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Saturday, September 06, 2008

Monetizing Relationship Capital, Part 1

by Adam J. Kovitz, CEO, Founder & Publisher

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Last month I completed a ten-month-long epic adventure into the Laws of Relationship Capital of which (coincidentally) there are ten. The Laws are about networking theory that goes far beyond what most of us know to be networking; collecting business cards/online “friends”/connections, working rooms, etc. And while networking theory is great in helping us understand the reasons why we collect cards/“friends”/connections and work rooms, it’s not necessarily for everyone. So…breaking from the ten-month-long streak of theory, I humbly submit the practicalities and applications of how people are actually making money from their own Relationship Capital. In the first part of this series, I will focus on what you and I can do as individuals and as members of organizations to create wealth from developing our own Relationship Capital.

What is Relationship Capital?

When we think of the word “capital”, we usually think of “money” or Financial Capital, and rightfully so as Financial Capital is the basis of our current economic system. Yet defines “capital” as “any form of wealth employed or capable of being employed in the production of more wealth”. When we perform a root-cause analysis as to how Financial Capital is acquired, it comes down to two major components:

  1. What we know, and
  2. Who we know.

This is the Ninth Law of Relationship Capital. The good news is that we have made considerable progress in valuating the “what we know”, there by deriving a more pure form of capital called “Intellectual Capital” and is now being used to valuate the true wealth of companies and individuals for purposes of mergers & acquisitions (M&A), stock offerings and for purchasing/selling. To a lesser degree, however, have we made advances in valuating the “who we know” into the other pure form of capital: “Relationship Capital”.

Evidence of the Less Understood Wealth Generator

Just because we still don’t completely understand Relationship Capital or have even begun to scratch the surface of its potential, doesn’t mean that it doesn’t exist. Examples exist everywhere of how we consciously or subconsciously valuate Relationship Capital everyday to make life’s decisions:

  • Doing favors for family and friends – leveraging our own network of closest contacts to help us with things that either make us money (like getting a friend to help you get you a job) or save us money (having your general contractor son-in-law fix your house, without charging you for the labor)
  • Rewards programs – companies understanding that strong relationships equal revenue reward their network of customers by providing incentives (usually in the form of points) that can be redeemed for products and services
  • Investing in a new venture – people with high levels of Relationship Capital have an aura of believability and credibility. One of the first things an investor will look at when determining whether or not to invest their own Financial Capital into a new venture is the perceived level of Relationship Capital of the Management Team. Think about it; would you rather put own money into a new tech start-up founded by Bill Gates and Steve Jobs or one founded by John Smith and Mary Jones? Why?
  • Hiring – aside from the degrees and certifications that typically make up the based requirements for some jobs, most that also require more “interpersonal skills” evaluate candidates based upon their believability and credibility. This is especially true for sales professionals who are often asked to “bring their own contacts” to the job.

Relationship/Network Mapping

When a public speaker prepares to address an audience, most experts agree that it is best to “understand the audience”. The same is true for effective networkers. So how do effective networkers “understand their network”? By mapping their network. Think of an organizational chart for a corporation…this a simple way by which they map out their own internal network. The science of networking, social network analysis, championed by such folks as Valdis Krebs maps networks using such software known as InFlow which allows organizations to map out their own internal and external networks. The software allows for what if? analyses to determine things like the effects of key employees leaving the company on knowledge transfer and succession planning.

Effective networkers do not necessarily need such sophisticated software but do their own mapping by analyzing their own key contacts. I do an exercise with groups when I discuss planning their own networks in which I ask them to choose five people that they know. Once chosen, I ask them to rank the “signal strength” of each relationship on a scale of 1 to 10. The higher the number means the better the relationship. Key indicators of a “better relationship” are typically determined by:

  1. Frequency of contacts with the individual (via phone, instant messenger, in person meetings, etc.)
  2. Average time spent with the individual
  3. Known results achieved through such a relationship, including
    1. Financial Capital generated and/or saved
    2. Jobs realized
    3. Intellectual Capital transferred and/or utilized
    4. Levels of emotional support
    5. Time taken to respond to requests for help
    6. Social acceptance and/or affinity
    7. Feelings of love, affection and/or respect

Maximizing Our Network Portfolio

Mapping our network is the first step to creating wealth by leveraging Relationship Capital. It gives us a baseline for seeing what we have. For many of us, we have only two choices if we are not getting the results we want with our current network portfolio:

  1. Expand it, or
  2. Upgrade and/or maintain it.

Why the term “portfolio”? Back in 2004 I made a startling realization for myself as I was researching networking organizations across the globe – every network is an asset. In the popular book Rich Dad, Poor Dad, Robert Kiyosaki and Sharon Lechter define an “asset” as an item that produces revenue. This means that a network is no different, in theory, than a real estate property, stock, bond, mutual fund, etc. Like traditionally-recognized assets, networks:

  • Require an investment (usually of money, more often of time) in order to achieve a return
  • Are managed by those who are competent enough to add value to the bottom line, and
  • Have a constantly-evolving portfolio of holdings.

