By Eli Schragenheim and George Dekker
Business organizations and individuals clearly try to maximize their own interests, even at the expense of others. This creates an inherent lack of trust between any two different business entities.
Just to be on the safe side of clarity, let’s consider the following definitions:
Trust: assured reliance on the character, ability, strength, or truth of someone or something (Merriam-Webster)
Trust is a key concept in human relations, but does it have a role in business? Some elements of trust can be found in business relationships like, reliability and accountability. But, does an organization have a ‘character’ that can be appreciated by another organization, or even an individual? Is it common to attribute ‘honesty’ to a business organization?
Yet, trust is part of many business relationships. Actually there are three categories of trust that are required for business organizations:
- Maintaining stable and effective ongoing business relationships with another organization. This is especially needed when the quality performance of the other organization matters. For instance, trusting a supplier that is able to response faster when necessary. Suppliers need to trust their clients to honor the payment terms. When two organizations partner together for a mutual business objective, the two-way trust is an even stronger need.
- The required two-way trust between an organization and its employees. This covers shareholders trusting the CEO, top management trusting their subordinates, and lower and mid-level employees trusting top management. When that trust is not there, the performance of the organization suffers.
- The trust of an individual, a customer or a professional, towards a company they expect service from or they expect to follow the terms of an engagement.
The need of governments to gain and retain trust of citizens is out of scope for this article.
What happens when there is no trust, but both sides like to maintain the relationships?
The simple, yet limited, alternative is basing the relationships on a formal agreement, expressed as a contract, which generally includes inspection, reporting and other types of assurance of compliance, and details what happens when one of the parties deviate from the agreement.
There are two basic flaws in relying on contracts to ensure proper business relationships.
- When the gain from breaking the contract is larger than the realistic compensation then the contract cannot protect the other side. It is also quite possible that the realistic compensation, including the time and efforts to achieve it, is poor relative to the damage done.
- Contracts are limited to what is clearly expressed. As language is quite ambiguous, contracts tend to be long, cryptically written, and leave ample room for opportunism and conjecture. They contain only what the sides are clearly anticipating might happen, but reality generates its own surprises. The unavoidable result is that too much damage can be caused without clearly breaching the contract.
We can also point to another significant and generic problem when the business does not trust others:
Lack of trust impedes the ability to focus on key issues, as significant managerial attention is spent on monitoring and reacting to actions of others.
This realization is directly derived from the concept of ‘focus’, which is essential to TOC. Without being able to focus on exploitation and subordination to the constraint, the organization fails to materialize its inherent potential.
Before going deeper into the meaning of ‘trust’, let’s examine the somewhat similar concept of win-win.
Unlike trust, which is mostly emotional and intuitive, win-win is based on logical cause-and-effect. The essence is that when both parties win from a specific collaboration then there is a very good chance that the collaboration will work well. It seems clear that when the collaboration is based on win-lose there is high probability that the losing party would find a way to hurt the winning partner.
Win-win usually keeps the collaboration going, but it does not prevent deviations from the core spirit. More, while win-win seems logical it is not all that common in the business world. In too many cases there is no realization that win-win is absolutely necessary. The main obstacle for win-win is that managers are not used to analyze a situation from the perspective of the other side. In other words, they are not aware of the win and lose of the other party. Too many salespeople believe they do a good job, even though they do not really understand their client’s business case.
Another problem with win-win is that the initial conditions, upon which the win-win has been based, might go through a change. In such a case one party might realize that the collaboration could cause a loss and that creates a temptation to violate the formal or informal agreement. The burst of Covid-19 certainly led to many cases where the seemingly win-win agreement came to an abrupt end or led to updated terms that are actually win-lose.
Trust is even more ambitious than win-win. It goes deeper into the area of broad rules of “what shouldn’t be done”. It also requires reliance on the other party to be fully capable and it stretches beyond the current relationship.
Trust is based on emotions that generate a belief in the capabilities and integrity of the other. It is natural for people to trust or distrust people based on their intuition. Marriage is a good example of having trust as a necessary condition for a “good marriage.” The practical requirements from a collaboration based on trust are far more than just win-win, because trust is less dependent on conditions that might easily become invalidated by external sources or events. Of course, there are many cases where people breach the trust given to them, which usually causes a shock to the believers and make some people less open to trust other people again. It also makes it almost impossible to restore trust, once it existed and vanished.
Generally speaking many humans feel a basic need to trust some people, making their living more focused by being less occupied with checking everyone and less fear of being cheated.
