Chapter One: Build Trust
Two giant rivals in the shipping business -- Maersk and SeaLand -- launched a great undertaking, one of worldwide creative collaboration. Maersk, a division of Denmark's A.P. Moeller, and SeaLand, a division of the United States' CSX Corporation, concluded that the best way for them to compete in an increasingly difficult global market was to form an alliance.
Although they kept their sales and marketing separate, the firms in 1996 began rationalizing their port facilities and combined their two hundred container ships in networks that span the globe. So smoothly do these links work that a customer who hires Maersk, say, to transport machinery from Seattle to Shanghai, or from Rotterdam to Rio, might never know that for part of the journey the cargo passes through SeaLand terminals, is handled by SeaLand longshoremen, and travels in SeaLand ships.
What the two container companies know is that the alliance has enabled them to extend their geographic reach, drive down their costs, and step up their shipping frequency. And as the firms continue working together, their results keep getting better.
Maersk and SeaLand have forged a successful alliance. That is what Trusted Partners is about -- how businesses can build successful alliances. The same conditions and procedures are essential whether an alliance is between rivals, as in the case of Maersk and SeaLand, between customer and supplier, or for any combination of firms. They apply as well to alliances between divisions within a company, and to mergers and acquisitions.
Let's start with an important distinction. There is a night-and-day difference between transactions and alliances. In transactions, contracts spell out everything. Negotiations may be divisive because neither firm cares about the other's well-being. With transactions, information sharing is limited to what is needed to close the deal, because divulging more could yield an advantage to the other side. Transactions also encourage finger pointing rather than creative problem solving.
In an alliance, you can't define every detail. Success depends on creatively joining the ideas and energies of two firms, sometimes more. Though negotiations may be trying, alliances are framed by an understanding that it is in neither firm's interest to hurt the other. Most important of all, alliances depend on trust. No contract can anticipate what two groups must do to be creative together.
I use the term alliance to mean cooperation between groups that produces better results than can be gained from a transaction. Because competitive markets keep improving what you can get from transactions, an alliance must stay ahead of the market by making continuing advances.
This definition identifies an alliance by its outcome and implies needed behavior. For superior results you can't simply call each other partners. You must actually function as partners. Alliances go beyond doing things between firms that become transactions afterward -- like licensing, co-locating resources, starting to outsource, or trading a lower price for a longer term. Such tactics may be involved in alliances; alone they produce one-time gains. In an alliance, continued joint creativity leads to regular improvement, outperforming what any single change can do.
Alliances are structured various ways, depending on their purpose. Direct cooperation is the most common form. Joint ventures, where partners create a separate unit they own and control together, are also widely used. Minority investments, a third form, are less common. Regardless, the principles of trust are the same.
Despite the growing popularity of alliances, there are many failures. Consider the arrangement between Northwest Airlines and KLM Royal Dutch Airlines to combine their networks linking Holland and the United States, to build more volume for each carrier. Though the airlines' arrangement is now successful, behind the scenes when it began was what Fortune magazine dubbed "an eye-gouging, rabbit-punching slugfest, with accusations flying like dinner plates."
The seeds of this hostility were planted at the start. Soon after taking their own financial stakes in Northwest, co-chairmen Al Checchi and Gary Wilson persuaded KLM to help finance a leveraged buy-out at six times the per share price Checchi and Wilson had paid. Although such premiums are common in U.S. financial circles, they were unusual to KLM's managers, who viewed the arrangement as unfair.
This attitude, plus a growing concern that their partners seemed more like deal makers than airline operators, led the Dutch to try ousting Checchi and Wilson from Northwest and increase their own control. Northwest responded by attempting to limit the stake any shareholder could hold. The upshot: KLM sued Northwest, Checchi, and Wilson. So bitter was the clash that it jeopardized an alliance producing $200 million a year in operating profits. The feud also halted plans to integrate their cargo operations and reservation systems.
For KLM, the alliance had been a key step in forming a global airline. To realize that goal, the Dutch took several steps. Besides buying more stock in Northwest, they lobbied the U.S. government to relax foreign ownership rules, rejected other European carriers that wanted KLM to drop Northwest in favor of a different linkup, and sought changes in Northwest to support more integration of the two carriers.
For Northwest, though Checchi and Wilson never publicized their longer-term objectives, their leveraged ownership and prior record of skillful financial engineering led KLM to assume they would sell out when their contracts permitted or, as was expected in the industry, when another wave of acquisitions swept through. Further integration with KLM could undermine the financial flexibility needed to sell their stakes.
