The importance of credibility

As a strategist, in a world where anyone might defect if it is profitable to do so, the sensible play is to make sure that every collaborative deal is very much biased in favour of cooperation rather than defection. This is not as straight forward as it sounds because it requires being able to anticipate the thinking of others. This can be illustrated by another of the dialogues from "How God Makes God", where an experienced businessman is advising a novice how to arrange a collaborative partnership:

To make money you will need to be able to persuade and influence. To do this effectively you'll need to have a good reputation. Every promise you make in any negotiations is going to be discounted according to your credibility.

Credibility?

That's much the same as track record. Credibility is a measure of how much truth or believability there appears to be in whatever you have to say to anyone.

Give me an example.

If you were to offer me a fifty percent share, in a proposition which you see as certain to make a profit of one hundred thousand dollars, and I turn you down to do something with an old business pal that will make me only ten thousand dollars, you probably wouldn't understand why.

You are right. I wouldn't.

As I know you have no experience of making money, I would not have a great deal of confidence that your plan would work out. Therefore, I might well think that I would be better off earning a reasonably certain ten thousand dollars with my friend, whose judgement I know I can rely on, rather than take a long shot chance with you to gain fifty thousand dollars.

Thank you very much.

The point I am trying to make is that when you make an offer, an inducement, or a promise to anyone, it is utterly useless to assume that the other person is going to see it as being as valuable as you might see it yourself. Most people new to business get really upset because they never allow for this and think people are trying to cheat them all the time.

How would I know the perceived value that other people place upon my promises or inducements?

Common sense I suppose. You have to always put yourself in the other person's place. See things as they might see them and remember that this discounting works both ways.

Both ways?

Why yes. The other person might be seeing a greater value in what they have to offer than you can recognise. You will be discounting the risks and uncertainties from your point of view - which they might not be able to appreciate.

You make it seem impossible for people ever to be able to believe in each other enough to begin collaborating.

It is difficult, I agree, but this is why it is so essential to develop continuous relationships in business, where you can become familiar with each other's abilities and values. This is a far better strategy than making quick, one off deals - where values always have to be heavily discounted.

I had a bitter experience that emphasises this point. It happened after I'd built up a very successful retail jewellery boutique in the trendy "Hyper-Hyper" fashion market in London's Kensington High Street.

As a direct result of the success of this unit, I'd been offered concessions in all the stores of a national fashion multiple: some 30 units spread throughout the UK. I was hesitant to take up this offer, even though I knew it could lead to a huge expansion of my business, because I knew I'd have difficulty in obtaining sufficient designer jewellery to meet the potential demand.

Then one day a lady came into my Kensington boutique offering me some of the best pieces of costume jewellery I'd ever seen. They were of a style that I recognised as Art Deco - the style characteristic of the 1930's. They were very reasonably priced and I bought every piece she showed me. I asked her if she could get any more and she said she could get plenty because her husband had just bought the contents of a old jewellery factory that had just closed down in France. I was extremely excited and arranged to go to France to meet her husband to buy more of this jewellery.

When I arrived, I was driven way out into the French countryside where I was taken to a picturesque old building. Inside were the remnants of what had once been a highly productive costume jewellery factory. There were presses and various kinds of ancient belt driven machinery and strewn around the floor were countless numbers of jewellery components. The walls were covered with shelves, stacked with dies and moulds for jewellery manufacture. Looking through them, it was clear to me that this was the production facilities of decades of jewellery making.

I immediately thought of these production facilities being put to work again, to supply a string of jewellery units in the chain of national outlets. Excitedly, I explained how we could collaborate together to create a great business. He had access to this manufacturing capability and I had the contacts and the organisation to set up the retail side. I suggested that we set up a partnership.

He said it was a great idea, but, told me he had yet to complete the payment for all this stock. I asked how much more he had to pay and he told me he would need £25,000 straight away to complete the deal. It was a lot of money and would take all the money I had, but, it seemed such a great opportunity I agreed on the spot. No formal agreement, I just gave him the money. Well, he seemed such a genuine guy.

The reason why I could agree so quickly was because I knew that just the components lying around on the floor would probably return most of the money because the arcade where I had been running the "£3.99" shop was shortly due to close and I could use this shop to sell this stock off cheap.

When the rubbish stuff from the floor was shipped over from France, I was surprised to see that it was accompanied by an invoice. All the items had been given an excessive price and the invoice total came to exactly £25,000. I'd been had. He'd reneged on the deal and ripped me off for the money. All I'd got was a lot of rubbish jewellery components which were hardly worth a tenth of the money I'd given him. I found out later that this guy was in fact a confidence trickster, who had cheated many people in the past. And once he'd worked this scam with me, he worked it on several other people as well.

The pity was that the situation could probably have resulted in a very profitable business and he'd have made much more money playing it straight. But, how was he to know? He'd had no experience of creating a business based upon having units in retail chain of stores, so, my idea was to him just pie in the sky and it made perfect sense to him to defect.

Of course it would be easy to say that I should have gone to a lawyer and had everything put into a watertight contract. Would that really have saved my money? He'd have probably found a way to cheat me anyway and it would have cost me a lot more in the long run - plus used up a large part of my time. At least, I discovered he was a crook very fast and I was quickly free to start building up again, without dragging the thing out for perhaps many months or even years of anguish.

In the world of e-business, a similar scenario is happening time and time again. Investors are investing money, time or effort into dreams that not everyone shares. The problem is that it is not just confidence tricksters that are catching people out. Genuine people, with ideas they honestly believe in put up seemingly realistic business plans that subsequently fail. This has exactly the same result to the investors as if the instigators had deliberately tricked them out of their money.

A developer on one of the technical email discussion forums I belong to mentioned that he'd had a couple of unfortunate experiences with collaborative associations. He told me that the first was where he'd paid his team of workers to develop software for a company on the basis that he'd get a percentage of the business. He wasn't cheated out of his share, it was just that the idea hadn't worked out the way they all thought it might and the lack of profits caused the business to fold. Different circumstances but the end result was no different from what had happened to me when I was cheated out of my money.

He told me of another experience, where he and another programmer had formed a business association with a very good salesman with a wealth of experience and contacts. Halfway through the project, the salesman had been offered a better opportunity and he just cut away from the business and left them on their own. Without any salesman to sell their product, they had no choice other than to close the business down. Again, he wasn't cheated, but, he'd been so convinced that the technological solution he was designing would lead to a profitable business that he hadn't even considered the possibility of the salesman walking away from it. But, to the salesman, the technical details were so beyond his comprehension that he wasn't able to assess the value. A more tangible opportunity presented itself and it seemed rational to the salesman to defect.

Again, it might be considered that this was just a question of being either unlucky or stupid enough to choose a collaborator who had no scruples, but, this in not the way to look at it in the world of e-business. The deal should have been set up with the expectancy that a collaborator would defect if it was to his advantage to do so. This is the way it would be looked at in Game Theory and because of this, a collaborative arrangement would have been structured quite differently. It would have been arranged that instead of big risks, the whole deal was arranged as a series of small risks, which always ensured that defection at each stage became progressively less attractive for the collaborators involved.

This is where an evolutionary strategy provides a solution. Instead of collaborating in one major plan that is fully defined and structured. It is better to develop an idea or a business as a series of small steps or generations. Each step should have a short term goal and the decision as to what the next step should be taken only when the results are known. This will allow a business to build upon experience and knowledge and at every step the risks and rewards can be freshly assessed.