The value of trust and reputation in negotiations

Executive Summary

Negotiations are everywhere. From landing a VC investment to bargaining at a garage sale to trying to convince your 3 year old to eat their veggies, we encounter negotiations in some form or fashion on a daily basis. Experienced negotiators are familiar with negotiating tactics like setting goals, knowing your bargaining style, understanding leverage, dealing with deception and anger, active listening, and determining BATNA (best alternative to no agreement). Each of these skills can become an invaluable tool resulting in negotiation outcomes that are more in line with your ultimate objectives.

Yet one of (arguably) the most important influences in a negotiation is often overlooked – the importance and value of reputation and trust.

While utilizing carefully practiced negotiation tactics will make a difference in nearly any negotiating setting, one simple fact stands out – the decision regarding who is invited to the negotiating table to begin with, and often the outcome of those negotiations, are driven primarily by relationships. And relationships – however young they may be – are most efficiently and effectively built on a foundation of reputation and trust. While it’s true that some negotiations are won and lost based upon tactics and style, it’s more common that negotiating tactics will impact a deal along the fringes. The core of the deal, however, will be a direct result of relationships relying heavily upon reputation and trust. 

The importance of reputation and trust are effectively summed up in this statement by Richard Shell, “At the core of human relationships is a fragile interpersonal dynamic: trust. With trust, deals get done.”[i] 

Why Reputation Matters

We live in a world of instant communication where a nearly limitless amount of information is available at the click of a button. This leads to a fast-paced business environment full of constant action, the need to be extremely responsive, and where deals are won or lost based upon an initial impression – long before any formal negotiations have begun. Because of this, parties often rely upon any information available – some of which is based upon prior dealings. This gives added importance to the instruction given by William Shakespeare in Richard II: “The purest treasure mortal times affords is spotless reputation.”[ii]

The value of reputation is magnified and made brilliantly clear when settled against the backdrop of our current high-speed and high-stakes business environment. When speed matters, reputation and trust take a front seat. As stated by Fred Reichheld, “Trust is a measurable accelerator to performance… when trust goes up, costs go down and speed goes up.”[iii] Because of this, one’s reputation often becomes the key contributor to the successful negotiation of any deal. Trust is, in essence, the catalyst that ignites and propels two parties forward to work together in mutually beneficial ways.

A positive reputation impacts all phases of the negotiation. With a positive reputation, speed is accelerated by enabling negotiators to side-step some of the traditional posturing that typically occurs at the beginning of a negotiation. Rather than trying to establish position, parties are able to immediately get to work in establishing the key tenants of an efficacious deal. With a positive reputation, discussions are able to progress based upon a mutual belief in good faith and sincere efforts. In reputation and relationship-based negotiations, even fierce competitors are cognizant of an overarching objective to maintain the quality of their reputation. This is because trustworthy counterparts recognize that maintaining their reputation is equally – if not more – important than the outcome of any single negotiation. These astute negotiators realize that it would be incredibly imprudent to forgo the war in order to win the battle. As a result, rather than looking for an opportunity to advantage themselves at the expense of their counterpart, relationship-based negotiators seek win-win solutions that push common interests forward. In the end, this serves to increase the size of the pie, making each member better off.

In short, when built upon a reputation, or legacy, of trust, the strength of relationships is able to act as an accelerant, overcome unanticipated speed bumps, and push progress forward to the achievement of a larger purpose. As stated by Horst H. Schulze, former founding President and COO of The Ritz-Carlton Hotel Company, “In life and business, relationships are important – but they are empty unless they are established and based upon trust. Trust is the fundamental building block for a brand, and it is the glue for any lasting relationship.”[iv] 

Your Reputation Precedes You

There’s an old Kenyan proverb that states, “Leave a good name in case you return.” This is a simple, yet profound, statement that encapsulates the longevity and value of reputation. Somewhat ironically, those who are most deserving of their positive reputation are the same people who are free of ulterior motives when leaving that good name behind. In other words, their motive is not to leave behind a “good name” with the intent that it can be capitalized upon later. Rather, their intent is to genuinely create mutually-beneficial agreements that metaphorically lift all ships as the tide rises. The good name they leave behind is not a carefully structured outcome, but rather a byproduct of their earnest and sincere efforts. 