Seen in this light, both sides were consistent with their separate objectives. Apparently, they never discussed what they knew at the time -- the immediate logic of an alliance was overshadowed by basic differences in those objectives. Only after top executives left both companies did repair become possible.
What went wrong with the KLM-Northwest alliance was a lack of trust at the start. Aside from technical or marketing problems, that's what causes alliances to fail. Trust makes successful alliances work. This book shows how to initiate, sustain, and increase trust throughout the life of an alliance.
WHAT IS TRUST BETWEEN ORGANIZATIONS?
Mutual trust is a shared belief that you can depend on each other to achieve a common purpose. In an alliance, where your purpose is to get results that exceed what a transaction can do, mutual trust also means you can depend on each other to adapt as necessary. That involves more than keeping promises, because it entails changes that can't be planned in advance.
An alliance between Canon and Hewlett-Packard in the laser printer business illustrates. In the late 1970s HP was one of a few firms having both computer expertise and a successful peripherals business. At the same time, Canon had developed laser technology for its copier products; laser printing did not yet exist. Frustrated in its own efforts to develop a reliable low-cost printer, HP accepted an invitation from Canon to combine HP's computer skills with Canon's laser know-how.
After some iteration, the firms introduced their first desktop model in 1984. Early sales, forecast to be a few hundred units per month, actually were 3,000 units and soon rose to more than 40,000 per month. Volume grew so fast that the alliance quickly became an important part of each company's business.
Since then, the partners have become major rivals in the bubble jet and ink jet printer business, while their laser printer alliance has blossomed. Today, their collaboration involves many products and more than a thousand people in both firms. Still, they have no contract. Their alliance is too dynamic and involved for that. Rather, it is based entirely on trust.
Trust does not imply easy harmony. Obviously, business is too complex to expect ready agreement on all issues. However, in a trusting relationship conflicts motivate you to probe for deeper understandings and search for constructive solutions. Trust creates good will, which sustains the relationship when one firm does something the other dislikes. Having trust gives you confidence in a relationship and makes it easier to build even more.
"We would not have our results without trust," says Dick Murphy, SeaLand's senior vice president for corporate marketing and chief commercial officer, speaking about his firm's alliance with Maersk. "It is the cornerstone of our relationship."
THE EIGHT CONDITIONS FOR TRUST
As the KLM-Northwest affair suggests, trust exists only under specific circumstances -- such as having shared objectives. A logical way to discover these is to start with the definition of trust in an alliance: Each firm can depend on the other to get results that exceed what a transaction could do. That notion leads to a set of eight conditions for trust.
1. Mutual Need Creates the Opportunity
As alliances go, they don't get much better than Hewlett-Packard's and Canon's. For two decades, the firms have enjoyed a thriving relationship. HP has built a world market-leading laser printer business with annual revenues exceeding $2 billion, while Canon has gained handsome earnings supplying components to HP. "While we would be in the same business without Canon," says Doug Carnahan, an HP senior vice president, "we would be behind the pack in the marketplace. With them, we lead the pack."
The laser printer partners illustrate a central feature of alliances: It's not enough for two companies to ally just because they need each other. In an alliance, companies must share valuable resources and adjust their organizations to support joint activities. The management attention needed to do that is not likely to be available unless each firm concludes that the task is important, and that joining forces is the best way to go. In the case of Canon and HP, both firms regard each other as the right choice for meeting important objectives, a condition I'll refer to as a priority mutual need.
Take, for example Nypro, a leading injection molder of plastics and one of the fastest-growing and most profitable. Nypro has ten joint ventures in its core business worldwide, all outstanding performers, plus five in related businesses. Serious conflict with partners is rare. "In forming a JV, we always made sure it is so important to both of us that we would want to work through difficult issues to make it successful," says Gordon Lankton, president.
pardA priority mutual need is a source of respect, a building block of trust: Each side is bringing unique and significant value to the other and deserves to be heard. If mutual need is not a priority, forget about trust.
One of the first questions I ask companies that seek help with alliances is why they chose each other. The most frequent answers I've received in many years of experience are that it seemed like a good idea or that some executives decided to do a deal. More often than not, that vague starting point has led to failure.
An early step in weighing a possible alliance is to determine whether it will serve an important objective in your firm. Next, determine the best way to achieve that objective. Compare the merits of internal development, alliances, and acquisitions. Before discussions get serious, your firm and a prospective partner should confirm to each other that you are the best candidate for meeting the other's needs.
