

Trust and Innovation: Does It Work in the Real World?

Forget the thinkers: who does this? One who can speak to this directly is Ross Smith at Microsoft. When in charge of the Windows Security Team, Ross and wingman Mark Hanson realized they had some incredible talent on the team that was under-utilized. They needed to innovate. As Ross studied innovation, he began to realize trust was the key to getting there.

Does it work for Ross? He’ll answer a resounding ‘yes.’

All these writers seem to agree on one thing: the road to innovation goes through trust.

The Semantics and Study of Trust

This post isn’t quite as wonky as the title would suggest. Bear with me.

Most of us would agree that ‘trust’ is a complex concept. But few of us, I suggest, have any idea how sloppily we think about it.

The Semantics of Trust

Consider some obvious grammatical usages of ’trust’:

  • Trust as a verb, as in “I trust James.”
  • Trust as an adjective, as in “James is less trustworthy than Jane.”
  • Trust as a noun, as in “trust is less common in Russia than in Denmark.”

Now ask yourself: what is the meaning of the sentence, “Trust in banking is down”?

Does it mean:

  1. that people are less inclined to trust banks these days? or
  2. that banks have become less trustworthy than they used to be? or
  3. that the customer-bank relationship is less based on trust than it used to be?

Why is that important? Because if you don’t know what problem you’re trying to solve, you’re just going to spin your wheels.

Is that a real issue? You betcha. It goes to whether we need more bank regulation, better bank PR, or a rebirth of spiritual values.

For an analogy, consider the fact that serious crime in the US has been declining for about two decades – and the mistaken belief held by majorities that it has actually been rising.  That’s a PR problem.

Now consider that Wells Fargo consistently and consciously incented its employees to sell unnecessary products for years. That’s a trustworthiness problem.

In the aforementioned link, from the Edelman Trust Barometer, you can find hints of all three meanings.  Which suggests, first of all – we have a semantic problem. What the heck does Edelman mean by ‘trust’?  Because if that answer isn’t clear, then how can we meaningfully talk about how to create trust (by smarter consumer risk-taking? by better regulation? by broader social change?).

Biases of Trust Researchers

Psychologists who study trust are, as a group, fixated on trust-the-verb. This is hardly surprising; their view of the world is from an interior perspective, the mind looking out, hence on issues of perception.  They focus on the decision to trust, and thus on the attitudes toward risk-aversion and risk-seeking. Trustworthiness as an adjective is dealt with as an issue of perception by the trustor, not as an attribute of the trustee – trustworthiness is all in the eye of the beholder.

Sociologists are concerned with trust the noun, and with questions like why southern Italy is a lower-trust society than Sweden. When they say ‘trust is down,’ they are talking about the  likelihood of a surveyed population to have a more suspicious outlook on strangers than they used to. They’re interested in herd behavior, not in the perceptions of individual cattle.

Business writers on trust are the most confusing of all.  They pay about as much attention to trust-as-adjective (trustworthiness) as they do to to trust-the-noun. Unlike the academics, however, business writers use the word ‘trust’ to refer to institutions, as opposed to most academic talk (and most talk on Twitter, for that matter), which is about interpersonal trust.

Unfortunately, business writers are often unclear about the distinction (if banks are untrustworthy, is this because bankers are venal, or because ’the system’ is amoral? And is my trusting JPMorgan Chase really not qualitatively different from my trusting Susie?).

Definitions: A Simple Trust Ecosystem

Here’s a simple, five-factor description of the trust ‘ecosystem.’

Trust (1. the noun) is a relationship, between a trustor who trusts (2. the verb) and a trustee, who is or is not trustworthy (3. the adjective). The trustor initiates the relationship by taking a risk (4. the driver of trust); and continues when the roles reciprocate (5. the sustainment of trust).

At the risk of grammatically complexifying what isn’t all that complicated in practice: trust is an asynchronous bilateral relationship initiated by risk-taking and sustained by reciprocation.

If all who wrote about trust simply referred to these five factors, and were clear about what meaning they intended, the trust literature would be much clearer, and recommendations more cogent.

 

 

 

To Live Outside the Law You Must be Honest

Years ago, O best beloved, there lived a musician, both popular and influential. His name was Bob Dylan. Some of you may remember.

Dylan’s lyrics grace the lists of most popular lyrics of all time, including my favorite, “the ghost of electricity howls in the bones of her face…” from Visions of Johanna.

But some lines were more than just poetically evocative – they also hinted at serious truths. One such line was today’s title: “To live outside the law, you must be honest.” The lyric is from Absolutely Sweet Marie, from (IMHO) his greatest album, Blonde on Blonde, recorded in New York and Nashville in 1966. As with all Dylan songs, who knows what the artist meant, he’s not talking – but here’s what I take it to mean.

