Developing Trust In Strategic Alliances: Concepts And Best Practices
Christian Bechtel, Michigan State University, East Lansing MI 48824-1122, 517/353-6381.
Liane Easton, Arizona State University, Tempe, AZ 85285-2160, 602/752-6276.
82nd Annual International Conference Proceedings - 1997
The Issues. Without trust, buyers and suppliers will not share cost information, tolerate mistakes, or make significant investments in a relationship. While trust is imperative for effective relationships, how can buyers quickly build high trust high performance (HTHP) relationships? What is needed is innovative skills and actions necessary to quickly build high trust high performance relationships.
Research has unquestionably shown trust to be the single most important element tied to performance in buyer-supplier relationships. While we know trust is important we don't understand how to develop trust?
Traditional Relationships. Traditional buyer-supplier relationships exhibit a number of properties including:
- Minimal communication beyond contract negotiations
- Bargaining rather than problem solving between firms
- A constant threat of changing suppliers or multiple sourcing
- No long term commitment to the supplier.
A key buyer objective is to obtain the lowest possible price regardless of the repercussions. The short term nature of the relationship does not allow either buyer or supplier to invest any significant resources into the relationship which may provide significant long term benefits.
Typically, traditional buyer-supplier relationships have used ineffective tactics such as:
While these tactics provide short-term behavioral change, they do so at the cost of long-term benefits. For example, fear can be used to intimidate a supplier into better performance; however, the supplier will likely take advantage of this buyer when an opportunity arises. In addition, the supplier will probably never try to exceed minimum standards because no trust in the relationship exists.
High Trust High Performance Relationships. Trust is not a critical issue in traditional relationships because if a supplier proves untrustworthy, the buyer only loses immediate inconveniences caused by switching suppliers. Since the buyer has not invested resources into the relationship the cost of switching and level of trust is generally low. Traditional relationships often use detailed contracts and controls as a replacement for trust. The detailed contracts provide motivation to each party to perform through the threat of legal retribution. While detailed contracts may replace trust, they clearly do not create the basis for long-term alliances.
Many firms are moving towards more cooperative buyer-supplier relationships. A variety of normative managerial guidelines instructing managers on how to create and establish cooperative interorganizational relationships exist, but no mention of how to maintain trust is available.
It is important to note that high trust high performance (HTHP) relationships cannot be formed with all suppliers. It is impossible to form a high trust alliance with all suppliers so key relationships must be chosen. High trust high performance relationships are best utilized with key supplier partners and/or strategic alliances. Buyer-supplier alliances are characterized by involvement of a buyer and a supplier in a strategic long-term relationship. Traditional contracts are used for commodity and irregular transactions that include purchases of non-production or non-essential items. Traditional contracts are based heavily on price and may have low asset specificity. Traditional contracts are infrequent and require little trust or exchange of information among parties.
On the other end of the continuum, strategic alliance and equity relationships exist. These alliances and equity relationships differ from contracts in two respects. First, buying firms typically purchase not only their suppliers' products or services but also their suppliers' systems and capabilities. Second, buying firms provide more than just financial compensation to their suppliers. Buyers must share information with their suppliers if alliances are to be successful for both parties, and they must also provide suppliers with guarantees of future volumes and prices which may be tied to suppliers' cost reduction and quality improvement efforts. As a result, buyers and suppliers may become actively involved in the joint development of new products, involving co-location, cross-functional and cross-organizational teaming. Such relationships are thus characterized by mutual interdependence, close organizational cooperation, increased levels of trust, and a strong tendency towards information sharing. Firms are currently moving to strategic alliances (non-equity relationships) to avoid the costs of equity relationships and avoid the inflexibility of equity relationships.
If trust is the most important element related to performance in buyer-supplier relationships then how can buyers effectively develop trust? There are six key elements to developing high trust high performance relationships.
- Model the behaviors you expect: The best way to influence another party is through your own actions.
- Keep and exceed commitments: The quickest way to ruin trust in any relationship is by breaking commitments.
- Proactively develop trust: Only 5% of buyers proactively create trust, but these 5% are also the highest performers.
- Disclose Information: If you do not provide information, it is unreasonable to expect the other party to do so.
- Measure trust: You cannot manage what you do not measure. Currently few firms measure trust, but the firms that do are all best in class.
- Be Emphathetic: You must understand the impact of your actions through the eyes of your partner. Place your actions in the trust-building grid to give an understanding of how your action will impact trust in the relationship.
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Conclusion. Trust is absolutely necessary in high performing buyer-supplier partnerships but, there is no understanding of how to develop it. By applying the six suggestions above, high trust high performance relationships can be created that will last.