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Full partnership is not the end of the road. As we develop more trust with our partners, as we achieve predetermined worthwhile goals, as our desire to benefit personally from the arrangement is sustained, our commitment deepens. Partnerships can revert to earlier stages— back to reassessing needs and redefining what we want from our partners.

Just as we reestablish a Norm stage following a return to the Storm stage, we can recommit to a partnership that we have chosen to redirect. In both cases, the establishment of trust sustains the partners through setbacks and potential turmoil.

Our commitment to a full partnership, therefore, is not a final destination, but an ongoing process. The relationships are performing, the synergies are generating mutual benefits, and the partnership becomes increasingly well-established. Sustaining its growth is the challenge. At this point we may want to do some strategic planning. This planning can be done within the boundaries of the partnership to create a mutual future, or it can be done in a larger arena. Many companies present organizationwide “future search” conferences where they invite their partners to try to envision what their partnerships will look like five or ten or twenty years down the road. The more mutual the planning, the deeper the relationship. Trust is a catalyst propelling people into the creative zone.

A new dynamic occurs when organizations make the paradigm shift from “me” to “we.” This is when they move from independence to interdependence.When an organization has increased its PQ enough to understand that its success depends on the partnership’s success, it integrates the partnership into the culture. It is now “the way things are done around here.”

The more skilled the partnership is in using the Six Partnering Attributes, the better the relationship between members becomes. As we saw in Part Two, these attributes are portable—that is, you can use them in many different settings. When employees learn to improve their PQ on the job, they’ll use these skills not only between themselves, but also when working with customers and even in their personal lives. Employees show higher morale and cultivate better relationships when they communicate effectively. These elements lead to increased productivity. Since business relies on relationships, customers will continue to support organizations with which they’ve built a good relationship. The organization wins in many ways.

Here’s another example of partners investing in each other’s success. I know of a company that paid to have consultants teach strategic planning to their employees’ union.Many members of management were dumbfounded when they heard about this. They wondered why the company would pay to have the union become more organized and stronger through company-provided strategic planning. When the question was asked of the CEO, her answer demonstrated her high PQ: “In the next round of negotiations with the union, I want them to know what their members want so we can get down to the critical issues that are facing our industry. Neither side wants to drag out these talks. It’s an investment in our management’s time to have the union be strategically prepared for these negotiations.”

After completing the steps described above, you are equipped to begin your strategic planning. You’ll also need to use the information you gathered from your internal assessment. But probably the most valuable information you’ll need at this point is your Organizational Process Model because this will help you and your partner determine how to integrate the two organization processes to provide the value-added component for which your partnership was created.

As you build trust through your joint efforts in strategic planning, you can begin to share information and resources with each other. I know of a french fry producer who liked the potatoes of a certain farmer in Idaho. Unfortunately, the potato farmer could not produce the number of potatoes required by the producer because he didn’t have enough acreage. So the producer bought a nearby parcel of land for the farmer to use, and over a ten-year contract the land became the farmer’s property. Both sides benefited: the farmer received a fair price for the potatoes he produced on the land; the producer increased his supply of potatoes. Partners who invest in each other’s success both achieve more.

The refinancing sensitivity increases with a decreasing credit quality. This means that weak B- and C-rated companies are the most refinancing sensitive. There is a close relationship between the ratings cycle and the Fed fund cycle. Atight Fed policy goes hand in hand with a lower amount outstanding of CCC paper. If the Fed switches to an easing mode the proportion of CCC-rated bonds will increase in the credit market. AFed tightening policy goes along with credit rating upgrades whereas an easing policy cycle is usually associated with credit rating downgrades. This is because the effects of the Fed policy will have an impact on the credit markets with a time lag of several months.

Asteepening of the treasury curve – driven by declining short-term rates will provide the credit market with liquidity, which in turn helps to lower default rates. In this scenario, companies will have easier access to liquidity (e.g. bank loans, debt and equity markets).

Direction of equity markets. The current state of the equity market has an effect on default rates because it determines asset values, investor’s sentiment towards risky assets and the accessibility of capital markets for companies.

