“Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master's happiness!” The Bible
What is the primary role of a Stock Exchange?
It is to provide liquidity for the stocks. It managed this liquidity by having processes in place that enabled thousands of transactions every hour which has now increased to millions per hour with the help of technology. To manage this rate of transactions, even the settlement of trade (fund against security sold and security against funds provided) is made an asynchronous activity (i.e. settled later).
When trading and settlement are asynchronous, there could be risk to both the buyer and the seller; the risk of counter party walking out of the transaction leaving you high and dry. When we have long chains of multiple transactions intertwined and interlinked, such counter party risk will have a domino effect and lead to market failure. This could dissuade many potential investors from participating in the market which ultimately affect liquidity. This used to be the case in Indian capital market before NSE was established with its sophisticated mechanisms for managing the risk. There is margin payment to take away incentive to default; there is a clearing corporation to provide counter party guarantee and so on and so forth.
These risk management measures have significantly contributed to market expansion. The level of trade has increased more than 100 times. Today Indian Capital Market is rated to be one of the best in the world in terms of institutional infrastructure on account of this strong risk management capability.
This is relevant and critical in every human interaction. Every day we deal with a number of people (costumers, suppliers, service providers, regulators, bankers etc) and we agree and commit on certain deliveries between us. Your supplier promises delivery of input materials based on which you have committed delivery to your client for next week. The finance manager has promised to complete the project review by today evening to help you submit the final report to the board tomorrow. The tailor has agreed to deliver the new dress you have ordered for your child. A number of deals and deliveries.
Like in the case of capital markets, the chain of commitments and deliverables are linked to multiple levels and any failure in any level could have cascading effects.
Some people are very reliable in their delivery and even if an unfortunate delay happens they give advance warning helping us to reschedule our plans and our deliverables in an orderly fashion. Some cannot ever honour their commitments. Very often people don’t appreciate the importance of this chain reaction and the need to be reliable.
Let us look at how this affects you and how you should manage this in your daily life.
One of the critical components of professional success is how reliable you are on your commitments. If you are not able to do deliver a promise you should not commit. If you commit and you are unable to meet it, please give advance warning.
When you reduce the risk of dealing with you, then there are more people willing and interested to deal with you. The demand for and liquidity of your offerings increases. On the other hand if you are not a reliable partner, then however capable you are or however useful your products or services are, the demand will be much less than the potential. This reliability factor is critical for your growth and as you go higher it becomes one of the key parameters on which your clients, subordinates and friends decide to deal with you.
On the other hand when you are at the receiving end you need to learn to judge the reliability of person you are dealing with. If you are not dealing with a person who is not reliable, then you need to have mechanisms to incentivise or force reliability.
In fact in your professional life your reliability and that of your partners (colleagues/ service providers / subordinates / bosses) is one of the most critical ingredients that will determine what you achieve.
Contracts, Service Level Agreements, Penalty Clauses etc are tools to manage reliability. As in the case of relationships, your market power (the power you can exert on the giver) can influence the reliability you will be able to command from your partners. But there is no substitute for the age old value of “Pride in Your Commitments”
There is another side to commitment and reliability that perhaps you could explore. Your current article focuses on expecting reliability and commitment from the giver. Maybe you can explore why the giver is reneging on commitments, and what we need to do, as takers, to understand givers who do not stick to their commitments.
ReplyDeleteOften, commitments are only adhered to if the giver sees incentive in sticking to the commitment. Often, as takers, we do not give out the right assurances to our givers about the incentives that they will get if they stick to their commitments.
The simplistic answer to this issue is: "If the giver of a commitment has doubts or needs further assurance, he should communicate his questions and doubts." This is a naive expectation. Few people in complex and subtle business transactions take the trouble to communicate doubts and unease. They'd rather simply and quietly drop their commitment. They'll quietly delay giving you the document you wanted or the shipment you expected.
As takers, how often is this because of us? How often have we, in our track record, given the giver signals that he cannot depend on us for prompt and appreciative response for his commitment? As takers, what do we need to do to bridge this gap? How vigilant are we about our own responses?