How - Dov Seidman [72]
Soon these judgments will become pervasive and ingrained, affecting every evaluation of a company’s prospects and its ability to perform in the marketplace. People will habitually ask: Does this company have a culture that is nimble and responsive, or one full of friction and dissonance? Are its team members free to create and achieve at their top level or encumbered by a governing system and culture that discourages their best efforts? Is it a company of talent aligned with shared beliefs, attitudes, and aspirations, or one with competing interests who jockey for internal advantage? Due diligence will take on new and added dimensions, with these formerly soft issues weighing as heavily in the mix as balance sheets and assets.
ICU, UC ME
Technological transparency has lifted the veil of proxies and surrogates, leaving individuals and organizations exposed as never before. This new vulnerability has profound ramifications on how we do what we do. In an attempt to quantify the way transparency affects the HOWs of business, Professor James A. Brickley of the William E. Simon Graduate School of Business Administration at the University of Rochester considered a typical deal between a buyer and a seller. The seller contracts to buy a certain product, say a chemical compound, of a certain high quality. It is more expensive for the seller to produce a high-quality compound than a low-quality one. If the conditions of the world are such that the purity of the compound can be easily and cheaply tested prior to the transaction, the buyer probably will do so, so the seller, in these conditions, has little incentive to cheat on quality. The seller would be easily discovered and lose the deal. If testing is difficult or expensive, however, things get trickier. The seller gains a strong incentive to cheat on quality, especially if the gain by cheating exceeds the expected costs of delivering as promised.15 In other words, if it costs $10 to make a product of promised quality and $5 to make one of lesser quality, the seller will gain $5 if he is reasonably sure he won’t get caught before the deal goes through.
Testing, in this example, is information, and easy access to information changes everything. In a nontransparent world, it was generally far easier for a seller to look at each deal as an individual transaction, with few ramifications for future sales. For buyers, it was far more difficult for the right hand to know what the left was doing (i.e., to get information about the seller or the product). Thus the costs of cheating remained low and easily determinable. The more rapidly, widely, and inexpensively information about a product can be distributed, however, the higher the long-term costs of cheating. Cheating will quickly be discovered and broadcast, resulting in long-term loss of reputation and sales. Further, a high-information culture creates the expectation of high information. When sellers can’t provide reasonable and substantiated assurances about a product, buyers will want to pay less to protect against higher uncertainty. The very presence in a market of cheap and easy information changes the costs involved in every transaction, providing the seller with a strong incentive to do the right thing.
Although Brickley’s analysis uses quality as a variable, quality as a process is not the issue at hand; it is trust and transparency, getting your HOWs right. Whether it be recruiting the best talent, negotiating with a