Aug 15

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 similar to the difference between a marriage and a one‐ night stand.

“The sale, then, merely consummates the courtship at which point the marriage begins.  The quality of the marriage determines whether there will be continued or expanded business, or troubles and divorce.”

Numerous studies have established the benefits of creating and maintaining strong customer relationships: 

  • preferred partner status
  • fewer complaints
  • fewer price objections
  • more referrals

ultimately, higher sales, market share, and profits.

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.”

The latest "snazzy" technology being all manner of data-driven, sales enablement tools. 

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.

They might use websites, social media and other technology tools to evaluate offerings and check on providers, but people still play a big part, and we still tend to buy from people we like and trust.

In modern business-to-business (B2B) relationships, multiple individuals are involved in the decision process.  Sellers need to identify decision-makers and influence those people.

By 2019, Gartner suggested that average B2B buying decision involves 6 to 10 people, each of whom is armed with more than four pieces of information they’ve independently gathered as part of their own decision-making process.  Gartner also noted that 77% of buyers struggle with the complexity of their own buying processes.  Anyone who has ever dealt with their own corporate procurement function will understand where that statistic comes from. 

Interestingly though, while our consumer lives are increasingly free of human touch, our work lives increasingly rely on our ability to work with others across different departments, between organizations and across time-zones; we must also collaborate, innovate and get things done across ever greater distances; sometimes without ever meeting the people we are working with.

In addition, diversity and inclusion, and a focus on creating places where people want to work means that organizations are looking more closely at the cultures of their B2B business partners to see if they are a good fit.  As an anecdotal example, a partner at a consulting firm shared with me recently that some clients are now asking for "chemistry meetings" prior to selcting advisors, to make sure that the team that will be doing the work, is a good fit for the people they need to work with at the client.

The importance of people is not going away.  Roles may change, the particular business focus at a point in time may change, but people will always exert influence over major purchasing decisions. 
Being prepared for opportunities, with relationships in place, with the right people will continue to be a major determinant of who wins.

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.