It’s easy to color within the lines. It’s easy to paint by numbers, fill in the check boxes, meet the specs and follow the regulations. In short, to follow the law. But when it comes to issues like trust and ethics, balancing social responsibility and profits, navigating between government demands and consumer demands – it’s not enough.

It’s tempting, taunting, tantalizing, to look to the law (or corporate guidelines, or regulations) for guidance when faced with a difficult issue in client relationships, customer satisfaction, or ethical issues. It’s also a copout.

Issues of ethics and trust demand a higher order of resolution. When faced with a client demanding to know the truth about some matter, how much truth do you share? The ‘law’ will clearly tell you what truths not to tell; and if you want to argue from omission, what truths are therefore not restrained. But your client – or your constituencies, or your legacy – isn’t going to be satisfied, in part because all you’re doing is citing ‘the law;’ you’re not taking any responsibility.

Being Honest, Being Principled

In this situation, I’m equating “be honest” with “be principled.” Principles apply to more than just honesty, but honesty will do fine as a stand-in for other principles. The point is – you’d better have something more than chapter and verse at hand to satisfy a demand for trust or fairness, whether from clients, employees or society at large. The statement “but it was legal” doesn’t cut any mustard in the higher courts of human interaction.

If you’re looking to be trusted, compliance is de minimis; by itself,  even inflammatory. “Sorry, that’s the law” is only slightly more satisfying than “Sorry, that’s our policy,” or, “Sorry, that’s not how we do things around here.”

Instead, you need principles – rooted in human nature and human relationships. Principles like service to others, or collaboration, or transparency, or don’t treat others as means to your ends. It’s principles like these that provide better guidance to tough decisions. (It’s also principles, that in the long run, must undergird the law itself for the law to be seen as legitimate.)

Your client wants to know what principles are driving you to be opaque and malleable about your pricing. Passat owners and VW dealers want to know what principles, if any, justify the slow drip of revelations about accountability. Apple shareholders and customers are very much vested in wanting to know the principles behind Tim Cook’s position on security – and the government makes its case best when it challenges Apple on principle grounds, e.g. arguing that the real motive is brand enhancement.

Living Outside the Law

To “live outside the law” doesn’t mean you’re a criminal – but in Dylan’s meaning, it does mean you’re an outlaw. You operate in part outside the narrow proscriptions of the law; you find affirmation by others of your actions by grounding them in broader principles.

That’s ultimately what makes others trust you. We live our daily lives by universal principles that others recognize as legitimate as well. We don’t trust people whose ‘ethics’ amount to rote checkbox compliance. We trust those who come from someplace deep, a place where connection to others and relationships with them are bedrock. People who feel their principles and are confident enough in them to re-compute them in every situation, as if for the first time.

If you’re going to live outside the law – and you should – you’d best be honest.

 

Fear and Loathing in Sales

Why is it that, when it comes to sales within a service-based industry, the very thought of selling seems to leave a bad taste in one’s mouth? Below, we dive into why the fear of sales creeps up on those of us “rewarded” with the extra task of “business development.”

Let’s dig a little deeper into the root cause of the fear and loathing that so often seems to accompany sales.

——

Some people seem born to sell. They enjoy the challenge, the meritocracy of the numbers, the feeling of controlling their destiny, and the social interaction that comes with sales. They like selling, and they are good at it.

But that isn’t true if you’re a professional who sells services. If you’re a management consultant, accountant, lawyer, human resources professional, financial planner, or technology consultant, let me ask you a question: did you set out early in your career with the goal of being a salesperson? No? That’s what I thought.

Fear and Loathing in the Professional Services Sales Business

The biggest difference between professional services salespeople and other salespeople is the former’s general distaste for selling. Fear and loathing is often not too strong a phrase. A professional is generally hired, trained, rewarded, and promoted for subject matter mastery.

Up to a point, that is. At some point, like a cruel joke, they are “rewarded” with the additional responsibility of selling. Little wonder, then, that the word “sell” is a four-letter word in the professions; most firms prefer the euphemism “business development,” conveniently phrased in the passive voice. After all, they reason, clients buy from us because of the quality of our work. Our sales strategy is to aggressively wait for the phone to ring.

Fear of sales runs deep, yet few professionals can really succeed without confronting and overcoming their apprehension. And so people who thought they had chosen cold hard data and logic as their career end up having to self-psychologize to remain effective—yet another distasteful venture for a content lover.

