Why initial trust is more than getting to know you
Relationships with new suppliers are a key to future profits
More than ever in business, collaboration is a critical element of success.
Suppliers and service providers are no longer just part of an outsourcing strategy, they are seen as valued partners whose contribution is vital.
But in an era of the gig economy, the problem is that there are so many new collaborators and each collaboration can be fleeting or just a one-off.
Their service or product may be essential, but in many sectors there are a number of potential suppliers and service providers who can provide the same service or product.
The quality that can elevate the supplier relationship from one that is easily replaceable to a genuine value-added collaboration is trust, and this was the focus of a recent experiment at UNSW Business School's experimental BizLab.
Led by Mandy Cheng, a professor and head of the school of accounting at UNSW Business School, the experiments sought to understand the factors behind trust. Co-researchers were senior lecturer Yee Shih Phua, alumna Hwei Fern Chang, and Shannon Anderson, a professor at University of California, Davis.
The aim was to gain insights into what psychological factors drive a manager's initial trust in a supplier during the due diligence process, and the consequences of this trust.
"Trust is critical to the success of such collaborations," says Cheng.
"The increasing prevalence of temporary work and inter-firm projects also means that it is important to understand how trust is built among 'strangers' at the start of new collaborative relationships, the so-called 'initial trust'."
According to Cheng, contracts can only go so far. They are one driver of how managers control their suppliers, counterbalancing the more intangible power of trust.
"When you have a relationship with a supplier or a contractor, you may be tempted to put everything and all contingencies in the contract," she says.
"But the reality is that the contract can't cover everything. You can't foresee everything, and it is almost impossible to write a clause on every possible scenario.
"This is why trust is important. If you are in a situation of trust, then you know that even if something is not covered in the contract, the supplier will do the right thing and deliver the right quality of output."
'The procurement process is very important. Managers will feel more in control when they choose a supplier to work with'MANDY CHENG
The supplier's effort
In the experiment, participants assumed the role of managers and were given real money to invest in a joint project with a supplier. The final return was dependent on the outcome of the joint project.
To mimic a collaborative project, participants had to choose how much money to invest, and how much to spend on management controls to monitor the work and performance of their supplier.
The key to a higher return was the supplier's effort; the more effort the supplier put in, the greater the likelihood of a higher return on investment.
One factor the experiment examined was the effect of granting authority to the manager in choosing their own supplier.
Procurement practices vary across organisations. In some firms, purchasing decisions are delegated to divisional managers who are able to choose their own suppliers.
Sometimes managers choose from a preferred vendor list, while in other firms purchasing decisions are centralised.
So does allowing the manager to make the final supplier choice change the level of initial trust in new collaborations? The consensus among psychology theories is that it does.
"The very act of choosing a supplier can cause you to view the selected supplier more favourably even if other potential suppliers are equally capable, and result in a greater commitment to the relationship," says Cheng.
"This is due to human beings' natural tendency to rationalise their choice after it is made, in order to feel better about their decisions.
"So the procurement process is very important. Managers will feel more in control when they choose a supplier to work with. They will have a psychological tendency to trust the supplier more than if others had chosen the same supplier for them."
'We found that goodwill trust results in less spending on controls, while competence trust results in less money spent on controls and more money spent on investment'MANDY CHENG
The conclusion is that the act of choosing increases managers' trust in suppliers.
In addition to investing in the joint project, the experiment's acting managers also had funds to use in monitoring their suppliers to ensure they were putting in the effort.
If there was a high level of trust, then managers were inclined to invest less in monitoring, thereby saving money. So a low level of trust had a real financial consequence, because managers were more inclined to spend on monitoring their supplier.
"The dilemma is that if you put in a lot of controls you could be potentially wasting your money, because the supplier could be doing the right thing and putting in the right amount of effort anyway," says Cheng.
"Further, with some suppliers, if you monitor them too much they might become annoyed, demotivated – and their feeling of not being trusted can also have a negative performance effect."
In addition to showing that trust is potentially more efficient than monitoring, the experiment also showed that in situations of trust the managers were willing to invest more in the project because they believed the supplier would perform well.
A second focus for the experiment was around information sharing from the supplier.
Managers can interpret a supplier's willingness to share information as proof of their openness, and even perhaps their honesty.
If a supplier was prepared to share information with a manager, did that create a feeling of trust with the manager even if the information was not directly related to the business aspects of the project?
The answer to this was yes. The social nature of information sharing, even if the information had no useful content, had a positive influence on levels of trust.
Goodwill and competence
But is this wise?
Managers are human, and human beings are social. When people share information it is a natural response to respond positively to them, even if what they are sharing is just general conversation and banter.
"Given that information is often exchanged as part of the due diligence process on potential suppliers, managers need to be careful not to place unwarranted trust in a supplier who appears very willing to share information," says Cheng.
"Instead, they should base their trust on the actual content of the information shared, while at the same time understanding that sharing information does build trust even when the content is not sensitive."
The research also shows that two types of trust have different effects on collaboration. There is goodwill trust, or the belief that a supplier will act in your best interest, and competence trust, which is a belief that a supplier is capable of completing the job.
"We found that goodwill trust results in less spending on controls, while competence trust results in less money spent on controls and more money spent on investment," says Cheng.
Ultimately, the experiment found a real link between initial trust and investment and control decisions, but there is always a risk around misjudgment.
"Misjudging the initial level of trust could have real consequences, in that managers could incur unnecessarily high costs on controls and make lower than optimal investments in the collaboration," says Cheng.
"Alternately, they could inadvertently take on excessive risk by spending too little on controls, and spending more than optimal on a risky collaboration."