Relationship Capital – a New Management Currency

There is an adage in business that “People do business with people.” Organisations do not typically do business at the organisation level.  The events of recent years have taught businesses that many businesses, particularly in banking and finance, relied on relationships that were built on very shaky foundations.

Going forward, organizations will focus a greater degree of attention on evaluating and managing the quality of their business relationships – what we term their relationship capital.

Relationship Capital comes of age

More than 20 years ago, Harvard’s Theodore Levitt introduced the term “relationship marketing” to suggest that establishing long-term relationships with customers and clients was preferable to transactional marketing. Levitt reflected that the difference between transactional and relationship marketing is to the difference between a marriage and a one night stand.  “The sale, then, merely consummates the courtship at which point the marriage begins,” wrote Levitt. “The quality of the marriage determines whether there will be continued or expanded business, or troubles and divorce.”

In the intervening years, numerous studies have established the benefits of creating and maintaining strong customer relationships. Strong relationships equate with greater customer loyalty and retention, which ultimately result in higher sales, market share, and profits.

Equally, numerous studies have focused on the factors, both behavioural and attitudinal, that underpin relationship strength and have demonstrated a link between these factors and relationship strength. From a behavioural perspective these include factors such as duration of the relationship, frequency of contact/order, regularity of contact/order and monetary value.

From the attitudinal viewpoint variables such as satisfaction, trust, commitment to stay with the supplier/provider and the perceived costs of switching to an alternative provider/supplier, are considered

Surprisingly though, while the value of strong customer/client relationships is widely accepted, the measurement and management of the value and management of the value of such relationships remains and underdeveloped science.

Indeed,despite the huge investments made by organizations in customer relationship management systems (CRM’), or perhaps because of them, the human touch is more absent from business relationships today than it was more than 20 years ago when Levitt introduced the notion of relationship marketing.

As Kirsten Sandber, executive editor of Harvard Business School Publishing, commented in 2006:

“The snazzy technology was supposed to make onet0 one interactions with customers a reality, but experts say all it has done is enable companies to.

From the attitudinal viewpoint variables such as satisfaction, trust, commitment to stay with the supplier/provider and the perceived costs of switching to an alternative provider/supplier, are considered 5,6.

Surprisingly though while the value of strong customer/client relationships is widely accepted,the measurement and management of the value of such relationships remains an underdeveloped science. Indeed, despite the huge investments made by organizations in customer relationship management systems (CRM’s), or perhaps because of them, the human touch is more absent from business relationships today than it was more than 20 years ago when Levitt introduced the notion of relationship marketing. As Kirsten Sandberg, executive editor of Harvard Business School Publishing, commented in 2006: “

The snazzy technology was supposed to make one‐to one interactions with customers a reality, but experts say all it has done is enable companies to disappoint theircustomers faster and more efficiently – anytime and anywhere. Customer loyalty hasn’t increaesd. Companies still can’t target their most profitibale customers, and their data-mining and sales processes are still as convulated as ever.’ 7

In the drive to define business management as science and systematize sales and customer interactions, firms have lost focus on a key principle of good sales and customer management:
People buy from people. Organisations do not typically buy from organisations.

Of course there are situations where organizations buy from organizations. Where the brand name is so strong, that purchases are made without strong personal contact. If nothing else, the events of 2008 taught u that blindly trusting brand names, especially in banking (that historically most conservative and “relationship” oriented business), is not necessarily wise.

The events of 2008 also taught many companies a harsh lesson in valuing the strength of relationships. As one banker commented to us: “We thought we had strong client relationships, but when times got hard we had some nasty shocks. Clients who had been with us for many years simply walked away.”

The banks were the first to feel the impact, but in the new business environment, organizations across all industries recognize the growing need to refocus their efforts of evaluating and managing relationship strength.

Taking this a step further, attributing value to the cumulative and inter-connected relationships of all people in an organisation; both internally (with colleagues) and externally (with customers, clients, suppliers and broader contacts) reflects an organisation’s relationship capital.