To get started in the right direction, the units that an alliance will serve must lead partner selection and conclude that the arrangement is their favored choice. Taking that role wins their acceptance and, because they are closest to the action, helps find the best partner. Further, since the alliance will affect their performance, these units must be accountable for its results. Nothing discourages teamwork more than imposing an unwanted partner on people who have a better alternative.
2. Interpersonal Relationships Make the Connection
Alliances live through people -- this is how all the parts come together. Deep trust -- the essential ingredient for creating the most value and solving the toughest problems -- grows as interpersonal relationships strengthen.
Listen to a mid-level manager at HP describe his ties with his counterpart at Canon: "I liked him. We developed a personal relationship. We could always solve the big issues constructively. We became candid with each other because at the heart of many issues were people's attitudes and personalities."
To appreciate the role relationships have in alliances, reflect on your own career. Have you ever been so comfortable with a colleague that you could candidly discuss the politics and personalities in your organization and how things really worked? If you answered yes (which most people do), did these understandings help you do your job more effectively? Did mutual comfort make it easier to tackle tough issues? Again, your reply probably was yes.
Each of us knows that good relationships enhance our performance and that they aren't always possible. But think about this: Inside an organization, if people can't resolve conflicts between them, a higher authority or political process may do so. Even if issues don't get resolved, the firm keeps moving along, carried by its own momentum. These solutions don't exist between separate companies.
3. Joint Leaders Deliver Both Firms
Our experience within companies offers useful lessons for cooperation between them. When top executives work closely together, staffers below know it is safe to cross internal boundaries. By contrast, polarization at the top virtually assures conflicts below, because people respect the turf of those above them. Similarly, an alliance will fail without joint leadership.
For HP and Canon, Doug Carnahan and Takashi Kitamura, now chief executive of Canon's Peripheral Products Operations, led the alliance during its early years of rapid growth. "The two of them could always cut through problems together," says someone who worked with Carnahan at the time. "They got along incredibly well. They really liked each other -- it was clear to everyone. In joint meetings they attended there was always a positive feeling that things would work out. The atmosphere was always one of creative problem solving to do what was best for our firms' mutual interest."
Reinforcing this sentiment, corporate presidents Lew Platt and Fujio Mitarai have had a high-quality relationship of mutual trust and confidence that continued even after Platt retired. "This symbol of collaboration at the highest level is important to all of us," says Carnahan.
4. Shared Objectives Guide Performance
Just as mutual need creates an opportunity to cooperate, having a set of mutually agreed-upon objectives guides your performance together. If your objectives are not aligned, expect discord.
Recall what happened to KLM and Northwest Airlines, whose alliance is one of many that have been weakened by conflicting objectives. More than half the underperforming alliances I have seen suffered from hazy or inconsistent objectives.
On the surface, having common objectives seems obvious. But they can be surprisingly hard to develop and the task often gets too little attention when alliances are built. To appreciate this, reflect on what it takes to find common objectives for separate groups within your organization.
Inside companies, people talk about managing by objectives but intuitively know the objectives are not the last word. Think of the last time vague or conflicting objectives caused confusion at your firm. How was the situation resolved? Chances are, someone with authority stepped in to set matters straight. Or behind-the-scenes politics ironed things out.
Again, those remedies aren't available with alliances. Here, your shared objectives must dominate. That's not just because there are no alternatives, but because when people know they will follow the same rules they are likelier to trust one another.
The way to get effective mutual objectives is to develop them from each firm's objectives. Then, if your mutual objectives are met your separate ones will be as well. Your objectives must be clear enough to serve as a practical decision guide at all levels in both companies.
For example, in the Canon/Hewlett-Packard alliance, Canon's goal is to sell more engines to HP, and to remain a global leader in its technology and profit from that; HP wants to build a strong position in the laser printer market. Starting with these separate objectives, the firms derived their shared high-level objective: to grow HP volume.
From that broad objective, the partners developed guidelines for staying on the cutting edge of user satisfaction. They also have rules about wanting to give users more for less and keeping their relationship on a win-win basis. With these rules as a foundation, the partners developed specific objectives and needed actions at the product level -- including market introduction time lines, performances, and price points. Their long-term plan goes out at least three years for products, farther for strategic and technology matters.