Age effect of bonds. The likelihood of payment default by a bond issuer can change with decreasing time to maturity. At the time of issuance, the new issuer has abundant cash and payment default is easily avoided. In addition it is quite common to put some restricted cash from the issuance into an account to cover the first 3–4 coupon payments. Over time the “hazard rate” grows as cash reserves gained through the bond issue are used. The critical period is reached when the success of the firm is least certain and the hazard rate is at a maximum. However, after corporate plans are successfully implemented and sufficient profit has been generated to offset debt, the critical phase is past and the likelihood of payment default declines rapidly. Several empirical studies show that the critical time after first issues is approximately 3 years after issuance for B-rated bonds and climbs to approximately 4 years for BB-rated bonds. The amount of defaults drops significantly after the critical period of the first 3–4 years is survived by the issuer.

Quality of new issue volume. An important measure for the quality of the high-yield market is the percentage amount of new issuance being used to refinance debt. During periods of balance sheet repair (1990–93 and 2001–03) the percentage of total new issue volume will reach high levels.

Overall, the analysis suggests that credit spreads are highly correlated with the business cycle and that there is a leverage cycle that is closely related to macroeconomic activity variables. While carry-driven strategies may work most of the time, a thorough understanding of the leverage cycle helps to anticipate a harsh credit environment, even before it is reflected in GDP growth and equity performance. As the years 1997–2000 have shown, information from the equity markets is clearly not sufficient as an indicator of business and financial risks in the corporate sector. Most companies go through a regular cycle of leveraging and deleveraging, which is related to the profit and Capex cycle. Especially trends in mergers and acquisitions have a significant impact on the performance of credit markets.

Consequently, the concept of “safe” and “risky” companies loses its allure. Companies from sectors like utilities or noncyclical services that are considered safe today may increase leverage and be more risky tomorrow. On the other hand, highly leveraged companies may decide to deleverage and thus lower their business risk, like the European telecom sector in 2002 and 2003. Although the profit cycle is more pronounced in cyclical sectors, a credit cycle may be observed across virtually all industries. Credit markets react to this dynamic process through spread tightening and spread widening, thus causing investors mark-to-market profits or losses.

Operating leverage is the idea that companies can make more money from each additional sale if they do not have to increase fixed costs to produce more. In general, operating leverage refers to the fact that a lower ratio of variable cost per unit to price per unit causes profit to vary more with a change in the level of output than it would if this ratio was higher. So operating leverage is a function of fixed unit costs and output. The benefits of operating leverage unfold when business picks up. Then the existing workforce, plant and equipment can produce more without additional costs. Profit margins expand, and profits boom. Obviously, the profit of a business with a high degree of operating leverage varies more, everything else remaining the same, than do those profits of businesses with less operating leverage.

Greater variability of profits, of course, means that the credit risk is higher. Conversely, with a lower level of operating leverage, the business shows poor growth in profits as sales rise, but faces a lower risk of loss as sales decline.

Corporate bond markets typically reward companies for stable revenues and earnings. However, empirical evidence shows that in times of high risk appetite and positive expectations for future economic growth, companies with rather volatile revenues tend to outperform. That is because when there is a lot of optimism on revenue growth, companies with volatile revenues usually benefit the most. Similarly, for companies with a history of high earnings volatility, the probability for a margin expansion is particularly high as the economy recovers. Therefore, if the market expects a cyclical recovery, corporate bonds from cyclical sectors tend to outperform due to the companies’ high degree of operating leverage.

As if it is not difficult enough to deal with employees siphoning off profits and market forces you cannot control, stocks are bought through a commissionhungry broker. A broker can be an individual you talk to, a telephone system, or a Web site. Nevertheless, your relationship with a broker can be troubling.

A broker makes money each time you buy or sell a stock. The broker profits from both commissions and the spread between the buy and sell price. For example, if you sell 1,000 shares of DUD for $10 each, you pay a commission ranging from $5 at a deep discount online broker to $200 at a full-service broker. The buyer of your shares pays anywhere from $10.02 a share to $10.20 a share. The difference between your selling price and the purchaser’s buying price is the spread. The broker and others pocket the spread in addition to your commissions and the purchaser’s commissions. It is in your broker’s interest for you to make as many transactions as possible.

It is not in your interest, because every transaction costs you money.