How the industry has changed forever pt.2

In my first entry, I mentioned certain trends were looming:

  • Renewed focus on core competencies; retailers abandoning manufacturing, manufacturers leaving retail
  • A return to traditional relationships; relying on partnerships with sales reps and retail
  • Accountability: increased responsibility and professionalism (better, not bigger)

I closed the entry with this paragraph, the topic of today’s entry:

Do you know what it all boils down to? It’s trust. Trust and confidence. More worrisome than a reduction in consumer confidence is diminished confidence among business partners… trust is based on credibility. In this tightening market, you may not have money but you must assume the responsibility of developing credibility no matter how unpopular it may make you (me).

The issue of trust will become increasingly important, here’s one example. Competition is going to become fierce. You’ll have to be legal in all respects. If licensing is required in your state (NY NJ CA), you and your contractors must have a license. If not, well, what could happen if you get a little press and a competitor knows you’re not using a licensed contractor or you don’t have a license either? In a manner of speaking, you do have an unfair advantage so a complaint is valid, repugnant though it may be. Do you have an RN number? It’s back to that whole professional means better not bigger thing.

Charles Green says this about making choices amid increasing complexity:

…we give up freedom of choice in return for more efficient use of our time. We do it with trust. Branding is the corporate version of trust. Rather than analyze every brand of bottled water, every version of jeans, or every make and model of HD-TV, we abdicate our freedom to do so in return for the security of a brand name. We trust Sony, or Coke, or Amazon, to make acceptably acceptable selections for us—so are freed to make other decisions.

This is not an argument for branding so don’t get sidetracked. Do you understand the concept of transaction costs? It is exactly as it sounds, the cost of acquisition specific to the transaction itself. A transaction cost could be duty paid on imports or the time it takes you to research which products to buy or the cost of going to get them from the store or market. Transaction costs can be the fees you pay an attorney to draw up a contract for you. Green is saying we save money through lower transaction costs by buying from vendors who have our trust.

Green explains that auto manufacturers (for example) used to make their own tires until the transaction costs of hiring a subcontractor or buying them outright became lower than the cost of making the tires internally. Lowered costs is what drove a lot of outsourcing in all industries including our own. However, manufacturers are still quick to select a contractor based on unit costs when transaction costs have dramatically increased; one estimate says US transaction costs exceed 50% of GDP. Green continues:

The more technically and globally integrated we get, the more freedom of choice we get. But at some point, freedom of choice becomes overwhelming. If I want to make and sell jeans, I probably have dozens (hundreds? thousands?) of ways to contract the work out. Past some point, I don’t want more options—I want someone I can trust to make that decision for me. In other words, I’ll give up freedom in return for lower transaction costs. The currency of that exchange is trust.

Retailers are nothing if not rational and will also give up freedom of choice in return for the lowest (transaction) cost of their time. Increasingly, retailers will not care if you are the best designer to ever draw breath; you’re an unknown quantity. They will make the trade off between innovation to buy boring but tried and true. If you don’t have any way of establishing trust, you must build it. This is the major reason I say that you will not only continue to need sales reps, you will need better ones. You will need reps who have a good reputation themselves, renting their influence for a fee. Complicating matters, more retailers are going out of business themselves meaning they’re not willing to assume risks. With more of them going under, there’s more product for them to pick from than ever. So the question becomes, how do you build trust with a rep? That requires professionalism (better, not bigger). It means making deliveries when you say you will. It means paying commissions on time. And yes, I know a lot of you are selling consumer direct or intend to but unless you’re a veritable lean manufacturer (only one of you that I know of is), that scale won’t play out for long. This stage of your enterprise should be used to learn the ropes and professionalize for the next step of selling wholesale should you chose to take it.

Sadly, many people think that contracts with their partners such as NDAs, production, licensing and the like are effective ways to control the costs of transactions in the event relationships go awry. They are not. Contracts subvert relationships; contracts are actually the antithesis of trust -and that’s the topic for next time.

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6 comments

  1. Lance Gordon says:

    I agree. I own a successful private label apparel business helping new companies and emerging designers launch their lines into the marketplace. Trust is everything with my clients and contract are not the “end all, be all” people make them out to be. It starts and ends with trust. I have a question, What are some of the ways I can go about securing additional financing to expand my firm? How do designers find backers?

  2. Leslie W says:

    Kathleen,

    The subjects you choose are always timely, interesting and on point. You always make me think, really think. As you said,
    ……”the cost of acquisition specific to the transaction itself. A transaction cost could be duty paid on imports or the time it takes you to research which products to buy or the cost of going to get them from the store or market”……

    This is where I struggle; decisions, decisions. My cost per transaction is high; I am very research-based, and a control freak. There is too much information/choice out there. I can buy scissors for 5.90 at vendor x, but vendor xy has them for 6.10, but, has a better cost on something else I need. Simple though this example is, it goes on and on. Sometimes I end up buying at an increased cost because I trust them to deliver what I need in a timely manner. I don’t have to spend valuable time checking on the order, making follow up phone calls, etc.

    My mom has always said, “do unto others as you would have them do unto you”. The Golden Rule. It is still a good one to live by; maybe more so in the future. If I want someone to trust me, I have to be trustworthy. If I am honest, I (hopefully) will be treated honestly.

    Thanks for another great post.

  3. Kathleen says:

    I have a question, What are some of the ways I can go about securing additional financing to expand my firm?

    Although germane to this entry, I’ll try to explain what I do. I’m not sure I know how to answer this even though my primary business is helping new companies and emerging designers to launch their lines. Other than very short term (less than 30 days), I’ve never sought any financing since I started. I’m very fiscally conservative; I fund business improvements (not sure what you mean by “expansion”) through revenue, plowing it back into the business. I can’t speak for you but in my case, expansion would amount to increased product and service offerings, neither of which would require appreciable capital to the extent I’d need funding. I haven’t exploited the potential I suspect or presume I have so it would be inappropriate for me to grow larger until I do (success and ready access to capital kills more businesses than the lack of it). At such time, were I to do so, veritable expansion (aka head count and infrastructure required of that) again would be driven by proceeds of the former. My point is, as a service provider, one derives revenue by the job; you don’t need much capital just your time as the client covers the costs of any subcontracted work.

    Now if you are referring to augmenting your infrastructure (equipment, CAD, larger location to park it) as “expansion”, I can see you might need capital because these would permit you to expand the range of services you could provide internally. In the short term, I would recommend you (continue?) to subcontract to other businesses that can provide these services to clients. In my case, I don’t subcontract at all. I provide direct referrals to businesses I think are good and leave the client to manage the relationship. It’s a lot less hassle for me because I’m concrete and very task oriented; it’s difficult for me to quantify (and bill) for the abstract duties involved with relationship and project management. For clients who need more hand holding until they learn the ropes themselves, I refer them to esteemed colleagues who excel at these functions.

    How do designers find backers?

    I’m surprised this hasn’t come up in discussions with your clients. In my experience, most entrepreneurs are self financing and research bears this out. Very few secure angel investors or backers beyond immediate family or what a partner one may have brings into the venture.

  4. Harmony says:

    When I first approached the converter I work with (in early 2005) I had written up a LOA and wanted them to sign it. There response was “Our relationship is very young, if you want us to spend the time and money running this by our lawyer we can, but we have learned that the relationship is much more important than the documents.” We were a bit weary at the time, but went with our gut instincts and trusted them. Yes, we have had our fair share of production challenges and issues but the relationship has grown and so has the trust. Dealing honestly and fairly with each other as things happen creates a much safer relationship than all the legal docs combined. Thanks for another wise and helpful post.

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