The time is right for a renewed recognition that people do business with people and in an environment where trust in corporates (and many public figures) has been undermined, a re-examination of the strength and values of relationships is critical to valuing the overall strength of a business and its future prospects.to improve their Relationship Capital.

Relationship Capital v’s Social Capital

Similarly, Relationship Capital is not related to Guanxi (meaning relationship in Chinese). The core concept of Guanxi in Chinese is ‘a personal connection between two people or a group of people (a network) in which one is able to prevail upon another to perform a favour or service, or be prevailed upon.

As an art of social relationship, Guanxi has generally formed the basis of Chinese social value structure. In business however, it sometimes violates proper business norms and can lead to corruption.

The advent and popularity of social networking websites such as Facebook, Twitter and LinkedIn are also sometimes confused with Relationship Capital.

Such sites are proving popular not just with the Y generation and beyond, but with the C suite.People take pride in the number of contacts they have on these sites.  It is starting to become almost a definition of one’s importance.

The simplicity of such sites, a key reason for their rapid adoption, is also potentially their weakness when it comes to business relationships.  They can be used to quantify the number of relationships a person has, but they do nothing to qualify the quality or strength of any relationship.

It is true that such sites do create relationships, but the relationships are typically superficial and socially oriented. Deriving value from these relationships is more difficult.  Indeed, the sites themselves, while popular, continue to struggle to monetize their offerings.  As Sergey Brin, cofounder of Google noted in late 2007, “I don’t think we have the killer best way to monitzize social neworks yet’ (9).

One reason may be that while social networks measure the quantity of relationships, they do little to measure relationship quality.

The benefits of a focus on Relationship Capital

A focus on Relationship Capital delivers many benefits.

These include:

  • A better understanding of the organization’s business sustainability. Early identification of significant accounts where Relationship Security may be weak and therefore the account may be under threat.
  • Lower costs of winning work, since, “in general the cost of retention is far lower than cost of acquisition. ”10. Maister et al estimate that the cost of winning work from a new client is 47 times higher than winning more work from an existing client.11
  • More profitable work because customers want to work with people they trust and so are prepared to focus less on price. Better matching of people to people e.g. matching sales reps to buyers on the basis of those best able to relate effectively.

The better the relationship the more likely you have an environment in which clients/customers will buy from you.

More word of mouth promotion and referrals. Lowering the likelihood of clients/customers switching to competitors. This makes it more difficult for competitors to enter the market.

Happier customers lead to happier employees; improving staff retention and reducing hiring and training costs.

Given that an understanding of Relationship Capital and a focus on managing Relationship Security has so many benefits, why do so few organisations take the trouble to understand, measure and improve these key indicators of future business success?

First, it is not easy to measure. Second, to improve takes concerted, organization‐wide effort.

In later papers, we look at how to support the change that is required both in terms of the technology which is now available to measure Relationship Capital and the ways that individuals, teams and organisations can work to improve their Relationship Capital.

About the authors

David Lambert and Keith Dugdale are the founders and principals of IOWEU International and co‐authors of the best selling business book Smarter Selling (FT‐Prentice Hall (FTPH), ISBN 0273 712 462).

IOWEU International promotes and manages the global application of the Relationship Capital through a range of training workshops, coaching programmes and consultancy services delivered by nearly 100 certified facilitators in over 20 countries. Contact IOWEU International via info@ioweu.com.

Patrick Boucousis is the founder and Managing Director of Traxor, an Australian company with a revolutionary new approach to Sales and CRM systems.

Traxor Relationship Management reflects how business really gets done: person‐to‐person. It enables organizations to implement people focused sales and support practices and to see markets and customers, not simply as ‘contacts’, but as real people.

Ultimately, Traxor enables organizations to gain the insights necessary to create and grow mutually rewarding business relationships.