A reputation is like a swift current after a rain storm – it travels quickly and once it’s moving it can be very difficult to hold back or steer. It takes minimal effort to develop a reputation and because of this, one’s reputation nearly always precedes them. Even when two parties from dramatically different industries or walks of life – where there appears to be little, if any, common connectors – engage in a negotiation for the first time, it takes only a little homework and advanced preparation to discover important facts and history regarding the counterparts. As Tinsley, O’Connor, and Sullivan state, “reputations are socially constructed labels that extend the consequences of a party's actions across time, situations, and other actors.”[v] Once established, these “socially constructed labels” are tough to shake off. Word – and a reputation – travels quickly and often bridges time and circumstances. 

This phenomenon is largely due to the digital age in which we live and is readily observable in consumer brands. There are countless examples of brands that have been galvanize or tarnished based upon a simple act or comment caught on a video that went viral. For example, nearly everyone is familiar with the American Airlines fiasco where a passenger was embarrassingly dragged off a plane. In contrast, most people are familiar with the use of Dawn soap to assist in cleaning wildlife that were harmed in the Valdese oil spill. As these examples, and countless others, illustrate, a single event can leave a lasting impact. While not quite as dramatic as these consumer brand examples, an individual’s or organization’s negotiating reputation also leaves a lasting impact. That reputation has an impact on how others deal and negotiate with you – along with the opportunities that are or aren’t presented.

The reality of one’s reputation preceding them highlights the need to be ever cognizant of managing the reputation, or “good name”, that you’re leaving behind. As a result, judicious and long-horizon-thinking individuals will carefully calculate the impact that their decisions today will have on their personal brand and reputation for years to come.

The Value of Future Opportunities

In the world of business, concepts like net present value, payback period, internal rate of return, and capital budgeting are basic blocking and tackling skills. These are hard skills that can be quantitatively shown and modeled in spreadsheet programs and charts. Every business leader needs to have a working knowledge of these topics in order to be effective in making important business decisions. But is it possible to apply these same basic principles of finance to the world of negotiations? Is it possible to quantify the present value of future opportunities that come as a direct result of one’s upstanding reputation among their peers?

The answer to these questions is likely, no – at least not with a high degree of precision. At best, it would be incredibly difficult to determine the value of future opportunities to be awarded driven by reputation, largely because the future is uncertain and impossible to predict. But while it may not be possible to quantitatively calculate the value of these future opportunities (at least with a high degree of accuracy), there is no doubt that the value could be significant. We know this because we enjoy the benefit of 20-20 hindsight and can look back on the deals of successful negotiators and assess – to some degree – the impact that their reputation had on winning those deals. Jon Huntsman provides a great example of this. In his book, Winners Never Cheat, Huntsman outlines deal after deal that was presented to him because of his reputation as an honest and trustworthy businessman. He recalls one specific occasion when he lost $20 million in value on a deal because he refused to go back on a handshake – something that never would have been legally enforceable. But as a direct result of this commitment to honor an informal agreement, he enjoyed a life-long relationship and many subsequent deals that far exceeded the $20 million.[vi]

What is the NPV of the future opportunities that will or won’t be afforded to you because of your reputation? It’s impossible to say. But there is no doubt that the value could be significant. In Jon Huntsman’s case, it amounted to hundreds of millions – if not billions – of dollars. For each of us, it will likely be less – very few achieve the level of prosperity that Jon Huntsman did. Nevertheless, those future opportunities will be there and those future opportunities have value. It would be foolish to lose sight of the broader perspective and sacrifice that potentially significant future value because you became overly engaged and passionate on gaining the upper hand in a singular negotiation by using any means necessary.    