5. Safeguards Encourage Sharing
Cooperation entails sharing information and making investments with a partner. How far you go depends on your conviction that sensitive data will be protected. Another concern is what will happen to that data, to jointly held assets, and to resources and know-how you developed together, once an alliance ends.
Although nondisclosure agreements are necessary, they don't go far enough. To develop confidence that valued possessions will be handled well, before an alliance begins you must understand each other's firewall policies and practices, agree on who will own joint inventions, and define what will belong to whom after termination.
6. Commitment Creates Enthusiasm
An alliance excels when each of your firms invests its best effort -- assigns its finest people, backs them with needed policies and resources, and adjusts its organization. Mutual need creates the potential for this, but does not ensure it. Such dedication can be expected only if each of you believes you are being treated well by the other. That calls for allocating risks and benefits fairly, rather than using win-lose bargaining to get what you want.
"Before we agree to cooperate, we want to be sure we share a strong feeling that each of us wants to help the other succeed," observes Nypro's president Gordon Lankton.
Alliances can run into unexpected events that shift the costs or benefits away from what is fair. Then, to keep trust you have to reset the balance. Doing so is not altruism by whichever partner yields some of its gains. It is enlightened self-interest.
7. Adaptable Organizations Support Alignment
One aspect of Chrysler that made the firm attractive to Daimler-Benz was the remarkable cost savings the American firm had achieved with its suppliers. Among U.S. auto makers, Chrysler was the only one to build true alliances across its supply base. The results showed. Working together, Chrysler and its suppliers made the firm the lowest-cost-per-vehicle auto maker in the United States, possibly in the world. Central to Chrysler's success has been smooth teamwork among its design, engineering, and other functions. Such collaboration is rare at other auto makers, where turf battles and conflicting signals from the various disciplines inhibit suppliers' contributions.
Here is a key to alliances: Organizations that collaborate well on the inside have the skills needed for doing so on the outside. The opposite is equally true. Similarly, companies that really manage by objectives on the inside make better partners because they can more easily link their internal objectives to their alliance objectives.
Some of the most common pitfalls in alliances -- poor teamwork, cumbersome processes, and fuzzy objectives -- come from within partner firms. It would be a mistake to believe that an organization will change its normal behavior to a more enlightened one for an alliance. Because company cultures evolve slowly, your expectations for an alliance must recognize what each organization can do. IBM and Sears, Roebuck missed this point when they formed Prodigy, the on-line service business.
Alone in a new and promising market, Prodigy was a trailblazer when it began in 1990. Five years later, the service had become a distant third and was fast losing market share. Even though its corporate parents had invested more than $1 billion, Prodigy had yet to see a sustained profit. Both partners bailed out in 1996.
The venture's troubles were predictable. Before Prodigy was created, IBM and Sears had stumbled badly in consumer markets and failed to learn from their mistakes. Lacking useful parent guidance in marketing, Prodigy lost its way. Further, the parents imposed their lumbering styles on the child. To illustrate: After fifteen months of planning, Prodigy introduced prices designed to undercut rival America Online. The speedy AOL matched the cut in six hours.
8. Continuity Sustains Understandings
To maintain superior performance, you and your partner must be confident that your successful collaboration today will continue tomorrow. When those involved in an alliance move on to other jobs, or when new people arrive, you have to keep those attitudes and understandings that were the alliance's underpinnings in the first place. For these reasons, continuity is a condition for mutual trust. Achieving it involves a combination of recruiting, training, career planning, promotion criteria, performance measures, and incentives.
HAVE REALISTIC EXPECTATIONS
How well the conditions for trust are met determines the potential for an alliance. For instance, weak mutual need inhibits internal support; vague objectives invite possibly destructive conflict. To some extent, champions may overcome such problems.
As an example, while Canon is proud of its well-known brand, the laser components it sells to HP do not carry the Canon badge. That has created internal resistance toward the alliance. "I have had to push for the HP relationship," says Takahashi Kitamura. "This has not gotten easier. I have always had difficulties."
At HP, in the alliance's early days many regarded cooperating with others as a heresy. Compounding concerns about a loss of independence was the fact that the new printers could be sold through dealers, whereas HP previously had relied on its own sales force. "The laser printer relationship did not naturally propagate here," notes John Stedman, an early champion. "It really took a lot of work." Backing by Carnahan, Kitamura, and others in both firms, along with the partners' unquestionable success together, have helped.
