This article explores several examples of how an investment in building a trust relationship is an investment in catastrophic risk mitigation.
Trust relationships help mitigate black swan events. Building trust inside your business and across your network of suppliers, distributors and consumers is an investment in the long term survivability of your business. Trust can be traded to reduce the impact of major unexpected events.
My business like many others is deeply affected the Coronavirus pandemic and ensuing economic collapse it is causing. Our three main businesses are all affected: event planning; direct management training via our own training centers and on premises with clients; and our global licensed training business with a network of around 450 partners who deliver some of curricula in their local or regional markets.
The biggest issue facing almost all businesses at this time is a cash crunch, a liquidity crisis, a desperate need for cash flow. Financial controllers will be looking for ways to defer costs, payments and obligations. For example, our own business leases three offices in Seattle and Bilbao. As the crisis broke, we immediately entered a discussion with our landlords to discuss options on deferring rent payments should it become necessary. This provided one of the first and perhaps simplest examples of how trust relationships help to mitigate the risk of highly unlikely white swan or black swan events. Each of our three landlords responded differently, and the level of the response correlated directly to the established level of trust between our respective businesses.
This article will explore several examples of how an investment in building a trust relationship is an investment in catastrophic risk mitigation. First, however, let’s define a few terms used in this article:
- Trust – also known as social capital in the field of sociology
- Trust – one of the affections, part of what Plato classified as Eros (with the human psyche) or Epithymos (within the human soul)
- Trust – the neurotransmitter for which is oxytocin
- Trust is something that happens socially between people, between groups, or between people and tools they use or entities with which they interact
- Trust is predictability, reliability, dependability, consistency
- Black Swan Event – in risk management, a highly unlikely event, unpredictable in occurrence, perhaps unknowable in advance, and yet having an incredibly high impact including financial ruin or death.
- White Swan Event – in risk management, a highly unlikely event, but predictable in occurrence within some bound of probability e.g. “the 100 year flood”, and while having an incredibly high impact, the impact can be calculated in advance and hence the risk can be priced with reasonable accuracy.
- Resilience – or ego strength in psychology – an ability to cope with stress, anxiety and crisis
- Organizational Maturity – a combination of organizational resilience, skill at managing risk, foresight and length of planning horizon
Returning to our discussion of office landlords and rental payments… We have three offices and three landlords. The first, in Seattle, is a space we’ve leased for 5 years, and we are already in talks to renew the lease. The landlord is the largest commercial real estate owner in Seattle and has a long established record in business. It’s a privately held business and the owner is one of the richest people in Seattle. Perhaps the richest one you’ve never heard of. We have a history with them over 5 years, and have always paid our rent on time. We are a low maintenance client. We pay regularly and we don’t give them any trouble. When our in-house counsel approached them, their immediate response was “You aren’t the first business to ask, and we’ll be happy to work with you should it become necessary.” The maturity of this business immediately shone through. They were realistic, anticipatory, and thinking to the long term – it is in their best interests for their good tenants to survive this crisis and continuing paying rent long into the future. Whatever they can do to assure that outcome is worth doing. A high level of trust correlated with a favorable response and a business with a long-term view and a strong ability to anticipate the future and to manage risks over a long time horizon.
In Bilbao we have two offices: one for the David J Anderson School of Management, our own training center and direct teaching business; and the other for Mauvius Group Europe, the subsidiary of our US parent company. The offices are located about 2 blocks apart in smaller buildings albeit in prestigious city center locations. Both buildings are privately held by local businessmen in their 70s.
Our first office in Bilbao is owned by a medium-sized property development firm publicly listed but controlled and managed by the founding family. We’ve been leasing space from them for 16 months and we’ve invested heavily in tenant improvements to the property and we’ve always paid our rent on-time. Our landlord’s office is immediately adjacent to ours on the same floor and they see us and our clients coming and going on a daily basis through the lobby. The son of the founder is a friend of our local general manager. When we approached them about the possible need for a rent holiday, they immediately responded that we could pay half price for three months. There was clearly trust but as a smaller business they also have a need for cashflow and they don’t trust us enough to let us stop paying altogether. Also they want the money back immediately after the 3 month period. We also see what I might classify as “wishful thinking” that the virus crisis will be over by July. However, as the Spanish say, “poco un poco”, and we move forward with them incrementally.
Our third space is new. We are still in the processes of building out the new interior. We’ve paid rent for only one month. The building is owned by a retired lawyer, and it essentially provides his retirement income. While we have a cordial and friendly relationship, there is no trust established yet. Consequently, his response was to repeat the official Spanish government view that landlords should not charge rent to businesses which have closed. Therefore, if we can provide him with a certificate from the authorities showing that we have suspended the contracts of all of our employees (laid them off) then he will be happy to suspend the rent until such time as we can reopen. As we are working from home, and hope, that we will not need to lay off any of our employees, we will have to keep paying the rent on an office which lies empty, even the construction work is suspended for the foreseeable future.
