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Five reasons inter-organizational trust is key to partnership success – Week 3 of Twelve Weeks to Trust

April 29, 2012

Welcome back! I hope you enjoyed Week 1 & Week 2 of this Twelve Weeks to Trust series.

In the past twenty years, all types of hybrid business partnerships – joint ventures, alliances, etc. – are on the rise because they permit access to new markets, reduce costs and share risks – particularly in uncertain economic times. Imagine all the time, energy and resources that go into these local, national and global collaborations.

Yet only 50% of joint ventures will succeed, according to a thought leadership round-table at the Tuck School of Business at Dartmouth University.

So what’s the secret ingredient to inter-organizational collaboration? How can leaders maximize the benefits and outcomes of their partnerships?

A 2009 study by KPMG Global found: Trust between partners emerged as the #1 success factor in joint ventures.

Critical in any type of business alliance – inter-departmental projects, joint ventures, partnerships, hybrid arrangements, supply chain relationships, corporate-NGO initiatives, etc.  – trust has been called the lubricant, the glue, the oxygen of business collaboration partnerships. What if you didn’t trust your engineering firm, your contractor, your construction crews, your suppliers? You would spend a ton of time and money selecting, contracting, supervising and second-guessing your partners when that time could be better spent maximising the outcomes of your partnership. In order to know how to build this inter-organizational trust; as we say in Week 2, we need more clarity around the term trust, particularly in a business context.

In the KPMG statement above, are they referring to trust between the people involved or between the organizations? Do they trust individuals’ personal traits or their accreditations and organizational processes? How do all these factors differ?

When you ask people about trust, they immediately describe interpersonal trust – “live your values”, “follow-through on promises”, etc.  I believe that we need much more than that and I’m not alone.  Attention to inter-organizational trust has exploded in the last two decades.  A search for “inter-organizational trust” in the ProQuest database of published journal articles yielded 8,885 results – 65% of these were published between 2000-2009 and 98% since 1990. I’m sure that number is climbing as we speak! (Psst …. you can find a selection of these in My Trust Bibliography.)

Why so much attention?

First, businesses want to maximize their partnerships but also because

1. Inter-organizational trust is the greatest hope to restore macro-level trust to institutions in this post-Enron, post financial collapse era.

“As we are moving out of the global financial crisis into a new era of post-liberal capitalism, this will be one of the most important fields in management research” (Bachmann & Inkpen, 2011, p.297).

2. Inter-organizational trust is a completely separate construct from interpersonal trust and has a greater impact on results. In their ground-breaking research, Zaheer, McEvily & Perrone (1998) found no direct impact of interpersonal relations on organizational performance while higher inter-organizational trust reduced negotiation costs, improved coordination, reduced conflict and increased performance.

3. Perceptions of trust or distrust in the initial stages of cooperation impact (1) formal coordination and control; (2) interorganizational performance, and (3) the favorability with which managers interpret the behavior of their partners [Basically, the entire set of assumptions that underlie the relationship]. These effects increase the likelihood that existing expectations are reinforced and that trust, distrust and formalization develop along vicious or virtuous cycles (Vlaar, Van den Bosch, & Volberta, 2007).

4. Inter-organizational trust provides mechanisms for building a common vision, joint-problem solving, bilateral communication and … more on those mechanisms in Week 6 &7.

5. Inter-organizational trust can “survive a breakdown of inter-personal relationships due to labour turnover or personality clash, and provides the stability necessary for firms to pursue innovative and competitive activities” (Sako & Helper, 1998, p.389).

Without trust there is little information sharing, there is no ability to go beyond the tightly defined parameters of the contract, there is increased monitoring and suspicion.

Interpersonal Trust

True, the interpersonal relationships are important but the people involved – the boundary spanners- are acting as agents or ambassadors of their organization, not necessarily as individuals that you might want to befriend. One case study by Gerhard Grimscheid & Christian Brockmann (2010) looked at large scale construction projects and found that,

…in the absence of preexisting institutions or history, joint venture partners trusted the people and groups based on their expertise and how they signaled, or communicated, their intentions.

Remember Trust= ability +benevolence in Week 2?

And when Stephen Currall & Timothy Judge measured trust between boundary spanners in 1995 they found

“no significant relationships…between the trust scales and the length of time they had known each other in any personal or work related capacity. Apparently trust was impacted mainly by the interactions they had in the context of their roles…” (1995, p.165).

The research suggests that inter-organizational trust between boundary-spanners may stem primarily from institutional factors such as roles, rules, standards and procedures, counterpart’s skills, trust in the partner organization, communication practices, etc.

Not only does the focus of inter-organizational trust need to be on structural aspects of the role; but, Marketing Management & Business Ethics professor, Amit Saini, actually cautions that it is possible that interpersonal factors i.e., friendships and social ties, may blur the lines of professional conduct and contribute to ethically questionable behaviour (2010, p.449). We’ll look at boundary spanners, characteristics that build trust and potential pitfalls more closely in Week 9.

Despite any misgivings, we saw in Week 2 that boundary-spanners have a critical role since the dynamic nature of trust means that it can transfer or move from the individual to the organization.

“The more one trusts the supplier representative with whom one deals, the more one’s organization trusts the supplier organization…suggesting mutually reinforcing effects of trust at the two levels” (Zaheer et al., 1998, p.154). Similarly, Patricia Doney & Joseph Cannon (1997) found: “the interpersonal trust engendered by salespeople and transferred to the supplier firm plays a key role in the developing and maintaining enduring buyer-seller relationships” (p.46). This suggests that hiring the right people is a key factor in building trust between organizations.

Does trust within OrgA impact trust with its partners?

In the interest of brevity, we’ll look at the linkages between intra-organizational trust and inter-organizational trust in Week 11. To give you a sneak peek though: the economics, strategy and ethics literature finds that an organization’s culture, structure, processes and incentives must foster trustworthy behaviours internally in order to maximize trust in inter-organizational relationships.

“Organizations must first ensure that trust permeates their own corporate culture before shifting their focus outward to their relationships with other firms” (Drake & Schlachter, 2008, p.852).

Leadership’s attention to trustworthiness, incentives and performance measurement all provide clear signals to boundary-spanners on the type of behaviour that is expected from them and help to channel behaviours appropriately. In addition to applauding and incenting trustworthy behaviour, organizations must also actively denounce and punish those who act opportunistically to demonstrate that it will not be tolerated, to protect their reputation, and to avoid damaging inter-organizational relations.

Just as the type of trust and trust determinants are different at various organizational levels, so too are the trust building roles and mechanisms. Notice here that we’re still talking about structures within an organization? We’re talking about policies, practices and incentives not having an open door policy, not staff to supervisor interpersonal trust, creating opportunities for face-to-face, “saying we”. While these all fit into the greater organizational culture, trust has to be manifested and encouraged beyond the interpersonal and be entrenched in the entire organization.

Yes, you have to hire, train and support the right “ambassadors” but leaders must also provide a culture and a structure that supports them.

It seems like building trust within and between organizations is a big investment, is it really worth it? Aha! We’ll talk about benefits on Week 4. In the interim, I’d love to know what struck you about this post or if you disagree. [Hint: open bilateral communication builds trust ;)]

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