The Importance of Trust in Long-Term Business Relationships

DougMaly.com


handshake

From: "Business Course I" by Gary North
Lesson 75

Bottom Line: Essentially, a long-term business relationship is the manifestation of trust.

If you have a choice between two business partners - all else equal - you value more the one with higher trust. Over time, this is a force for long-term partners of high trust.

Definitions

First let's define terms.

Trust: Others can rely on you to keep your word and honor your commitments.

Trust is earned by keeping your word consistently over time. It can be lost in an instant.

Business Relationships: For our purposes here, suppliers to whom you pay; and customers who pay you.

In fact, this essay generally applies to all relationships including family, friendly, and romantic.

Who Cares?

A long time ago, I received the following advice.

Anecdotally, I have witnessed people lie to me just out of habit, even without benefit. Others, I never have to wonder if they are hiding something or deceiving me.

Most suppliers, customers, and relations however, could use a little encouragement. After all, the real world is always messy. Even those with the best intentions are routinely faced with moral dilemmas. Few are even the most self-righteous who do not cheat on their taxes.

Point being: if you are in business, you care about trust. Successful entrepreneurs can not be naive. They must gauge trustworthiness to properly value a relationship.

Trust Equals Relationship

When a supplier promises to deliver but you receive sub-par goods, this is costly. When a customer takes your product but pays late or never, this eats into profits.

You will not maintain a relationship with a party that you can not trust if you can go elsewhere. Or at least this is true in symmetric relationships such as those in a free market.

Exceptions

When a power differential exists in a relationship, trust suffers. For example, when the taxman comes - backed by guns - a businessman is not in a fair or symmetric position to negotiate.

The mob may make an offer which you can not refuse.

Even in a purely free market, monopolies form. Consider IBM for example. In the first half of the 20th century, it did not matter how much a customer trusted a salesman from IBM; one could not go elsewhere.

With a power differential, the power-side may neglect or even rob the weak. The weak-side then puts energy into asymmetrical warfare: lying, cheating, stealing.

Counter Examples

My thesis is that trust is required, or at least valued in relationships. But what of these well-known counter examples?

Aside from a facile "honor among thieves," ironically Underground Markets require greater personal trust than ever. Goods are not certified by regulatory bodies. Funds are not backed by financial institutions. Certainly, some anonymous transactions occur on street corners and back alleys. But most underground transactions occur between close acquaintances and others who have earned a local reputation.

The Darkweb has produced "trust" mechanisms such as escrows that do not release funds until all parties consent. Suppliers earn credibility over time; customers use cryptocurrencies with core characteristics of built-in trust mechanisms.

Societies that are crawling with ripoff artists still must conduct business. Perhaps surprisingly, trust is more highly valued than ever. In my experience, while a company may be targeting "suckers," they must also secure resources, manage finances, and recruit trusted employees. They do so through their "tights": highly trusted networks.

Paradoxically, these heretical markets show most clearly the importance of trust.

Create Trust? Why Bother?

For me, this question is akin to, "Why breathe air?"

Ten percent of people know the answer without asking. Ten percent will never know. Eighty percent can learn.

To the 80%: Making promises is easy. Keeping promises is hard.

Why not take the easy route, make wonderful promises and call it a day?

If you do not know this already (the +10%) then it must be learned over time. One day you take the easy way out instead of the right way, and you lose a contract - or worse, a friend. As you mature eventually you must make a sacrifice in order to keep your word. But later you reap the rewards of righteousness.

In other words, you see the value of trust.

Trust is more profitable. For any reward you garner by deceit, you sacrifice a repeat customer. Quantify the value over the lifetime of a customer relationship and you understand.

To make a comparison, consider cases when a supplier provides a "loss leader." Printers are sold below cost; ink sales make the lifetime value profitable.

Correspondingly, by merely cold calculation, the pain of commitment to trust is outweighed by the gain.

Further, consider karma payback for deceit, or repercussions of violating the Ninth Commandment against bearing false witness.

Best of all, you feel good when you act with honor! Even when you get screwed, you still feel better than otherwise if you have operated with honor.

Finally, if you deceive another, you wear it on your face. No matter how much you try to hide it, others can see it as clearly as your mom.

Conclusion: "Your Word is Everything"

Trust is required for intelligent works. By that I mean works that require planning. Planning requires a degree of confidence in future circumstances.

This is precisely why trust has value. Business relationships are built around value. As such, business relationships reward trust.

In any case, to honor your word is the right thing to do.


Affiliate Links


d.maly@ieee.org