It’s nobody’s fault, and it’s obvious how it happened. In a marketplace like IP, it’s natural that strong personal relationships are built and maintained, and so to some extent it’s a natural consequence. It even has a professional sounding name: “Reciprocity”.
But there’s no getting away from the fact that, at its core, what it really breaks down to is “you scratch my back, and I’ll scratch yours”.
Essentially the deal is: ”I’ll send you some (or all) of my business in your country, if you send me the same in my country”.
There’s really no way to make that sound okay, yet somehow it’s the accepted norm, and I think it’s worth carefully thinking about this. It isn’t comfortable, and I know this isn’t going to be read well by many, but we’re operating in a truly wonderful, intelligent and professional industry, so I think we’re all big enough to take a look at this.
It isn’t necessarily bad to operate in this way, with certain caveats, and I’ll come on to those later, but let’s first look at why it’s a problem in the first place.
Reciprocity Lowers Quality
This does not mean that every reciprocity agreement causes a lower quality outcome for every case, but unless you can be absolutely sure that you only enter a reciprocity arrangement with a firm as long as they already are the best quality choice, then you are at least to some extent selecting a supplier not based on the quality of result you expect.
But this is a paradox.
If you really did select them because they were the best, why did you need a reciprocity deal? You could argue, “well why not? We already decided they were the highest quality, so what’s the problem with receiving work in return?”. If they accept your deal, this means they themselves are not selecting foreign associates based solely on quality which means you can’t be confident they really are that high quality. And as you did a deal with them, they can’t trust you as much either, but are still willing to use you.
If you really are the best for them, and they really are the best for you, then naturally you’ll just place all your instructions with them, and they with you anyway. So what purpose does the agreement have?
Reciprocity Causes Commercial and Operational Tension
You’ve let your client down, because your foreign associate messed up. Another foreign associate is starting to be not as helpful as they used to be, and are causing delays. Your formalities team are at the end of their tether and don’t know how to justify it anymore, but between them, those foreign associates spend $2m with you a year. What do you do next?
The tail starts to wag the dog.
You might be noble and take the tough call to lose $2m of revenue and cut them off. But that’s a pretty big call, and no matter how you look at it, there will be a different margin of pressure to assess. It can’t possibly be as simple as it would be without the reciprocity agreement.
You might have a word with them, but you’re likely to pull your punches just a little more than if they didn’t spend a penny with you. You’ve backed yourself into a very difficult corner.
You could argue that you then just go and find another provider who will enter the same agreement with you, but that means you’re now definitely limiting your selection pool to deal-makers who have capacity, rather than the best possible agent, so you now have that tension to deal with.
Reciprocity Increases Costs
This is probably the most obvious one. It’s clear that if you’re spending $1m a year with a supplier/client, you’re less likely to offer that client lower rates. This is to at least some extent the essence of “anti-competitive”. It locks out other offers due to a commercial arrangement which is not based solely on the merit of the provided service.
Now, your client/supplier is also spending $1m with you, so they feel exactly the same. Their pricing policy remains more robust. Both are being overcharged. But as it works both ways everyone feels fine about it. The odd-one out in this arrangement is of course the end client. They don’t have any reciprocal work to offset these higher prices. And deep down, nobody is really comfortable with this.
Reciprocity Impairs Self-Improvement, and Removes Loyalty
Not many people would want a spouse who was only with them for their money. But if you were happy with that arrangement, and they’ll stay with you and give you everything you need just for your money, then what would be your motivation to get to the gym, or improve yourself? You can get away with anything!
And even if you really wanted to be better, you’re not going to get the feedback you’d get from someone with less calculating motives.
Then look at what they are actually giving you? If you’re shallow enough to be comfortable with that relationship, then you’re clearly not looking for true love and devotion. Maybe they’re young and hot. Maybe they have a six pack you could shave your legs with. Maybe they’re willing to sit there like a puppy and do whatever you tell them to do. Either way, it’s going to be shallow and transactional.
There is very little to separate this from a reciprocity arrangement. It’s a shallow, cupboard-love relationship. There’s no loyalty.
