Managing Portfolios of Relationships

Introduction

We currently find ourselves adapting to extraordinary circumstances, and this is likely to see many changes to the dynamics between and within organisations.  One consequence is likely to be a review of current business practices and systems, something we understand many organisations have already launched.  In these reviews, it is important not to neglect relationships.  Indeed, this may be a critical part of any comprehensive analysis of current opportunities and a preparation for an optimal rebound out of the current stasis.  It is always valuable to remember that such crises create new opportunities, as industries and organisations adapt to changing circumstances.  Amid these changes, there will be opportunities to create new or to build on existing relationships.

In my last article (Network Resilience During The Covid-19 Outbreak) I briefly discussed the concept of network resilience and referred to managing relationships during these difficult times.  In this article, I would like to expand on this concept.  I want to introduce the idea of managing relationships as if they were another form of an intangible asset.

Relationships as a form of intangible asset

Intangible assets have a long history in business.  One of the oldest is goodwill, that is, the surplus an acquirer pays in excess of identifiable assets to buy a business, although in an accounting sense this is only truly calculable at the point of acquisition.  An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets[1].  An increasingly digital economy has meant that these assets have rapidly risen in importance and have evolved from a supporting role to now representing a significant share of corporate valuations.

It is also possible to consider relationships as a form of an intangible asset.  For example:

1. They are important for business (and life). This hardly needs discussing, particularly as we currently struggle under the relationship restrictions imposed by the necessary steps to halt the spread of Covid-19.  They are particularly important for those businesses that are based on personal contact, especially where advice or high value business commitments are made;
2. They require investment in time and resources to create and develop. A key concern for many businesses at the moment is the maintenance of good relationships among staff and other key stakeholders, including customers and suppliers of goods, services, and finance.  Not only could they be the key to corporate survival in the short-term but also determine how quickly firms rebound (indeed, whether they rebound!) once the economy moves to more normal conditions;
3. Their benefits are persistent over time.  A key issue with defining an asset in an accounting sense is whether they persist over time.  This is clearly true with solidly formed relationships;
4. Importantly, though, they also depreciate over time if they are not continually renewed and developed. The rate of decay is highly dependent on the nature of the relationship (e.g. colleague, advisor, or family member), how transactional their nature (e.g. is this a commercial relationship or one based on mutual admiration and respect), and how long a relationship has persisted (friends forever, or only colleagues for a brief time).

The key elements of asset management models

Tangible assets are relatively straightforward to value as they have a finite monetary value and usually a physical form[2]. There is a body of theory and practice that has developed tools such as the Capital Asset Pricing Model, or Asset Allocation Models to manage risk and reward for using (financial) assets.  The four key elements of these models are:

1. Every asset involves a cost – value doesn’t appear spontaneously out of thin air, but has to be created and this consumes resources;
2. Assets yield returns – all assets yield a return, irrespective of whether they are real or intangible. These returns may be direct (a good or service for sale) or indirect (the infrastructure that allows goods and services to be created);
3. Risk is associated with all assets – this may be obvious and explicit (such as the risk of a financial asset losing value) or implicit (losing the ability to generate revenue from an asset owing to it becoming unavailable, something that has become very real for those businesses struggling with the response to the Covid-19 crisis, e.g. the leisure sector); and
4. These risks can be managed by adopting a portfolio approach, that is, spreading risks across a range of assets to minimise the impact of the failure of any one component.

Applying asset management concepts to relationship assets

For relationships, no similar asset management model exists.  Nonetheless, some of the key insights underlying these tools and models are equally applicable to business relationships when viewed at the level of the enterprise or business division.  For instance:

1. There is a cost associated with each relationship. This isn’t just the direct cost of calls, lunches, and entertainment but also includes the opportunity cost of other work not done during that time;
2. They also yield returns. This return on investment can be as direct as winning a sale or signing a contract.  They can also be indirect, or even hidden, such as being the recipient of one of the first calls for advice, having your telephone call answered on the first time, or even just a source of valuable information on market conditions (excluding illegal insider information, obviously);
3. Equally, these relationships carry risk. If these risks aren’t carefully assessed and managed the retirement, resignation or transfer of a key relationship holder could leave a business vulnerable;
4. Unlike tangible assets, though, these risks are often hidden. In fact, key relationships can sometimes be held by unexpected people.  Indeed, the whole case for business social network analysis is based on uncovering the key relationship holders (called critical nodes) that enable a business to function effectively  and efficiently; and
5. Like with tangible assets, a diversified portfolio approach could yield real benefits in managing these risks as well as focussing investment on the most critical relationship assets.

In my next article, I will look further at some of these ideas.  In specific I will examine how modern relationship mapping tools can be used to gain a clearer picture of an organisation’s relationship assets, and how they can be used to assess risk and to direct investment in a structured and business focussed manner.

[1] Definition from Investopedia (https://www.investopedia.com/terms/i/intangibleasset.asp).

[2] Definition from Investopedia (https://www.investopedia.com/terms/t/tangibleasset.asp).