Trust Leads to Better Economics

While so much of negotiation seems to be focused on gaining the upper hand and out-doing the competition, this is a short-sighted perspective and approach. In reality, when trust is at the center of a relationship and negotiation, mutual gains are more readily achieved. This phenomenon is clearly evident by reviewing both the desired benefit of the negotiation along with the cost.

When trust becomes a pillar of the negotiation process, the outcomes achieved by both parties are improved. This is due to the fact that a mutual understanding more often enables negotiating parties to find solutions that achieve both sides’ key objectives. In other words, when there is shared understanding of the desired outcomes, negotiating parties are far better equipped to think creatively and are more successful at identifying innovative solutions.

For example, in one negotiation exercise three buyers were asked to negotiation with a seller in order to procure a set number of jellyfish polyps. The scenario was set up in such a way that the buyers initially felt like they were directly competing with one another for a scarce resource. However, as negotiations progressed, and for parties who were able to exercise sufficient trust with each other, an important discovery was made that enabled all parties to achieve their individual objectives without extracting value from their counterparts. That discovery was that each buyer was seeking the jellyfish polyps for different use cases that were not mutually exclusive. In reality, there was plenty of this scarce resource to accomplish each of the buyer’s objectives. If this discovery was identified, then the buyers were happy because they were able to appropriate the necessary inventory to fill their need – and able to do it at a lower cost due to the purchase price being shared across each of the three respective buyers. In addition, the seller was happy because they were able to extract a higher price for themselves due to the willingness of three buyers contributing to the total purchase price. In the end, all parties were better off and felt they had “won.” But without a certain level of transparency – enabled through trust – this win-win-win-win solution across four parties to the transaction would never be achieved. 

This type of condition in a negotiation – where a creative solution exists that effectively meets each parties’ objectives – is not uncommon. In fact, only very rarely are negotiations truly zero-sum. Most of the time there is a positive-sum solution. The challenge is identifying that solution, and this is where trust enters the equation. When trust is the foundation of the negotiation, information can be shared that yields the discovery of a positive-sum solution. This concept is articulated by Sabine Koeszegi in the Journal of Managerial Psychology when he states that, “Mutual trust leads to information sharing between negotiating partners, which in turn has a positive impact on the effectiveness of the process and joint benefits. In addition, there is empirical evidence that trust leads to a higher motivation to implement the negotiated agreement.”[vii] Clearly, trust is an enabler of mutually beneficial terms by helping negotiating partners identify positive-sum solutions that increase the size of the pie.

In addition to the improved outcomes of the negotiating parties, trust also provides significant wins for business partners through a reduction of costs. Transactions can be extremely expensive – and those transaction costs (i.e. costs outside of any purchase price) are largely driven by a need to perform diligence in order to mitigate the risks associated with distrust. Without a foundation of trust and a win-win mentality, negative outcomes are far more common. Fulmer, Barry, and Long articulate this well in the Journal of Business Ethics when they state, “When individuals approach the negotiation with individual gain as the primary objective, they also are more likely to lie and to lie more egregiously than when they have a more cooperative mindset.”[viii] This mentality not only has a negative impact on relationships, but it also impacts an organization’s bottom line.

Of course, a foundation of trust is not a replacement for quality diligence, but it can have a real impact on preventing these transaction costs from ballooning out of control. This important lesson is effectively taught by Marilyn Nelson, the Chairperson and CEO of Carlson Companies when she stated that, “Trust reduces transaction costs; it reduces the need for litigation and speeds commerce; it actually lubricates organizations and societies.”[ix] By acting as the transaction “lubricant”, trust is able to increase the total value to be shared by counterparts by reducing the wasted cost that too often consumes transaction fees as a result of distrust.