As soon as someone richer, younger or hotter comes along, it’s all over. And during the whole relationship, both parties have wandering eyes looking for the next ship to jump to, while remaining insecure about the relationship which they know is based on nothing more than a transactional agreement.
Again, it doesn’t mean that every relationship between someone hot and someone rich is flawed, but if that’s truly what you’re entering into knowingly – which is what a reciprocity agreement basically is – then the fact remains, you’re exposed to abandonment as soon as someone finds someone hotter than you, and neither party are working hard to bring their best to the relationship.
So when is reciprocity acceptable?
This isn’t going to be easy reading, I’m afraid, but this fact highlights the reason why they’re bad in the first place.
If both you and your reciprocal partner are the sole parties that benefit and are disadvantaged by the quality of the services you trade; no problem. If Bill pays Bob to paint his fence, and in return Bob pays Bill to fix his plumbing, nobody is at risk apart from Bill and Bob. This is really just an extension of the original economy of bartering.
But if Sara asks Bob to recommend a plumber, who recommends Bill just because Bill paid him to paint his fence, it breaks everything.
But! If you openly tell your client that you are placing their work with a party selected due to your reciprocity arrangement, and your client accepts that, then of course this is also fine. That’s the client’s choice. But I bet nobody tells their clients that. It would be hard to justify.
“Sara, I recommend Bill to you, because he paid me to paint his fence” doesn’t really hold a lot of weight.
When you want a mortgage for your dream home that is a bit of stretch, and engage a mortgage broker. They recommend a mortgage to you, and of course you get that deep down sinking feeling as you know they’re recommending it to you because that’s the one they get the best commission on. They’re not serving your needs, but theirs. Yes you get your mortgage and it’s absolutely fine, and might even be the best one for you, but this is partly by chance.
If instead they said “Look, I’m going to recommend this one to you, it honestly is a decent mortgage. There might be better ones out there but one of the reasons I’ve selected this is that I get more commission”, what would you think? You’d probably respect them for being honest with you, but it wouldn’t make you confident they’re selecting the right mortgage. So most mortgage brokers won’t say that. But if you said “No problem, that makes sense, let’s go ahead”, then fine. Nobody has done anything wrong.
But as an industry, and as professionals who are proud of what we do, we can do better than that. Not only for our clients, but for ourselves and for the image and reputation of the industry as a whole.
At IP Centrum we have never engaged in reciprocity agreements. It hasn’t been easy, and we’ve left a lot of potential business on the table from time to time. We’ve had a number of very difficult conversations with good clients over the years, but in the long run it has been a great decision.
Overall those clients have respected us, when we’ve explained that the moment we do a deal with them, they know we’re doing deals with others, and they need us to be independent; selecting the perfect providers, not the ones that spend the most with us.
I think it is way harder for an IP Firm to adopt this no-reciprocity rule, as all of this is more complicated (not impossible though), but for IP Service providers it really doesn’t make any sense at all. We’re here to perform a functional role. It’s up to us to create a supply chain, not an incestuous market place which ultimately harms everyone.
When we engage with new foreign associates, we actively explain that we don’t need any reciprocal business. In fact, if they wish to place all of their foreign work with our direct competitors we have absolutely no concern about that at all. But what we do need is great prices, utter honesty and integrity, near-instant response times, and if we need to call in the middle of the night on New Year’s eve, we need someone to answer the phone.
We offer, and also ask for true loyalty.
We pay fast, and we work really hard to make their working engagement with us a true pleasure, and as profitable as we can through efficiencies and process, rather than inflated prices.
On the rare occasion that we have a problem with an agent, we can address this without the slightest complication or competing tension. And if we have to part company, this decision can be made in absolute isolation of any factors other than those which matter.
Keeping things clean and clear has such a profound effect on all of these things.
Reciprocity is so entrenched within the industry that it won’t be eradicated overnight. It’s easier for us that we’ve never done it, than it is for a firm that has followed this industry tradition for a long time, and it’s going to have some pain associated with it. But just like with hidden currency fees, market forces will bring all of this to light in time and it will be necessary to evolve.