The Source of Our Fears

Most professionals were attracted by the intellectual aspects of their career. They were bright, with good minds, and the professions worship intellectual achievement. Since clients are often from the same profession, both buyers and sellers share the same delusion—people buy solely through a process of rational decision making. No self-respecting in-house counsel or vice president of strategy would admit to hiring an external advisor based on vague criteria like trust or chemistry.

And so both parties contribute to the myth that services them both: clients buy value propositions, packages that deliver positive net present value, and providers who make the best business case. If one firm loses, they can feel secure that it was probably not their fault—it was just price. And price is the easiest reason for the client to give to the also-rans. The delusion continues.

To contemplate that things don’t work this way is a threatening idea to professionals. It suggests clients aren’t buying their expertise, but their personalities—which feels unfair and rather scary. Since the seller is often the deliverer, it suggests that rejection is far more personal than it is for the seller of a widget. Finally, to lose is the ultimate failure. It means your expertise, the thing you have prized all your life, just wasn’t good enough. And by extension, neither were you.

No wonder professionals loathe the need to sell.

Overcoming Fear and Loathing

Unfortunately, the sales world is all too full of salespeople willing to teach professionals how to sell. They and their professional clients buy into yet another myth: the idea that sales is sales and best practices cut across all industries. And so sales programs that teach closing techniques to manufacturer reps and clothing suppliers founder when they try to close chief financial officers.

What’s true of closing is also true of sales cycles, CRM systems, pipeline analyses, and sales efficiency programs. What works in “regular” businesses falls flat in professional services, and it accentuates the already bad taste in the mouth for selling.

This deep psychological aversion to selling cannot be overcome by behaviors, tips, techniques, processes, and tools alone. It must be addressed at the mindset level. While you can partly act your way into right thinking, in the fog-sculpting world of professional services, you must also think your way into right acting. It starts with re-conceiving the very purpose of selling.

The Purpose of Selling Is…

In most businesses, that is a simple sentence to finish. The purpose of selling is to get buyers to buy the seller’s products. Both buyer and seller know this, and they easily accept the rules of the “game.”

In the professions, we need a very different purpose—that of client service. By this view, the purpose of selling is to make the client better. The sale is not the goal; the sale is a byproduct of successfully helping the client improve. The sale is an indicator, not an objective.

Taking this definition seriously has serious implications. It means transactional selling is all wrong—transactions are just points along the way of a relationship. It means we don’t compete with our clients—we collaborate with them. It means our timeframe must be long, not short.

Most of all, it means we don’t sell by selling. We sell by successfully helping the client to see new possibilities and trusting that the clients we help will, with predictable regularity, prefer to do business with us. It means detaching from the outcome of the transaction and trusting in a broader pattern of human behavior.

If that sounds like selling based on trust, that’s exactly right. It’s the same powerful dynamic recognized in concepts such as customer loyalty. The economics of trust are compelling.

Perhaps best of all, though, is the message this viewpoint offers the professional. Rightly conceived, the only difference between selling and delivering is getting paid. When we think of sales that way, the fear and loathing can slip away—we are all comfortable with client service as a model for delivery. Selling is the same: the right way to sell professional services is to aggressively do good, and then, at the right time, ask to be (well) paid for doing so.

That view of selling isn’t to be feared. It’s a view we can feel good about, while generating a powerful business model at the same time.

Are You Worthy Of Your Clients’ Trust?

Most salespeople will agree – there is no stronger sales driver than a client’s trust in the salesperson. Further, the most successful route to being trusted is to be trustworthy – worthy of trust. Faking trust is not easy – and the consequences of failing at it are large.

But is it possible to know if your client does trust you? Is there one predictor of client trust? Is there a single factor that amounts to an acid test of trust in selling?

I think there is. It’s contained in one single question. A “yes” answer will strongly suggest your clients trust you. A “no” answer will virtually guarantee they don’t.

The Acid Test Of Trust In Selling

The question to you is this:

Have you ever recommended a competitor to one of your better clients?

If the answer is “yes” – subject to the caveats below – then you have demonstrably put your client’s short-term interests ahead of your own. Assuming you sincerely did so, this indicates low self-orientation and a long-term perspective on your part, and is a good indicator of trustworthiness.

If you have never, ever, recommended a competitor to a good client, then either your service is always better than the competition for every client in every situation (puh-leeze), or, far more likely, you always shade your answers to suit your own advantage; which says you always put your interests ahead of your clients’; which says, frankly, you can’t be trusted.

Here are the caveats. Don’t count “yes” answers if:

  1. The client was trivially important to you;
  2. You were going to lose the client anyway;
  3. You don’t have a viable service offering in the category;
  4. You figured the competitor’s offering was terrible and you’d deep-six them by recommending them.

