Classifying Assets within Relational Capital
Just as there are specialist in the structuring and management of financial capital, human capital, natural capital and even intellectual capital, so there are an emerging group of specialists in relational capital. The key task of those specialists is to enable general management to understand how to handle relational capital alongside the other five capitals in the International <IR> Framework. This means understanding how relational capital is similar to but distinct from the other capitals.
As we work with the relational capital of our clients, we find that it is possible to have a common framework to understand the different types of relationship. Just as we would classify and characterise financial capital and perhaps manufactured capital, so we find that it is helpful to classify and characterise relationship capital. It enables clients to quickly and clearly focus on effective management of that capital and take relevant action.
Financial assets tend to be classified in terms of the liquidity. We find it helpful to classify relational assets primarily in terms of the general class of stakeholder (see below). Each of those classes of relational capital can be characterised.
Because many organisations think that a good personal relationship between two executives is all that is needed for good relational capital between departments or organisations, we also find it helpful to alert clients to the distinction within each class between inter-personal and inter-organisational relationships. Because we are interested in enabling effective asset management of relational capital, the framework outlined in The Relational Lens (Ashcroft et al, 2016) is particularly useful. It enables us to systematically characterise the asset classes.
Internal relationships. Virtually by definition, an organisation is a specific configuration of relationships between people and between departments. The choice to remove tiers or merge departments is fundamentally about looking for ways to organise the internal relationships to be more effective. Problems with human capital with the organisation, such as low morale, stress-related absence and inefficient performance, can commonly be traced to dysfunction within organisational relationships.
Without a clear framework to analyse and characterise the issues, the familiarity of the internal relationships can cause misdiagnosis of problems. Regularly, we see organisations with issues between departments that are caused by issues in the hierarchy and vice versa. Restructuring is not the only way to address this. Similarly, we see inter-organisational relationships making appropriate inter-personal relationships difficult and vice versa.
A careful diagnostic could enable direct engagement to address the issues of quality, quantity and structure, thus bringing the relationships back on track. In my experience, relationship can be mended if you know what the underlying dynamics are. “I didn’t realise that was why you did that,” is a common precursor to someone completely re-evaluating their perception of another department.
Counterparty relationships. A business’s strategic decisions are usually intended to impact their relationship with customers (actual or potential), suppliers, joint venture partners or other direct counterparties. An evaluation of an acquisition will usually involve an assessment of the strength of the relationships with direct counterparties.
Many businesses concentrate on monitoring their relationship with counterparties at a transactional level: How many deals do they do with us, how likely are they to recommend us, what is the profitability of the deals? Transactional measures are useful but they often miss the underlying relational dynamics because they tend to be lagging indicators of the direction of the relationship. Worse, they only tell you what is, rather than what could be.
Effective assessment of relational capital with counterparties must look at the underlying factors. If a supplier is unhappy with the power dynamics or feels poorly aligned with your business objectives, you will eventually see dysfunction in the relationship – your orders are given lower priority, quality will become just good enough, they go out or business or search for better markets, even if there are good inter-personal relationships involved.
Third-party relationships. At first glance relational capital between third-parties (or indeed social capital) is closely associated with reputation. Social media is making it possible for families of workers or former workers to impact the reputation of a business. Similarly, perhaps because of problems in the global supply chain, some companies are recognising that indirect relationships with people in another country can have reputational consequences near at home.
However, the supply chain issues demonstrate a crucial point; just because there is no direct relationship does not mean that there is no relational impact of decisions up or down the chain. Indeed, the idea of a “chain” is probably inadequate – most companies function in a global ecosystem. Strategic decisions have relational consequences on many parts of the economy, not just the direct stakeholders. A decision to optimise taxes away from a particular jurisdiction doesn’t just impact reputation, it also impacts the physical and social infrastructure available to the company.
There is another more significant effect which impacts business. The sociologists call it “social cohesion.” Close, healthy stable relationships within a community change the way organisations can interact. A good current example of this is the problem of the health service in the UK. Public finances demand that there is significant transformation of the health system, rebalancing it away from expensive hospitals to more community-based services (delivered by family doctors, community nurses and social workers). However, the professional relationships outside of hospitals are quite distant and sporadic. It is proving almost impossible for the centralised institutions (including the hospitals) to influence the dispersed professionals and vice versa. The lack of cohesion in the community makes system transformation almost impossible.
The character of third-party relational capital does impact the performance of a company. For example, businesses that help self-aware affinity groups build strong relationships, don’t just build their reputation, they create a partner for conversation. Some of the luxury brands have known this for years – they aren’t in the business of selling stuff to rich people, but rather giving someone status with people they care about. Perhaps more companies should think about the impact of their behaviour on lifestyle or more specifically the relationships in the communities in the supply network.