Communication is Critical

With an appreciation of the value of trust in nearly any negotiating scenario, the question quickly turns to how we can establish trust in a relationship, especially when a negotiation is pending and both parties are fully aware of this. When your reputation precedes you and that reputation is a positive one – establishing trust may require little effort. In this case, maintaining trust by acting in a manner that is consistent with your values and reputation is key. But what can be done when no prior relationship exists and there’s little reputational information available?

In these cases, communication becomes critical. Certainly, formal communication – whether written, spoken in person or on the phone, or presented – matters a lot. Formal communication reflects an opportunity to put your best foot forward, to let your professionalism shine, and to in essence seek to impress your counterpart so they believe you are someone worthy of doing business with. Effective formal communication can not only project confidence and competence, but it can also project seriousness and power, which can in turn act as a deterrent, to some degree, of gamesmanship as the negotiation progresses. More importantly, effective, professional, and responsive communication can build trust by showing your counterpart that you are someone who takes the process seriously, who is thorough in their thought process, and who is detail-oriented. These attributes can then ready translate into a better negotiating position based upon mutual respect and trust.

In addition to formal communication, informal communication is also critical. In fact, the conversation before the conversation is often more important than whatever is said in the board room. Similarly, the meeting after the meeting is a critical opportunity to build a relationship and establish trust. This concept is supported by findings from an article in The Rand Journal of Economics titled “Cheap Talk and Reputation in Repeated Pretrial Negotiation.” The article uses the phase “cheap talk” to describe a series of conversations that occur outside of the normal negotiation period. The article’s author, Jeong-Yoo Kim, states, “Since repeat players care about not only the current payoff but also the future payoff, cheap talk can be effective in eliciting true information.” The author further states that in repeated interactions, cheap talk can “convey useful information even if the bargaining costs are negligible.”[x] In other words, cheap talk often comes at an immaterial cost but can set the stage for a successful partnership, negotiation, and long-term relationship.

As we discuss the importance of formal and informal communication, it’s imperative to note that communication goes far beyond verbal conversations. In fact, verbal communication often reflects less than half of the message that is actually conveyed in any interaction. In reality, so much of communication is non-verbal. Because of this, negotiators must pay careful attention to their non-verbal communication – particularly, their body language, facial expressions, and active listening.

When effective communication skills are employed, negotiators are better able to leverage the power of relationships, reputation, and trust throughout the negotiating process. With effective communication, parties can clearly convey their intentions, concerns, and priorities. In addition, effective communication enables a mutual understanding of desired outcomes and objectives. As a result, negotiations can move at a faster pace and with greater precision, all while accomplishing better results.

Who Will You Choose to Deal With

Each individual and business leader is faced with the decision from time to time regarding who they will choose to deal with. This could be in the form of a “big” decision such as hiring a new CFO, contracting outside counsel to lead a critical case, acquiring a competitor, or forming a joint venture to expand into a new business line. In these cases, significant research and effort go into making an informed decision where a prospect’s background, knowledge, and character are carefully reviewed and scrutinized. More often, however, this question is encountered in “medium” situations that occur on a more regular basis such as who should lead a specific initiative, which individual should we ask to represent us at this conference, or which vender should we select. Whatever the case may be, leaders are constantly being asked to make a determination regarding who they choose to deal with. While prior experience, expertise, and background are often assessed, most of the time these decisions are anchored on one critical relationship characteristic – trust.

Given the undeniable importance of trust, how can trust be established? In his book The Speed of Trust, Stephen Covey explains that trust can be broken down into component parts – character and competence. Character is comprised of integrity and intent – in other words, the values that one espouses and lives by and the sincerity, honestly, and openness with which they approach their business. Competence is comprised of capabilities and results – in other words, the outcome truly matters and desired outcomes are only likely to be achieved when someone is gifted or talented at the task at hand.[xi] In order to effectively establish trust, any individual or organization can work on building the component parts. By delivering excellence and establishing credibility in a space, you build trust. By acting with integrity, following through on commitments in a timely manner, and looking out for the best interests of others, you build trust. There are opportunities granted to us every day – in both professional and personal settings – where we can build trust. When those opportunities are seized, trust is built and relationships are strengthened. These mini trust-building moments become the framework and building blocks of mutually beneficial and long-term relationships.