The only fair “yes” answer is one in which you honestly felt that an important client would be better served in an important case by going with a competitor’s offering.

If that describes what you did, and it is a fair reflection of how you think about client relationships in general, then I suspect your clients trust you.

This is the “acid test” of trust in selling. To understand why it’s so powerful, let’s consider the factors of trust.

Why This Is The Acid Test

My co-authors and I suggested in The Trusted Advisor that trust has four components, and we arrayed them in the “trust equation.” More precisely, it is an equation for trustworthiness, and it is written:

T = (C + R + I)
T = trustworthiness of the seller (as perceived by the buyer)
C = credibility
R = reliability
I = intimacy
S = self-orientation

Credibility is probably the most commonly thought-of trust component, but it is only one. Think of credibility and reliability as being the “rational” parts of trust. Believable, credentialed, dependable, having a track record – these are the traits we most consciously look for when screening vendors, doctors, and websites.

The third factor in the numerator – intimacy – is more emotional. It has to do with the sense of security we get in sharing information with someone. We say we “trust” someone when we open up to them, share parts of ourselves with them. We trust those to whom we entrust our secrets.

But all pale beside the power of the single factor in the denominator – self-orientation. If the seller – the one who would be trusted, who strives to be perceived as trustworthy – is perceived as being self-oriented, then we see him as someone who is in it for himself. And that’s the kiss of death for trust.

At its simplest, high self-orientation is selfishness; at its most complex, self-absorption. Neither gives the buyer a sense that the seller cares about any interests but his own.

Self-orientation speaks to motives. If one’s motives are suspect, then everything else is cast in a different light. What looked like credible credentials may be a forged resume and false testimonials. What looked like a reliable track record may be an assemblage of falsehoods. What looked like safe intimacy may be the tactics of a con man. Bad motives taint every other aspect of trust.

The acid test aims squarely at this issue of orientation. Whom are you serving? If the answer is, the client, then all is well. No client expects a professional to go out of business serving them — the need to make a good profit is easily accepted.

It’s when the need to run a profitable business is given primacy in every transaction, every quarter, and every sale, that clients call your motives into question. How can they trust someone who’s never willing to invest in the longer term, never willing to compromise, never willing to gracefully defer in the face of what is best for the client? They cannot, of course.

Passing the acid test suggests you know how to focus on relationships, not transactions; medium and long-term timeframes, not just short-term; and collaborative, not competitive, work patterns.

Flunking the acid test means clients doubt your motives. Whether you are selfish or self-obsessed makes little difference to them – the results are self-aggrandizing, not client-helpful.

The paradox is: in the long-run, self-focused behavior is less successful than is client-helpful behavior. Collaboration beats competition. Trust beats suspicion. Profits flow most not to those who crave them, but to those who accept them gracefully as an outcome of client service.

This post first appeared on RainToday.com

My Client Is a Jerk

Ever had a difficult client? I don’t mean the client from hell, I just mean garden-variety difficult. Difficult clients come in lots of different flavors.

  • There’s the client who will not take the time up front to share critical information, explore ideas, or otherwise involve you in the early stages of a project.
  • There’s the client who just cannot make a decision, regardless of how much data or analyses you provide at their request.
  • There’s the client who is frozen by politics or fear or ignorance, who will not face facts about critical issues.
  • Finally, there’s the client with personality issues, who argues, or rejects, or is otherwise disrespectful to you and your team, yet often shows favoritism to someone else or another team.

Fortunately, there is a common thread to all of these cases, which – if we understand it – can help us succeed.

The common thread has nothing to do with the clients. The common thread is us.

The Client Situation

First, let’s get some perspective – about our clients, and about ourselves.

We’ve all said, if only in our heads, “My client is a jerk.” But “My client is a jerk” is a terrible problem statement. The client is unlikely to accept it as a problem statement. It’s highly subjective, and it’s quite unverifiable.

People in a position to hire outside professionals typically have achieved some degree of success in life. While it’s popular lately to describe the prevalence of “a**holes” in business (see Robert I. Sutton’s book, The No A**hole Rule: Building a Civilized Workplace and Surviving One That Isn’t), my guess is their frequency is overestimated. Most clients are intellectually and emotionally intelligent.

Most clients have spouses, or parents, or siblings, who seem to be quite capable of loving them. Most have a boss who has promoted them.

It is wise to assume that, even if their behavior is bad, they have some ability to get by in life. True psychotics are pretty rare in business.

Furthermore, truly bad behavior, more often than not, comes from decent people who are stressed out. If someone is behaving badly, it’s a good bet that they are afraid–of losing something they have, or of not getting what they want.

