Kelman: Creating value and trust

If you treat industry partners like you can’t trust them, it’ll be a self-fulfilling prophecy

Angela Styles, former administrator of the Office of Federal Procurement Policy, was quoted recently in the Washington Post about her views on government/
industry partnerships. “It’s kind of like going into a used-car dealership and being too trusting. I don’t think you really want a partnership with a used-car dealer because you’re probably not going to get the best car at the lowest price.”

Styles’ statement ignores a large body of academic research on successful negotiations and contractual relationships. Probably the single most important publication on negotiating is the classic, “The Manager as Negotiator,” by David Lax and James Sebenius. It distinguishes between creating value and claiming value.

Lax and Sebenius write that any successful negotiation or contractual relationship includes elements of creating value and claiming value. By forming partnerships, parties create value. The free flow of information between parties creates new knowledge and leads to solutions that neither party could achieve alone. The vast literature on cross-organizational learning makes that clear. However, the literature also makes clear that the free flow of information requires trust.

Trust dramatically reduces the amount of resources organizations must put into monitoring the relationship. The amount of resources used for monitoring a relationship that lacks trust can often be so large as to destroy the advantages of the relationship. Nobel Prize -winning economist Kenneth Arrow many years ago asked people to imagine what would happen to functioning markets if consumers thought they had to take a scale with them to weigh each package of meat before they bought it.

That reminds me of a warning I received long ago before visiting India about being careful when mailing a letter at a post office. I was told to make sure the stamp was canceled, lest the employee steal the stamp after I had paid for it.

When trust is lacking, contracting parties often must invest enormous resources to create trust.

After a foundation of trust is established and value is created, that value must be divided. However, in claiming value, the parties’ interests are not the same. In this aspect of a partnership, the government must safeguard its interests. One of the most effective ways for government to protect its interests in relationships with industry is to use a company’s past performance in making future contract awards. I will write about revitalizing the use of past performance in an upcoming  column.

Styles’ used-car analogy reminded me of another classic, “The Market for ‘Lemons,’ ” by Nobel Prize winner George Akerlof. Because consumers can’t trust used-car dealers to provide accurate information, the used-car market functions poorly and economic value is destroyed. That is illustrated by the price gap between a new car and one that has just left the showroom.

Here’s the point: Treat industry partners like used-car salesman, and you’ll create a self-fulfilling prophecy. They will act like used-car salesman, to the detriment of well-functioning markets.

Kelman is professor of public management at Harvard University’s Kennedy School of Government and former administrator of the Office of Federal Procurement Policy. He can be reached at steve_kelman@harvard.edu.

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