Saturday, October 11, 2014

How Can We Operate With High Trust in a Low-Trust World Without Getting Burned?

So how do we know who to trust? How can we operate with high trust in a low-trust world without getting burned? And how can we extend trust wisely to people when not everyone can be trusted? Before we share a framework for thinking about these questions, let's look at a few companies that seem to have figured it out.

When Meg Whitman joined eBay as CEO in 1998, she said the reason was because she was "blown away by the power of trust." The company was founded by the French-born Iranian-American entrepreneur Pierre Omidyar, and from the beginning, it quickly became wildly successful. Today the company has a market capitalization in excess of $35 billion, with 235 million registered users (buyers and sellers) engaging in more than 1 million transactions a day.

So how has eBay managed to become so successful, especially considering the "success" involves millions of transactions each year between people around the globe who don't even know each other? The company was built on Omidyar's high-trust belief that "most people are basically good." Whitman said:

More than a decade later, I still believe that Pierre was right; the fundamental reason eBay worked was that people everywhere are basically good. We provided the tools and reinforced the values, but our users built eBay. Our community's willingness to trust eBay-and one another-was the foundation of eBay's success.
Does that mean that eBay operates on blind trust? Not at all. According to Whitman:

Pierre's premise was not that all people are good; it was that most people are basically good. I agree that it is an optimistic statement, but let's be clear: we did not build eBay by sticking our heads in the sand. We did not ignore or deny that fraud, distasteful behavior, or unlawful activities occurred on eBay from time to time. Quite the contrary: we invested significantly in eBay's Trust & Safety division, which policed the site. We created software that looked for patterns that might be signs of trading in counterfeit goods, illegal building, or even behavior that was simply inappropriate, such as one user stealing a digital photograph from another user's page. But from day one it was clear to us that such behavior involved only a tiny minority of people.

A fundamental element of eBay's approach is self-policing, much like that engaged in by the Maghribi traders in the tenth-century Middle East. eBay buyers and sellers do business in a highly transparent way, publishing onsite feedback on their trading partners after each interaction. This feedback creates a reputation for each trader, which affects his or her credibility in the eyes of other traders. A strong positive reputation increases a trader's ability to do business; a lesser reputation diminishes it. If a trader gains a sufficiently negative reputation, the company's software prohibits the person from trading on the site. In addition, eBay encourages the formation of communities of traders in different category areas to watch out for one another and to be on the lookout for counterfeit goods and rogue traders. 

In Jump Point, Tom Hayes observed:
If we believed that we would or might be cheated, few of us would be eager to transact on eBay. But we do trust, not only eBay as the intermediary, but also the user community itself. The eBay community is self-policing and self-correcting of cheats and fakes. Sellers and buyers earn their reputations. And reputation is one's calling card and bond on eBay. Sure, a cheater may get away with it once, but they system will brand and marginalize that person quickly.

The sociologist Peter Kollock said:

Many participants report that they are more willing to trade with someone with a high rating, or even that they will only trade with individuals with high ratings. In that sense, some traders are able to create a brand identity that increases their volume of sales or even the price at which they are able to sell items. . . Even a few negative ratings can seriously damage a reputation, and so frequent traders are even very careful about nurturing their rating by providing swift execution of honest trades. 
Surprisingly to the skeptics to the skeptics, out of the 2 million auctions that occurred during the first two years of eBay's operation, only twenty-seven were considered to involve possible fraud, and those were referred to the proper authorities for prosecution. Even today, as the number of transactions has skyrocketed (and along with it the number of fraudulent cases), eBay refuses to allow the extremely small percentage of people who abuse the trust to define the vast majority of users who respect it. Its business model focuses on the great many who can be trusted rather than on the relatively few who can't. And eBay goes to great lengths to weed out those few. The company's objective is not only to increase trust among buyers and sellers but, at a minimum, to increase trust in the system. In 2005, when Omidyar was asked what the most significant lesson learned from eBay was, he responded, "The remarkable fact that 135 million [235 million] people have learned they can trust a complete stranger."

Another company that has figured out how to navigate risk in a low-trust world is Netflix, the DVD rental and on-demand video-streaming company that has more than 20 million subscribers in the U.S.  and Canada. Like eBay, Netflix is based on the idea that most people can be trusted. Subscribers pay a monthly fee in return for renting a certain number of DVDs at a time, which are sent to them in the mail. Though some DVDs are lost or stolen, by and large the Netflix community has proven to be honest, enabling company to operate successfully on the business model of extending trust to customers. Netflix does not allow the small untrustworthy minority to derail the business. In fact, also like eBay, Netflix aggressively seeks to identify and eliminate that small minority through a robust, sophisticated system that monitors suspicious activity and identifies both untrustworthy customers (whose accounts are canceled) and postal delivery workers (against whom charges are filed). Though Netflix can't root out all the offenders, it's remarkable that a high-trust system that involves thousands of postal workers delivering millions of DVDs each week has as few problems as it does.

Another standout is L.L. Bean, a $2 billion online and catalog retailer specializing in clothing and outdoor recreation equipment. It is best known for its extraordinary customer service, having ranked number three in MSN's 2011 Customer Service Hall of Fame. The company's excellent customer service - which grows out of its remarkable customer service - which grows out of its remarkable customer service guarantee - inspires enormous loyalty and trust. The guarantee reads, "Our products are guaranteed to give 100% satisfaction in every way. Return anything purchased from us at any time if it proves otherwise. We do not want you have anything from L.L. Bean that is not completely satisfactory."

What's particularly remarkable about this guarantee is the fact that the company puts the evaluation of customer satisfaction completely in the hands of the customer - and not for only thirty days or even a year. There is no time limit. The current chairman, L.L. Bean's grandson Leon Gorman, said this of the guarantee when he first introduced it in 1968: "If we expected customers to trust us in buying products were satisfactory throughout their expected lifetimes."

Now, it's not hard to imagine how customers might abuse this policy and take advantage of L.L. Bean. And on extremely rare occasions, the company has had to draw a line and close an account. An L.L. Bean executive told us, "It is not blind trust on our part. We do occasionally and reluctantly have to suggest that a customer shop elsewhere. But remarkably, we have very little abuse. Our customers seem to appreciate and like being trusted. Particularly in the recent difficult economic times, and customers look to a company where they can trust the value proposition and know that the company will stand behind it."

Now, as you think about eBay, Netflix, and L.L. Bean, notice that the trust being exercised by those companies is different in kind. It's not blind trust; it's not distrust. It's Smart Trust.

(From Stephen M.R. Covey's "Smart Trust")

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