Six problems third parties solve

We hear so much about the importance of business relationships—and “relationship” almost always refers to the relationship between two people (a pair or dyad). But we hear relatively little about relationships involving three people (a triad), even though triads are everywhere.

It is true that dyads (pairs) are the basis of all human relationships. Yet a third party can help those main relationships, especially in business. Part of my mission with the Power of Three is to show the many ways a third party can do that, either by enabling the pair relationship to exist at all or transforming an existing two-party relationship for the better.

One way to think of the third party’s advantages is in terms of the six roles these connecting third parties (middlemen) play, or what I call the Bridge, the Certifier, and other essential roles. Each role corresponds to a problem that the third party is in a position to help the first two people overcome. 

Two-party relationships face several predictable problems, problems a third party is in a unique position to solve.

Here’s a brief explanation of these problems. 

Distance 

Two people might benefit from a business relationship with each other, but they cannot realize those benefits until they can bridge some sort of distance. They might be in different cities or countries (physical distance), one might want to sell before another is ready to buy (temporal distance), and they might not know each other (social distance) despite physical proximity and good timing.

A third party who can connect them across one or more of these types of distance is what I call a Bridge. For example, someone who flips appliances through Craigslist is a temporal bridge between, say, the seller eager to get rid of a used appliance on Tuesday and a buyer interested in picking up the appliance on Saturday. By swooping up the appliance at a low price on Tuesday, holding it in “inventory” for a few days, and then selling it at a markup on Saturday, the Craigslist flipper provides a valuable service to both seller and buyer.

Quality uncertainty

One of the biggest obstacles to successful trade is the “lemons” problem (from George Akerlof’s famous analysis of “The Market for Lemons"): a seller typically knows more about the quality of what she’s selling than a prospective buyer does. (In the lingo of economics, the lemons problem is a type of informational asymmetry. Sometimes, the buyer knows more than the seller does, as when you’re buying insurance, but much more often it’s the seller who has more information.) In the classic case of used cars, the owner knows the internal condition of her car far better than anyone considering buying it. It’s pretty obvious that such informational asymmetry is a problem for the buyer, who doesn’t trust the seller. Interestingly, it is also a problem for the seller, particularly the seller of a good car, who has a hard time persuading the buyer that her car is not a lemon and therefore worth the price that she is asking. 

One solution to this problem of quality uncertainty is to bring in a third party, who’s in a position to create trust between the buyer and the seller. It can’t be just any kind of third party: it has to be a Certifier, a long-run player who is able to scout, screen (vet), and credibly vouch for quality. A reputable car dealer, for example, not only knows how to judge the quality of a used car (in particular, by having experienced mechanics on staff), but can also stake their reputation on the quality of the cars they sell. When you go to a reputable car dealer to buy a used car, you’ll typically pay more than you would through a private sale—but you’ll be assured that you’re not getting a lemon.

Lack of accountability

When you’re buying services, rather than goods, knowing about underlying quality is helpful but not enough because, regardless of service providers’ underlying ability, they can decide how much effort to put in and how honestly to conduct business. Sussing out hidden information about sellers, as Certifiers do, won’t protect buyers from shirking and cheating, problems that can come up after buyers sign on the dotted line. These problems of shirking and cheating (sometimes called moral hazard, post-contractual opportunism, or hidden action) are the second type of informational asymmetry that can deter people from doing business with one another.  

For buyers and sellers to trust each other under those conditions, they need to know that someone—a third party—will reliably and fairly enforce the contract. That’s the job of the middleman I call the Enforcer. We benefit from the Enforcer's role whenever we get in a car with a stranger through a ride-sharing service like Lyft or Uber--we are counting on Lyft or Uber to make sure we get to our destination safely and without getting gypped.

My favorite example of an Enforcer is the wedding planner. Most couples get married once, but wedding planners work on many, many weddings. The couple is a one-time player, but the wedding planner is a repeat player. Guess which buyer—the couple buying direct or the professional planner buying on behalf of the couple—will elicit the best service from florists, bakers, and wedding-cake makers?