But, trust between organizations is a very difficult concept.
Trust is an elusive concept that is difficult to measure. While humans use their emotions and intuition, the organizational setting prefers facts, measurements and analysis. Another difficulty in trusting an organization is that its management, the people that have made the trust possible, could be easily replaced at any time, or can be coerced to betray trust by forces within and outside an organization.
Still, if trusting others is a need for organizations, which means the organization needs to relax its basic norms. Realizing the damage of lack of trust needs to be clear.
Let’s first check the relationships between the organization and its employees.
When an individual chooses to be an employee the common desire is to stay within one organization until retirement, hopefully to go up the ladder. At least this was a common wish before high-tech companies and the search for truly great high-tech professionals, have changed the culture. The rise of high-tech revealed more and more employees who don’t intend to stay too long in the organization they currently work for. In other words, they radiate that the organization should not trust them to be there when they are badly needed. This creates a problematic situation for high-tech where the key employees are actually temporary workers and every side could decide to end the working relations.
The commitment of the organizations to their employees in all areas of business has been also weakened, even though in Europe the regulations restrict the freedom of management to easily lay off their employees. Covid-19 made it clear to many employees that they cannot trust top management.
In an exposure of mistrust most organizations consistently measure the performance of their employees. Many have serious doubts regarding the effectiveness of these personal performance measurements, but the most devastating effect is that the vast majority of the employees look for any way, legitimate or not, to protect themselves from this kind of unfair judgment, including taking actions that violate the goal of the organization.
So, currently there is common mutual mistrust between employees and top management. But, in spite of that most organizations continue to function, even though far from exploiting the true business potential. The price the organization pays is stagnation, low motivation to excel and general refusal to take risks that might have personal implications.
As already mentioned, when there is a need for two organizations to collaborate certain rules have to be set and agreed upon. Monitoring the other party’s performance in reality is not only difficult; it consumes considerable managerial capacity and prevents managers from focusing on the more critical issues. As already noted even detailed contracts do not fully protect the fulfillment of the agreement.
So, there is a real need for organizations to trust other collaborating organizations. This means a ‘belief’, without any concrete proof, that the other side would truly follow the agreement, and even the ‘spirit of the agreement’. The rationale is that trust greatly simplifies the relationships and increases the prospects of truly valuable collaboration.
Agreements between organizations are achieved through people, who meet face-to-face to help in establishing the trust. The feelings of the people involved are a key factor. This is what the term ‘chemistry’ between business people and politicians means.
However, a negative branch (a potential undesirable effect) of trusting another is:
It is possible, even quite common, that organizations breach the trust placed on them, and by that cause considerable damage. The same is true between the organization and its employees.
How it is possible to trim the negative branch, taking into account the cost and difficulty of closely monitoring the performance and behavior of the other party?
A practical way is to trust the other party, but once a clear signal of misbehaving is identified – stop trusting anymore. Breach of trust is considered a product of erosion, an observable instance is sufficient to damage it for good.
This actually means that it is possible to build the image of a ‘trustworthy organization’. What makes it possible to trust, without frantically looking for such signals, is that ‘trustworthiness’ applies not just to a specific agreement, but it is a generic concept that applies to general conduct of an individual or an organization. When an organization spreads the notion of trustworthy behavior and capabilities, this can be monitored, as any deviation from trustworthy conduct would be published and all the organizations that do business with that organization, or an individual, will get the message.
Social media makes it possible to build, or ruin, the reputation of trustworthiness. There is a need, though, to handle cases where spreading intentional fake facts might disrupt that reputation. So, every organization that chooses to build the reputation of being trustworthy has to react fast to false accusations to keep its reputation.
E-commerce made the need to radiate trustworthiness particularly clear. Take a company like Booking.com as an example. Consumers who purchase hotel reservations through Booking have to trust that when they appear at the hotel they really have a room. The relationships between the digital store and its suppliers can also greatly benefit from trust.
So, it is up to the strategy of every company to evaluate the merits, and the cost, of being committed to be trustworthy and using that image as part of the key marketing messages. It is all about recognizing the perceived value, in the eyes of clients, suppliers and other potential collaborators, of being trustworthy in the long-term. What organizations need to consider, though, is that true breach of trust would make the task of re-establishing the trustworthiness very hard indeed. So, when being trustworthy is of true competitive advantage, maybe even a decisive competitive edge, then management has to protect it very thoroughly.