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22 Benefits of Inter-Organizational Trust Week 4 of Twelve Weeks to Trust

May 6, 2012

Welcome to Week 4 of the Twelve Weeks to Trust Series. In the past few weeks we’ve covered the declining state of trust globally, core concepts and types of trust, and why inter-organizational trust is key to partnership success. While week 3 provided high-level findings on the macro-level benefits of inter-organizational trust, this week shares insights from academic research on how building inter-organizational trust benefits your organization and your alliances.

The benefits of inter-organizational trust fall into two broad categories: (1) cost & performance and (2) relational benefits.

Cost & performance benefits of inter-organizational trust include:

1. Lower negotiation costs and less conflict (Zaheer, McEvily & Perrone, 1998)

2. Lower transaction costs (Dyer & Chu, 2003; Zaheer, McEvily & Perrone, 1998)

  • including search costs for partners (Gulati, 1995); and,
  • lower legal and contracting costs

3. Better use of internal resources (McEvily et al., 2003)

  • including less time required to manage relationships (Claro et al., 2003; Girmscheid & Brockmann, 2010)

4. Better exchange performance = Better RESULTS! (Dyer & Chu, 1993; Gulati & Nickerson, 2008; Palmatier et al., 2007; Zaheer, McEvily & Perrone, 1998) Remember Week 3 stats on the dismal success rate of joint ventures and KPMG Global’s conclusion on the role of trust? Trust = Results.

5. Improved sales growth and perceived satisfaction defined by economic and non-economic factors (Claro, Hagelaar & Omta, 2003; Geyskens, Steenkamp & Kumar,1999)

6. Improved product innovation performance. This is an important indicator for evaluating a firm’s research and development and is based on both design and market performance (Lai et al.,2011)

7. Greater collective opportunity between partners (Jap, 1999). Trusting partners see the collaboration as creating a bigger pie rather than a zero-sum-game.

8. A broader scope of available opportunities (Barney& Hansen, 1994; Fichman, 2003; Gulati, 1995; McEvily et al., 2003). While partners may start a relationship in one area, greater trust opens up further business opportunities. When I worked as a government relations consultant, “growing the client” meant finding other opportunities where we could work together and expand our partnership for joint gain. If they trusted us on one file, often that trust would transfer to a broader relationship.

9. Value creation and additional trust creation. Dyer & Chu (2003) proposed that:

“trust is a “unique governance mechanism because the investments that trading partners make to build trust often simultaneously create economic value (beyond minimizing transaction costs) in the exchange relationship” (p.66).

10. A positive impact on a partner’s long term orientation (Doney & Cannon, 1997; Ganesan, 1994). As we will see in Week 6, a long-term orientation is essential for inviting investments in the partnership, joint marketing, training, etc. that are the basis of ongoing success. A long-term orientation reduces search costs for new partners, negotiation and contracting costs, and resources required for ramping up in a working relationship. Imagine a couple who are looking forward to their wedding, their children, their retirement – longevity and happiness in their relationship is based on what they see as opportunity in the future.

11. Lower communication costs. According to the Edelman Trust Barometer, “skepticism requires repetition” conversely, trust reduces the frequency with which a message must be repeated, reinforced and therefore less time, effort and cost are required for communication.

Relational benefits of inter-organizational trust include:

12. Increased  joint action and commitment (Hausman & Johnston, 2010). Both of these are a result and also a mechanism to build trust. Remember, “Trust is generative and builds on itself” from Week 2? We’ll spend quite a bit more time on these relational mechanisms for trust in Week 7.

13. Development of flexible arrangements and sharing of strategic plans and scheduling information (Johnston et al., 2004, p. 35)

14. Improved scale and scope of communication among alliance partners  (Dyer & Chu, 2003; Gargiulo & Ertug, 2006; McEvily et al., 2003)

15. Increased joint problem solving which, in-turn, also fosters greater trust (Claro et al., 2003)

16. Continuous improvement and learning (Sako,1998) which is critical for the transfer of tacit, or informal, learning (Janowicz-Panjaitan & Nooderhaven, 2009). This tacit learning, that McKinsey Quarterly explains is “based on knowledge, judgment, experience, and instinct”, is necessary to navigate increasingly complex business, industry and social challenges.

“During the past six years, the number of US jobs that include tacit interactions as an essential component has been growing two and a half times faster than the number of transactional jobs and three times faster than employment in the entire national economy.” – McKinsey Quarterly

17. Greater ability to obtain information from a partner’s network that would not otherwise be available (Osarenkhoe, 2010)

18. Greater involvement of third parties i.e., universities/research institutions which contribute to innovation(Lai et al.,2011)

19. Increased likelihood of being given the benefit of the doubt when “one party engages in an act that its partner considers destructive” (Kumar, 1996 , p. 97)

Mark Twain wrote: “A lie can travel halfway around the world while the truth is putting on its shoes.” Inter-organizational trust at least gives you a chance to catch up.

20. Provides a qualifier, a basic requirement to compete. While an organization’s reputation for trustworthiness may not always provide a measurable benefit or provide a competitive advantage, Doney & Cannon (1997) suggest that

trust between organizations is a fundamental requirement to even be considered as an exchange partner.

Finally, while scholars (and I, and maybe by now you too) bemoan the complexity of trust…

21. The complexity of high-trust relationships constitute a competitive advantage. The goodwill, shared norms, joint investments, increasing identification between partners, etc. all reflect an exchange partner’s unique path through history. This stronger type of trust, as seen in Week 2, was called “strong-form trustworthiness” by Barney & Hansen (1994). This complex relationship and unique journey is impossible for competitors to imitate and therefore immune from rapid diffusion.

Finally, my research  – and thankfully, this blog post – is not exhaustive so I’m sure there are many more proven benefits (and please feel free to cite them below) but I’ll add a final one.

22. People, by far, prefer to work in an environment of trust. Therefore trust in inter-organizational collaboration creates higher engagement. Psychologically, it’s simply feels better. Biologically, neuroeconomist Paul Zak, has shown that a feeling of connection – through shared experience, hugs, weddings, social media, etc. releases oxycontin in the body which, in turn, creates greater trust. [You can check out his Ted Talk: Trust, morality — and oxytocin.]

There is a significant benefit for leaders to foster feelings of connection between their organizational representatives: increase trust & boost results.

Similarly, social psychologist Roderick Kramer, writes:

“Indeed, much of what makes life pleasant and efficient comes from the salutary effects of trust… When we start fearing and avoiding (rather than trusting and cooperating with) people we work and compete with, we enter a world of impoverished zero-sum games and escalating arms races.” (Kramer, 2002)

Generally, people prefer not to work in environments like these. What are your work environments like? Your partnerships? What benefits have you experienced from greater inter-organizational trust?

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