The high cost of suspicion

I once advised a European multinational company with extensive operations in a number of post-communist countries. My assignment was to sort out a communication breakdown between the Western manager of their subsidiary in Poland, whom I’ll call Frank, and his Russian counterpart.

The Russian manager, I’ll call him Ivan, explained what had been going on. The company had decided to move a number of delivery vans that were no longer needed in Russia to the Polish subsidiary. The vans were unavailable in Poland and the Russian subsidiary could invoice the Polish subsidiary for a higher price than it could have obtained from selling the vans in Russia. Frank was put in charge of making this happen.

In common with many Westerners, due to his lack of knowledge of the market, Frank had unfounded concerns and fears about getting taken for a ride by the Russian mafia and losing the vans in transit. So he insisted that the Russian subsidiary employ a Western freight forwarder to move the vans. This forwarder had a great reputation but was at least three times more expensive than the Russian companies that the subsidiary had been using before without any problems.

Frank, ‘’for safety reasons,’’ as he put it, also insisted on renting special wagons, normally used to transport luxury cars. The wagons were expensive and not readily available, which delayed the shipment by a month, during which time the vans had to sit in a parking lot, racking up a steep daily charge.

That wasn’t all. Frank decided that the company had to insure the vans with an insurer recommended by his forwarder, whom he trusted, that charged roughly four times the amount quoted by the Russian subsidiary’s usual insurer.

Ivan, of course, protested that these decisions were piling unnecessary costs onto what should have been a fairly simple and economical transaction. He told me later that it was like talking to a brick wall. Frank said that he didn’t know any of the local companies Ivan was recommending and preferred that the company pay more to get peace of mind: ‘’No cost is worth safety’’, he primly informed Ivan. He even insinuated that Ivan might have had a ‘’special reason’’ to engage local suppliers. When appealed to, the folks at U.S. headquarters sided with Frank and his tales of Russian nefariousness.

Eventually the vans made it to Poland. But the Russian subsidiary footed a heavy bill, losing much more on the deal than they would have incurred by simply selling the vans cheaply in Russia. Ivan was even grilled about the transaction by the internal auditor, who couldn’t believe that management had made such a mess of it.

Frank’s behavior reflects a common dynamic among managers operating outside their comfort zone. In an effort to reduce their perceived risk they make decisions that they are not really competent to make, though they may believe that they are (Frank might have been well placed to choose suppliers in Poland but he was not qualified to do so in Russia). But excessive control is expensive …(Continued on next page)

and can actually increase exposure to risk, as this company’s experience illustrates.

The moral of the story is that you lose less by trusting more. Managing a business is not about asserting control to minimize costs and risks, but about working collaboratively to achieve an agreed goal. To do that you have to be willing to listen to the people you work with, accept that there are decisions that they are more qualified than you, to make, and then respect the decisions they make.

There will be times when that trust is misplaced, but I have found that more often than not, withholding trust is far more likely to result in failure and, therefore, much more expensive.

(A former businessman and consultant, Charalambos A. Vlachoutsicos is an adjunct professor at Athens University of Economics and Business in Greece.)