Quantitative Approaches: Expansion

The Third Law of Relationship Capital states that one of the ways to build Relationship Capital is to increase the amount of relationships one has. Just like we mind our Financial Portfolio and occasionally see fit to add to the overall diversity of holdings, we can expand our Networking (Relationship) Portfolio by:

  • Attending more offline networking events – this means getting out of “cave-dwelling mode” as fellow TNNW writer, bestselling author and Founder of BNI, Ivan Misner puts it and seeing more people. In his book, The World’s Best Known Marketing Secret, Ivan discusses making oneself visible as a means of achieving credibility. The more credibility one has, the more Relationship Capital (Ivan calls it “profitability”) one has.
  • Collecting more business cards – at events, the more one collects, the more opportunity one has to expand their network. Effective networkers will enter or scan the cards collected into a contact relationship management (CRM) system like Outlook, ACT! or Goldmine.
  • Making more “friends” online – thanks to new online venues like LinkedIn, Facebook and Myspace, people are expanding their networks in ways they have not before. This has become a viable alternative, if not adjunct to offline networking. While I’ve found that most people will connect with you as a “friend”, there is less depth to a relationship, although the key indicators of a better relationship as stated above do apply and deep relationships do have the potential of forming.
  • Joining/Participating in more new networks – the more new networks to which you become active, the more people you will meet – it’s the law of statistical probability and it has been employed by sales and marketing professionals since there were sales and marketing professionals.

Qualitative Approaches: Upgrading

The Fourth Law of Relationship Capital states that we can increase our Relationship Capital by bolstering our current relationships through further enhancing positive perceptions of ourselves. Just like we would put additional money into assets that are currently performing well for us (or we think might start performing well for us) in our Financial Portfolios, we can upgrade and/or maintain our Networking (Relationship) Portfolio by:

  • Increasing frequency and length of contact with key relationships – this could mean regular calls, checkups, outings, etc. When we want to do something special for our family, instead of buying more things like toys for the kids or items for the house, we can also invest in special outings like day trips and picnics or family vacations to encourage bonding. In business, this can mean after hours parties, team building retreats or golf games.
  • “Sweetening the pot” – companies offer incentives all the time to reward its customers for their years of patronage or for just “switching over” to them. This can include discounts on pricing, value added services, and promotional items.
  • Minding the “golden rule” – Human Relations 101 says to treat people the way we want to be treated. The studies of customer service, hospitality and generally being of service to others goes a long way to build positive flow of Relationship Capital, especially when we “walk our own talk”
  • Following up – Sending thank you notes, recognizing others for their work and calling people back after you’ve had a pleasant first meeting in person go a long way to ensuring that the business cards/online friends become more than just names that get forgotten (Relationship Capital goes to zero – Fifth Law of Relationship Capital for those keeping track). You wouldn’t want to be forgotten would you?

If we begin to look at Relationship Capital the same way we look at Financial Capital, we can almost imagine having Relationship Capital Accounts where we make deposits every time we work to improve or at least maintain our relationships while forgetting about or doing a disservice to others would be considered a withdrawal. Each network, therefore, acts like a bond fund/mutual fund/hedge fund in which we can both build potential for and get fantastic returns on our Relationship Capital.

Next month we will look at those whose business is networking. The networking industry is alive and well and these creators and brokers of networking assets make a living from helping you and I earn the best return we can on our Relationship Capital. Stay tuned!

The Emergence of the Relationship Economy

Relationship Capital is the cornerstone of the Relationship Economy, which RNIA defines as an “economic system in which Relationship Capital influences the production, distribution, exchange, and consumption of goods and services.” I am proud to have contributed discussion of the Ten Laws of Relationships Capital to the upcoming book The Emergence of the Relationship Economy, now out as an eBook and in hardcopy. With a forward written by Doc Searls (of Cluetrain Manifesto fame), it is being considered a “must read” for anyone responsible for the strategic direction of their business. If you would like to purchase your own copy of The Emergence of the Relationship Economy, please click here.

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The Emergence of The Relationship Economy

The Emergence of The Relationship Economy
The Emergence of the Relationship Economy features TNNWC Founder, Adam J. Kovitz as a contributing author and contains some of his early work on The Laws of Relationship Capital. The book is available in hardcopy and e-book formats. With a forward written by Doc Searls (of Cluetrain Manifesto fame), it is considered a "must read" for anyone responsible for the strategic direction of their business. If you would like to purchase your own copy, please click the image above.


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