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Relational Capital – So What?

Posted 6 January, 2017

The idea that there is some hypothetical value in relationships is obvious to most people but it remains a vague idea for many companies and accountants.  Relational capital is a significant element of the International <IR> Framework but companies are only just learning to think fluently about it.  It functions very differently from the other five capitals so this is not surprising.  I believe that organisations that get their minds around relational capital are more able not only to report on all six capitals but also to manage them in an integrated fashion.

You can count the number of relationships with clients, suppliers and employees but is it worth assessing the quality of those relational assets, even if we could?  At one level a lot of existing business decisions revolve around assessment of some aspect of relationships: many companies assess customer or employee satisfaction; in most acquisition discussions assessment of “goodwill” is crucial and identification of a poor commercial relationship inside or outside a target can take millions off the acquisition offer.

Yet my firm regularly meets CXOs who prefer to stick to simple financial capital models of their business: a business case for investing in a relationship must be justified in terms of financial return on financial investment.  Such a demand is a useful challenge.  Having HR or PR say we should do something because, “It is the right thing to do,” is like a parent saying, “Because I say so.”  Treating relationship as a capital is appropriate, if investment of other capitals to improve relational capital can be justified using established understandings of return.

In principle, if the idea of relational capital is useful then we will need to be able to assess

  • Current balance: the current state of the relational capital;
  • Cost of change: the capital resources required to bring about a change;
  • Identifiable Return: the positive impact on various capital resources as a result of a change in the current balance.

It is possible to identify the key components that need to be configured in any relationship. The recent book published by Cambridge University Press (“The Relational Lens” Ashcroft et al) outlines such a framework to help businesses configure any of their relationships.  The nature of the contact is one such component: some effective organisational relationships need high quantities of face-to-face time between only a couple people whereas others may need less face-to-face but more people involved.  By assessing the current configuration of the components in a particular relationship, it is possible to know the current balance.  The particular framework in The Relational Lens deliberately looks at components that can be changed.  So the key issue is explicitly around the So-What: are there tangible outcomes as a result of increasing relational capital?  Just because it is possible to systematically assess the configuration of their relationships, doesn’t make it the right thing to do.  If there is no So-What, then there is no business case to do it.

At the recent launch of The Relational Lens, one of our clients, National Grid Gas Distribution, explained their business case.  Their teams are required to maintain the gas pipe network. That means digging up roads and making good afterwards.  If the teams do not do it well (on time etc.) then the company gets fined and the local authority gets lots of unhappy road users.  In addition, permission to do critical complicated projects can be perpetually delayed until a time when disruption of the traffic is acceptable.

Working with the utility company, Balfour Beatty and the local authority, we were able to assess the configuration of the working relationships, and then reconfigure them.  This made it possible for the three teams to work together more efficiently and effectively.  One measure of that improvement was that they could clear a backlog of eight complicated critical projects which had been building up for six years.  Strong relationships meant that each side could be more confident in the others and collaborate to get it all done.  A second measure of improvement was that during that period those projects were done in addition to the usual workload and yet there was a 30% reduction in the fines. Put simply, the effectively configured relationships made some projects possible and made the usual work more efficient.

The specific impact on different capitals will vary according to the context but it is clear that it is possible to assess the current balance, the cost of change and the identifiable return.  It is therefore possible to identify a valid business case for assessing and improving business relationships.