So three landlords, three different trust levels, three different levels of response to the black swan event.
Now let’s look at our event planning business for a second angle and more evidence.
Our events business runs several conferences in two main formats: our Kanban Conferences designed as “broadcast” events where speakers present to a mainstream business audience of people who consume the information presented, this also includes our Enterprise Agility branded events; the second type of events are our Leadership Retreats intended for our partner network and are open space/consultants’ camp format type events intended for collaboration and sharing, there is no formal agenda or program and no pre-scheduled speakers. We also license our branded events to some partners in Brazil, India and historically within Europe too. We’ve been running conferences and events since 2008 and the current series or types of event since 2009 and 2011 respectively. We have a lot of experience with it and our small event planning team is seasoned and knowledgeable.
As the coronavirus crisis grew, our team started contacting venues for planned events this spring to ask about rescheduling. They were met with a denial response and an attitude that included full enforcement of penalty clauses: these are typically very one-sided in favor of the venue, other than the “force majeure” clause which usually requires the world to be close to (a couple of days away from) Armageddon before it becomes effective. Time went by. We weren’t making progress.
We began to see other large events cancelling altogether, and smaller events, some of whom we know, announcing rescheduled dates or cancellation. This made me wonder, how it was possible that these other event planning firms had managed to have fruitful conversations with their venues while ours were still in denial?
Trust offers us an explanation. Our events are traveling events. Our North America conference moves around the United States switching coasts each year. The aim is to make the event accessible for people in certain regions, especially, those working in sectors where their travel is heavily restricted such as the public sector. The secondary goal is to keep the event interesting for regular attendees by changing the location and venue. It became evident that events which don’t travel, instead use the same venue every year, were the ones which were able to make announcements of changes earlier. Where there was an established long term relationship between a conference and its venue, they were much more willing to work with them and be flexible. Our venues had never worked with us before, and tended to take a transactional view that this was a one-off deal and they’d never see us again. They had a short-term view of their business and our relationship. The exception for us was the village of Mayrhofen in Austria where we hold a Leadership Retreat every other year: the venue; the tourist office; and the local hotels know us, as we’ve been going there since 2012.
It has become clear that trust between business partners is enabling both sides to cope better with the crisis.
It is clear to me as the leader of an event planning business that the lack of trust that comes as a result of a traveling event adds significantly to the risk of organizing it. That risk would have to be priced and in theory should be passed on to the attendees: for the utility of convenience, or the utility of variety, there must be a premium. However, it is unlikely attendees would be happy to pay this premium when there are so many other events clammering for their time, attention and money. They may be willing to trade fidelity and quality for price, and hence select an alternative, albeit, inferior event instead. Consequently, it will be hard to truly price the risk for traveling events equitably. And subsequently, the likelihood is that in future we will move to a model where our events don’t travel. However, we are considering a compromise: two venues in two different locations/coasts/countries and we switch back and forth year to year. It will take double the time to fully build trust but there will be trust. This could be accelerated by signing a 5 event deal, stretching 10 years into the future. With a 12 year track record of event planning, any venue should trust that we can survive another 10 years and the deal is secure.
In the Kanban Maturity Model, we (I together with Teodora Bozheva) modeled trust as increasing through each of the 7 levels of organizational maturity. What I’ve seen over the past 4 weeks as the coronavirus crisis has developed has provided validating evidence that the model is correct in several dimensions:
- higher maturity businesses have more trust
- higher maturity businesses are better at risk management
- higher maturity businesses anticipate events a lot more
- higher maturity businesses take a long term view
- Where there is a disparity in organizational maturity between an organization and a vendor or a client, their relationship breaks down or struggles when placed under stress
Investing in trust is a risk hedge for both white and black swan events. If you know of white swans in your domain, then developing high levels of trust is a required strategy as part of a risk management plan. Meanwhile, more trust will always help you in the event of a black swan. Invest in trust within your organization, and across your relationships with other organizations. Developing trust is critical to your organizational resilience, critical to your ability to survive for the long term. Trust helps you move faster. In a crisis, an ability to move quickly, an ability to act on a elbow bump, or wink (handshakes are not advised at this time) becomes essential. Higher maturity businesses with greater levels of trust will survive this current crisis far better than those without it.
Organizational maturity, trust and resilience are not magic fairy dust. These are concepts that can be learned, practiced and improved. At the David J. Anderson School of Management we teach you how to learn, practice and improve, your organizational maturity, your trust and social capital, your risk management, your leadership and your organizational resilience. If you’d like to learn more about our (online) programs please visit http://djaa.com/ and contact one of my team who will be happy to advise you.