Frank Buytendijk Blog

Transparency will give you deeper insight in your own organization, which will lead to better decisions. Transparency is a competitive weapon to differentiate from the competition in attracting capital, informing customers about the value proposition (not only price) and in cost efficiencies by driving down the transaction costs in the value chain. Empowering the knowledge workers leads to more organizational collaboration, everyone being on the same page (focus and alignment) and as a result more ambitious targets.

Doesn't this all sound great and wouldn't you want this all to happen in your organization too? Yes... and no. Transparency simply is a great idea and every person in the organization will understand the power of it.

But there's a flip side, let's think this through for a second... (sorry for the long post, but such an important topic really requires some thought).

Perfect transparency

What would perfect transparency look like? Let's sketch a hypothetical situation, in which everyone within your company has access to all relevant information. The management information provides a perfect representation of the value drivers of the business. Annual financial budgeting doesn't exist anymore; instead, your company follows a system of continuous planning through a collaborative process. Every manager knows exactly how his or her decisions affect other parts of the company. There is a good overview of how external changes have an impact on internal matters. And your organization is able to predict precisely how the market will respond to your activities. The systems you have implemented offer all this information at exactly the moment it is needed, "right-time." And let's make our hypothetical example even more perfect, by assuming the total cost of ownership of this all consists of just some minimal work to set it up and maintain it, a fraction of the cost of current information systems, processes and people. Perfect.

Or is it perfect? If your company would have the capability to create this perfect transparency, then it would be reasonable to assume that other companies could create the same system too. And if other companies can do so, it's logical to believe that ultimately everyone can. Money is not an issue and best practices become readily available, because it is perfect. This means the overall market for everything (ranging from banking to legal services to mobile telecoms to energy to bicycles) would be completely transparent, with complete insight into profitability of every player. And if all companies have that insight, again it is logical to assume consumers will have the same level of insight. In essence, that is a good thing, because it ensures that every transaction will have a fair and reasonable profitability. In microeconomic theory, this is called "perfect competition." But not all current profits are fair and reasonable. Some profitability is based on a market's intransparency: customers are unaware of better or cheaper alternatives, or are unaware of the abnormal profit taken on a product or service. Under conditions of perfect transparency, these margins will disappear, leading to margin erosion for large and established firms. Many small firms, doing business in a certain region or in a certain niche, even exist by the grace of intransparency and as a result will be wiped out completely.

The conclusion is simple. Part of your profitability exist because of intransparency. Transparency can lead to margin erosion. Is that what you are looking for?

Customer behavior

But let's assume, realistically, that an entire market can't attain perfect transparency, and that only individual corporations can provide some transparency to their customers. You can reason that that provides competitive advantage, because transparency can increase customer loyalty as customer come to trust and prefer a particular brand. Unfortunately, it is equally easy to reason the opposite point of view. A recent Harvard Business Review article pointed out that this form of customer loyalty can actually lead to lower profitability, because loyal customers who have a long history with a company expect the best deals and know how to get them.

Organizations have responded by seeking ways to counter these expectations. One hotel chain had a loyalty program for highly profitable customers that included an occasional upgrade to a suite.  These savvy customers came to expect upgrades and were even disappointed if they didn't receive an upgrade within the expected timeframe. The program started to have a negative impact on customer satisfaction. The solution to this problem involved creating a number of scripts. In one example, the loyal customer would occasionally be told on check-in that the hotel was overbooked, but that he or she would be upgraded to a suite as part of the loyalty program. Research shows that if there is a problem with customer service and it is quickly resolved, customer satisfaction will be higher than it was before the incident. In fact, the solution of using scripts has actually added intransparency to the process.

The conclusion again is straightforward. Customer loyalty partly exists due to intransparency in the relationship.

Public relations

Corporate transparency is touted as being good for a corporation's image, and is a key ingredient in compliance and governance. Transparent companies inspire more trust and will be less inclined to create and allow irregularities, which are likely to be scrutinized closely in the environment they have created. But is such corporate transparency really such a good thing? Consider the example of one large multinational firm which is actively positioning itself as a transparent company. Its annual reports win prizes and the company is highly involved in corporate social responsibility activities. However, the tax office in one of the countries where the company is active found some irregularities in the firm's tax planning department. Newspapers linked "good image" to this tax issue shareholder value vaporized. Because the company had  publicly prided itself in its transparency, it fell even harder.

Still, opacity (or intransparency) is an even bigger risk. Not showing what you're doing is simply not accepted anymore. Customers want to know type of business they are dealing with. If you don't integrate in your value chain, at one moment you'll be shut out. Regulators simply demand the information they require. And competitors who did get transparency right will overtake you left and right.

It's simple, we live in a transparent world. Period. How to balance the pros and cons? That's an interesting journey for all of us...

--frank