Information overload 

Thanks to the Internet, we live in a world full of free information. Even if you limit yourself to information of reliably high quality (thanks to the efforts of professional Certifiers such as reputable magazines and highly ranked Web sites), for many topics you have access to more information than you can easily process. The more information you gather, the more time you must spend processing that information to reach a decision--such as which hotel to stay in on your trip to Copenhagen or which faucet to buy for your kitchen remodel. Information, as intangible and costless as it often seems, actually does consume a valuable resource: your time. This is what Herbert Simon meant when he wrote that “the wealth of information creates a poverty of attention.” The upshot: when information gathering is almost costless, as it has become on the Internet, decision making remains costly because of the processing cost of comparing so many options across many dimensions. 

The savvy Concierge can solve this problem for consumers of information. A travel agent specializing in travel to Denmark can quickly show you one or two hotels in Copenhagen that match your needs, and an experienced designer can help you zero in on the right faucet for your new kitchen. 

External risk

When I described the Concierge and the Enforcer, I was talking about reducing risk from the qualities or actions of the two trading partners—the third party was removing counterparty risk, the uncertainties arising from one of the first two parties. But counterparty risk (which I call “internal risk”) is not the only kind of risk that can arise in transactions. Often the risk a buyer or seller faces has nothing to do with the other party; rather, it is an external risk, or risk due to all the other possible forces in the universe (collectively known as randomness or luck). 

This doesn’t necessarily mean risk as in the chance of disaster or danger—it can really be risk as simple volatility, or deviation from a steady state. Volatility doesn’t have to be a terrible thing, but most people don’t like it. Yet third parties are in an excellent position to manage such risk and reduce it for the people on the other side. Because they often deal with a large volume of transactions (like all the drivers and passengers Lyft serves, for example), they can smooth out the ups and downs by pooling variations in available supply on one side (supply-side risk) and uncertainty about demand on the other (demand-side risk). 

I call this type of third party the Risk Bearer, and there’s a lot of skill in playing this role well. It typically requires, among other competencies, the ability to discern internal risk from external risk.

Self-advocacy

People often have trouble promoting themselves and negotiating on their own behalf, and there’s a good reason for that. Both self-promotion and aggressive negotiation tend to harm you and your relationships, even if you get what you want in the short term. Athletes who try to get attention for themselves or who hold out in contract negotiations are seen as selfish divas, the opposite of the good sports and team players beloved by fans (and by brands looking for celebrity endorsers).

Enter the third party I call the Insulator. A sports agent who plays the Insulator role, for example, takes the heat for the athlete. And the agent actually enhances his reputation by doing so! The middleman in negotiations is thinking of his long-run reputation (such as for toughness, or for making credible threats) just as the Certifier is thinking of his long-run reputation for quality. The essence of being a good Insulator is championing the client in ways that it would be unseemly for the client to do himself or herself. And in the same way that Certifiers and Enforcers correct informational asymmetries between buyers and sellers, Insulators can correct power imbalances between two parties in a negotiation.

The Takeaway

Although we all rely on relationships with colleagues and businesses, few appreciate the role that third parties play in forming and sustaining these relationships. The truth is that, particularly in business, two-party relationships face several predictable problems, and those are problems a third party is in a unique position to solve. Are you taking full advantage of third parties to help you? And are you helping other people in your professional life by playing the right third-party roles?

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About the Author

Marina Krakovsky is the author of The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit (Palgrave Macmillan). She is also co-author, with economist Kay-Yut Chen, of Secrets of the Moneylab: How Behavioral Economics Can Improve Your Business (Portfolio/Penguin). In her writing, speaking, and consulting, her main focus is on the practical application of ideas from psychology and economics. Her articles and essays have appeared in Discover, the New York Times Magazine, Scientific American and Scientific American Mind, O (The Oprah Magazine), Psychology Today, Slate, FastCompany, the Washington Post, Wired, and more.