Feb 3

Relationship Capital - a new management currency?

Late in the 20th Century, Harvard marketing guru 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 behavioral and attitudinal, that underpin relationship strength and have demonstrated a link between these factors and relationship strength.  

From a behavioral 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 important.

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 when Levitt introduced the notion of relationship marketing. 
As Kirsten Sandberg, executive editor of Harvard Business School Publishing, put it:

“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 their customers faster and more efficiently – anytime and anywhere. Customer loyalty hasn’t increased.”

Clearly, something has gone wrong. 

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.

Organizations do not typically buy from organizations.
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.

Though the list of big name collapses in recent years should make us wary of trusting names: Kodak, Westinghouse, Schleker, Nortel, Lehman Brothers and more.

The 2008 financial crisis and its long aftermath in particular, taught us that blindly trusting brand names, especially in banking (that historically most conservative and “relationship” oriented business), is not necessarily wise.

Coincidentally, my Smarter Selling co-author, Keith Dugdale, and I were in New York at the time of the crisis and were sitting in the offices of Bank of America on 14 September, the day they bought Merrill Lynch for a knock-down price.

The events of the  past few years 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.”

Recently, the world has focused on technology advances to drive growth, and deliver accountability.

Interestingly though, while our consumer lives are increasingly free of human touch, our work lives increasingly rely on our ability to influence others across different departments, and often between organizations and across time-zones to collaborate, innovate and get things done.

To get things done, people must work with other people – and in an environment where trust in corporates (and many public figures) has been undermined, a re‐examination of the strength and value of an organization’s relationships with itself and with the outside world, is critical to valuing the overall strength of a business and its future prospects.

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

What is relationship capital

We define Relationship Capital as:
 
The value of all relationships that all people within an organization bring to that organization.
Further, Relationship Capital may be calculated as:

The sum of the strength of each individual’s relationships with other parties, with respect to each other party’s degree of power and influence.

These can be relationships with suppliers, partners, ex‐employees, nodes (people with high influence not necessarily associated with any organization), or other functions within your organization.

Factors to consider in calculating Relationship Capital include:

  • power and influence of the other party
  • type of relationship
  • strength of relationship
  • number of touch points on both sides
In accounting terms, Relationship Capital constitutes a key element of “goodwill” or intangibles.

Goodwill reflects the difference in the valuation of organizations between say, their share price, and the value of their physical assets and current revenue streams.

This difference in values is often explained by intangibles such as the value of the brand name; copyrights and patents; proprietary systems and processes; and employees’ knowledge and skills.

These sources of value are often referenced as structural capital, intellectual capital and human capital.

The value of relationships, both within and beyond the organization is another intangible source of value. Intellectual capital and human capital are already part of the corporate lexicon.

Relationship Capital should now be added to that lexicon.