When making decisions that have a lasting impact on your organization and your personal well-being, a risk-minimization mentality often prevails. Said differently, when making important decisions and when closing deals, people don’t want to run into unexpected challenges and they don’t want to mess up. Because of this, people choose to do business with those they trust. Richard Shell articulates this concept very well: “An ounce of well-grounded personal trust in a business partner is worth a thousand pounds of formal contracts and surety bonds. And being a trustworthy person gains us more than future business. It also gains us self-respect.”[xii] That ounce of personal trust pays huge dividends in the world of business. Not only does it help avoid costly mistakes, but it also builds the foundation upon which future successes are built.

So as you consider your answer to the question of “Who will you choose to deal with?” – make every effort possible to live by the same standard that you’ve set for others. This is a practice that should be followed by businesses, and it’s a practice that should be followed by individuals. Ultimately, businesses and individuals want to deal with those in whom they believe their confidence is well placed. By being that organization and individual first, you will quickly become surrounded by those who reciprocate those actions, morals, and business dealings.

A Priceless Possession

As story was once shared of a wise old man counseling his young son of the value of personal reputation. The son had made several poor choices in his youth and his father didn’t want him to forever live the consequences of those poor choices by being branded an untrustworthy individual in their small community. To combat this image, the wise man instructed his son to make a small commitment to every individual in the village and to keep that commitment regardless of the cost. The commitments ranged from fixing a meal to repairing a damaged fence. None of these commitments required excessive effort, but the young son followed through as if his life depended upon it. Only years later when requesting community assistance on an important professional endeavor did the son realize the impact of those relatively small efforts. When he stood in need of public support for a meaningful proposal that held some level of risk, dozens of community citizens stood behind his efforts and recommended his proposal based on their prior experience of him fulfilling his commitments.

While this story is quite idealistic, it does illustrate the value of a positive reputation and the power of trust. Trust is built in a variety of ways, but most of those ways require the compounding effect of small trustworthy actions over time. And while trust can take years to develop, it can be shattered in a brief moment through a lapse of judgement.

Truly, trust and positive reputation are priceless possessions. They can’t be purchased, bargained for, or illegitimately obtained. Rather, they must be earned through effort, action, and repeated positive experience. Once established, trust and reputation can carry you through good times and bad. One’s reputation can open doors of opportunity and the trust others place in you can transform your future. There’s no doubt that investing in trust and reputation will generate meaningful returns and will contribute in significant ways to one’s negotiating success.

[i] Bargaining for Advantage, Richard Shell, chapter 4.

[ii] Richard II, William Shakespeare

[iii] Fred Reichheld, author of The Loyalty Effect and The Ultimate Question; The Speed of Trust

[iv] Horst H. Schulze, President and CEO, The West Paces Hotel Group; former founding President and COO, The Ritz-Carlton Hotel Company; The Speed of Trust

[v] Tough guys finish last: the perils of a distributive reputation; Organizational Behavior and Human Decision

[vi] Jon M. Hunstman, Winners Never Cheat

[vii] Trust-building strategies in inter-organizational negotiations; Journal of Managerial Psychology

[viii] Lying and Smiling: Informational and Emotional Deception in Negotiation, Journal of Business Ethics

[ix] Marilyn Carlson Nelson, Chairman and CEO, Carlson Companies; The Speed of Trust

[x] Cheap talk and reputation in repeated pretrial negotiation; The Rand Journal of Economics

[xi] Stephen M. R. Covey, The Speed of Trust

[xii] Bargaining for Advantage, Richard Shell, chapter 4