But championing alone can't explain Canon's and HP's track record. Though early advocates made an obvious difference, they were working in an environment where mutual need was widely recognized in both firms, shared objectives were clear and broadly accepted, and both organizations were able to respond to changing needs.
Don't expect trust between other groups in your firms just because you have been successful together. Those groups may have separate interests, priorities, or styles. An alliance between Ford and ABB to build paint plants was a model of best practice. Yet the auto maker has created rancor at other suppliers and weakened their commitments. The diverse styles at Ford are due to varying norms throughout the company about how to work with suppliers.
The potential for trust between firms is higher the more that both have in common; it is limited by any differences. Despite obvious contrasts, many similarities between Canon and Hewlett-Packard have made their collaboration easier.
Both firms hire individuals who work well in a team environment. Both rely on consensus processes. People in both companies regard their counterparts as easygoing. Unlike employees at most Japanese firms, Canon's are less group-oriented and more individualistic. Compared with most American companies, HP is more group-oriented, while its people are not as outspoken as many Americans. Further, both companies' laser printer units have compatible structures. Another plus: Canon staffers who interact with HP are competent in English, while HP has hired Americans fluent in Japanese, and several others there have learned the language.
Because trust building depends on what happens within as well as between firms, you will need to pay attention to personalities and politics, as well as tangible matters covered in transactions -- like products and terms. Think about it this way: The most important contract you will have with a partner will be unwritten and unsigned, but very much understood. The essence will be about how people and their organizations behave.
HOW TO BUILD TRUST
Though satisfying the eight conditions for trust is necessary, there is still more to do. You and your partner must also engage in practices that build trust and that depend on those conditions. For instance, as the book will elaborate, one such practice is constructive problem solving. To succeed at that requires interpersonal relationships to develop needed understandings, a clear shared objective to guide decisions, commitments to ensure people that the outcome will be fair, and adaptive organizations able to support joint decisions.
How to employ each of the conditions and practices is detailed in Chapters 2 through 7, in a step-by-step fashion, beginning when you first contemplate an alliance and then moving through negotiation to implementation. Each step adds a condition to be met or a practice to be used, and each step builds on the earlier ones. Following the road map here will help you avoid having to make a leap of faith that trust will be there when an alliance begins.
As your negotiations proceed, meeting more trust conditions and adapting more practices fortifies trust, smooths the transition to implementation, and increases your performance together. By following the sequence explained here, you will be able to assess progress and foresee problems. If any step seems particularly difficult, you can decide whether to invest more effort or say goodbye.
Chapter 2 sets the stage for later chapters by focusing on those conditions and practices that must be addressed early on. It covers ways to build relationships that will contribute to trust, criteria for selecting joint leaders, and what their responsibilities entail. The chapter also describes key practices like building interfirm teams.
Chapter 3 explains how to combine each firm's objectives and how to use the result as a guiding framework to develop an alliance. Also discussed are ways to be creative together and to resolve conflicts constructively. Chapter 4 describes how to align both organizations around your mutual objectives, develop alliance plans that reduce the risk of failure, and adopt policies that support continuity when people move on.
Chapter 5 presents ways to apply the conditions and practices developed earlier to alliances involving more than one business unit from each partner.
Two more steps get you ready to begin an alliance. One is to select the right structure; the other is to establish effective governance. Both are spelled out in Chapter 6. Launch and implementation are the topics of Chapter 7. These last steps toward mutual trust reflect a key aspect of alliances: Even when you are under way, you can't take anything for granted.
Chapter 8 shows how to repair broken trust. After explaining how to diagnose failure, it presents the sequence of steps needed to get back on a healthy course.
How to build trust with difficult customers is the thrust of Chapter 9. Selling alliances to customers is described in Chapter 10. Because rivals have much in common, alliances between them are now popular. Even so, many are plagued by the problems common to all alliances and have the added burden of starting with hostile attitudes. You will learn how to overcome those handicaps in Chapter 11.
In Chapter 12, the conditions and practices for trust are applied to show how to forge alliances between groups within a company, and how to create a culture of cooperation.
Building trust in mergers and acquisitions is explained in Chapter 13, which draws on material from earlier chapters.
"Tools for Trust," the final section of Trusted Partners, describes how to measure trust, and offers guidelines, checklists, and other devices to guide alliance development and management. The Appendix presents scholarly underpinnings of the trust conditions described in this book. It also shows how each of the trust practices depends on one or more of the eight trust conditions.
Copyright © 1999 by Jordan D. Lewis