If you can identify that fear, then you can replace demonization with a real problem statement, which is a far more productive approach. If, further, you can talk about that fear with your client, you will create a lasting bond that can serve you both well.

Our Own Situation

What’s true of clients about fear and bad behavior is equally true for us. Particularly in selling, we are loaded with fears. We are afraid, first of all, of not getting the sale.

And it goes deeper. We’re afraid of our boss, peers and loved ones knowing that we might not get the sale and judging us. We’re afraid of clients judging us, too–feeling that if we don’t get the sale, it means they think less of us.

But we ourselves carry the ultimate judges around in our own heads. We allow ourselves to be hijacked and held hostage by our own ideas of what constitutes success, or being “good enough,” or whatever value judgments we distill from our past, and apply to ourselves. There’s a thin line between having high standards and beating up on oneself.

If we allow ourselves to act from those fears, we are likely to run from judgment. One of the most emotionally attractive ways out of the tyranny of self-judgment is to blame others. “It was not my fault,” we want to say, or “The dog ate my homework,” or “It was a bad hair day.” More to the point, we might say, “This sale was doomed because I got stuck with a difficult client. If you’d had my client, you couldn’t have done much either. It wasn’t my fault – it was the client’s.”

But blame is more useless to us than our appendix. At least when an appendix gets inflamed, we recognize it and operate to remove it. When blame flares up, people at first commiserate with you, encouraging it. Then as it metastasizes into resentment, people begin to move away from you. Resentment, it is said, is like taking poison and waiting for the other person to die. Misery may love company, but company doesn’t return the favor.

Blaming a client never got you the sale, and it never will; but it may keep you from getting the next one. People don’t like blame-throwers. Clients especially don’t.

If there is such a thing as a truly “difficult” client, the only valid lesson to draw from the experience is to avoid similar clients in the future. And that is a lesson best kept to yourself.

Self-Diagnosing

Again, what’s true of clients is equally true for us. Particularly in selling, we are prone to fear, hence to blame. And that leads to nothing good.

The first thing to do is to notice our thoughts. Practice taking a “snapshot” of your thoughts when you are stressed.

Ask yourself, “What is the problem here?” If your mental snapshot answer starts with, “My client won’t…” or “My client doesn’t…” or “I can’t get my client to…” or “My client never…” then you need to step back and reframe your thinking. You are stuck in the blame game, spinning your wheels, and going nowhere.

You need a problem statement that has you in it, first of all. And almost always it should be a problem statement that is joint. If you and your client can’t even agree about why you’re not getting along, you’re certainly not going to make much progress on the substantive issues you want to work on.

Good problem statements are joint. Jointness is reflected in language, e.g.:

  • Our problem is we have differing views about the priority of X and Y.
  • We seem to have a problem in communicating when it comes to Q and R.
  • It looks like we differ about the timeframe to be considered here.

If you have a “difficult” client, find a “we” statement you can each agree to that gets to the heart of the disagreement.

Fixes

Sometimes, all we need to do is jointly reframe an issue and–voila–our client no longer seems so difficult.

It never hurts to go back to basics. One reason people act badly is that they have not had someone listen to them. Really listen. Deeply. Without reacting with suggestions or action steps. Just for the sake of understanding. “Just” understanding our clients often ends up being the catalyst that changes everything.

But sometimes, we need to do some advanced work on ourselves–in particular, to find out what we have become attached to that holds us hostage. Here are a few:

  1. Don’t hold yourself hostage to the outcome. We should have points of view–that is part of what clients pay for. And we should argue clearly and forcefully for what we believe is right. But we are not responsible for our clients’ actions–only for informing their actions as best we can. No one ultimately controls another human being without their consent–even at gunpoint. Holding ourselves accountable for changing others is a recipe for misery. Do the next right thing and then detach yourself from the results. You don’t own the outcome.
  2. Check your ego at the door. The best way to lose the sale is to try very hard to get the sale; the best way to lose the argument is to try very hard to win the argument. It is not about you. The only one who thinks it is about you is you. Focus on the client, not yourself.
  3. Be curious. Is your client “difficult?” Be curious as to why. What is he afraid of? What is at stake for her? What is your role in the situation? What are you afraid of? On what basic issues do you see differently? What do you think the client sees as the problem statemen? What problem are you both trying to solve?

There aren’t any difficult clients. Not really. There are only relationships that aren’t working well. And nearly all of those can be fixed. But it must start with us.

As Phil McGee says, “Blame is captivity; responsibility is freedom.” To get free of “difficult clients,” take responsibility for fixing the relationships.

 

This blogpost was originally posted in RainToday.com