The curious case of Trust and Alliances

The first lesson you learn in ‘trust’ is as a child.  Your father toss you up in the air and catches you back. You enjoy the moment and laugh ecstatically. While as a child your understanding of fear is less profound, at the same time you trusted your father with this very act! As you grew older, your understanding of trust evolved. Personal and professional experiences shape this significantly. It would be fair to say by the time you reach the middle of your corporate career; you would have formed your own “theory of trust”.trust

This to quite an extent becomes the foundation of how we interact, agree, disagree and form relationships with our stakeholders, viz. customers, partners, colleagues and managers. Some have made reference to these relationships as ‘contracts’. Imagine this contract to be a machine giving the desired output, ‘trust’ then becomes the lubricant that guarantees it runs smoothly.

Trust deficit in business leads to friction, disasters and huge financial losses. While this is a common understanding, we frequently hear about trust issues between customers, partners, employees et al. Many leaders do not realize that lack of trust has a long term economic cost and the immediate gain will taper off in a matter of time.

A significant part of my role in alliances management, is resolving conflicts. I get to see trust in action every day. Alliances are aimed at achieving a common objective through joint actions. These joint actions form the building blocks of trust and hence significantly contribute to the performance of an alliance. In scenarios where trust has been established, collisions are fewer, sales cycles are smoother, and less time is spent agreeing on actions. The reverse is true for scenarios of trust deficit. Established trust helps alliance partners exchange resources faster, invest more in the venture and exchange information seamlessly.

But at the end of day, it is individuals’ motivations behind events that establish or do not establish trust. The question is “why do people do what they do?” I have tried to understand this using Game Theory’s Prisoner’s Dilemma. Assume a situation where a sales rep (let’s call him player A) from a principal company and a sales rep for a channel partner (let’s call him player B) are structuring a deal based on the price point at which the customer would buy. While doing so they have to consider factors like customer discount, the share it takes away from the partner’s margin (player B) and the impact on deal size which ultimately affects the principal sales rep’s sales quota (player A). prisoner's dilemma

Game Theory’s Prisoner’s Dilemma gives us a framework to understand, why sometimes two purely “rational” people (players A & B as mentioned above) may not cooperate, even if is in their best interests. The assumption is the case that people in general are rational and supremely selfish beings. From this standpoint, we have four states, viz.

  1. Temptation for non cooperation (A cheats, B plays fair): The principal sales rep deals directly with the customer, bypassing the channel partner, thus avoiding the margin to be given and maximizing his or her deal size.
  2. Reward for cooperation (A and B play a fair game): Both the principal and partner sales reps agree on a win-win margin, discount and deal size to ensure they get the customer on board.
  3. Punishment for mutual defection (Players A and B cheat): Both try to take control of the customer to carve out their respective benefits but they ultimately irritate the customer and the deal goes off.
  4. Sucker’s payoff (A plays fair while B cheats): A chooses to play fair, gives the partner his due margin and takes a hit on deal size, but B cheats by quoting an additional price component separately to the customer without the knowledge of A.

Going by our initial assumption, scenarios 1 and 4 look fine. Players A & B maximize their respective benefit depending on whether they defect or cooperate in a situation. The benefits would be short term though. In scenario 3 both get punished with the potential deal going off the table. It is only in scenario 2 that there is mutual reward and an opportunity to jointly establish a long term relationship with the customer. Prof. Raghunathan in his book Games Indians Play captures this beautifully.  He says the underlying problem that individuals do not understand is “You are as smart as I am and think exactly the same way as I do”. Ultimately both A & B end up defecting thus foregoing the potential long term reward for cooperation.

So if trust is the most critical element for a relationship or an alliance to perform, how can the same be effectively developed? Some strategies to consider:

Model the behaviors you expect: Kids soak up information like a sponge. They see our reactions and feelings on issues and imitate us. It is expected of parents to model the behaviors they expect from kids. This forms the very basis of Social Learning theory. Now extend this analogy to an Alliance relationship. If Alliance stakeholders consistently demonstrate behaviors of defection, they can expect to get the same in return. This consistently puts the transacting parties in the quadrant of least payoff i.e. mutual defection! The alliance leader plays a key role here.

The role of the Alliance’s leader: The starting point for the alliance leader is to eliminate any hidden or conflicting agendas in the relationship framework. The leader has to ensure that any Image: Listensbehaviors that are opportunistic and contrary to the Rules of Engagement are discouraged. It is equally important for the leader to focus on issues and not personalities while resolving conflicts. Conflicts are hard to resolve, when focus shifts from skills and attitudes to personalities and attributes. There can’t be a better way of building trust than meeting people, asking open ended question and listening intently to gain understanding. Being consistent in both words and behavior goes a long way in building trust.

Define the Rules of Engagement (ROE):  Business scenarios require good judgment. It could be that last minute contract negotiation or a scenario of a customer asking for an aggressive discount. Many such scenarios involve uncertainty, risk and trust is put to the test. Clearly defined rules of engagement would guide towards decisions that establish mutual trust. What’s important though is to ensure that these rules live beyond being a page in the alliance’s agreement. They need to be communicated much more frequently, not just at annual reviews or quarterly updates.  The intent is not just to implement rules, but iteratively establish reasons for cooperation and long term rewards.

Establish Significance and Position: A question I get asked often by my alliance partners is “Where do we stand?” In any alliance relationship, the partners continuously assess their role, what contribution they are making and how they rank in the ecosystem. If alliance partners don’t feel valued, they can feel threatened. This reflects in behaviors either in the form of disengagement or the logic of action not being in alignment with the values of the alliance relationship. Hence rewarding and recognizing alliance partners for their performance goes a long way in building trust in the relationship.

Measure trust: The measure of an alliance success is its ability to achieve joint goals with least conflicts. The challenge though is alliance partners tend to measure their own gains rather than the joint ones. This needs to change. We need to look at overall profitability of the relationship, as the idea is of joint growth and not individual success. Establishing joint success metrics not just give a holistic view of relationship, but also fosters team work, collaboration and mutual trust.

Strategic and not just need based: Need based and non collaborative alliances are bound to see issues of trust. For example, a lot of times an organization forms alliance relationships based on an immediate need for coverage, expansion or costs. The other way of looking at it is to say “you have something I need” or as someone nicely put it once, “a pie expanding mindset”. I get Screen Shot 2014-04-03 at 11.50.18 PMapproached by many entities to establish alliances which have an opportunistic flavor. I discourage such engagements to best possible extent as the life of such alliances is shorter than the life of the opportunity itself.

Patience Pays: In a very interesting article on Strategic Alliances, Gerlach, Porst & Steiner put this across wonderfully. “Infinite patience produces immediate results”. Alliances are about two completely different organizations coming together for a joint objective. It will not just involve alignment on business but also aspects like culture and values that define the basic logic of actions. Hence it takes time to build trust and establish open communications. Easier said than done, it requires certain level of maturity and wisdom from the leaders managing the alliance.

Competition is a reality: Some leaders argue that competitive advantage (or sources of it) do not sustain for long as the source can be simply replicated. Trust in alliances cannot be replicated easily thus ensuring a performing alliance and trust as the key source of competitive advantage.LEADER FAILS Trusted partnerships perform far better than others and can be used to reduce competitive threats.

In my interactions, I hear a lot of leaders say ‘Start with trust, till you prove that you are unworthy of it’. I would rather say start with building the right foundations of trust, before it’s too late and loss is irrecoverable

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