HomeIndustry Commentary

Market failures, volume 3

Like Tweet Pin it Share Share Email

We’ve been talking about market failure and how it applies to IT departments that are “run like a business” that sells information technology to its “internal customers.”

When it comes to causes of market failure, monopolies might be the most obvious, but the Tragedy of the Commons is the monster.

Discovered by William Forster Lloyd in 1833 and popularized by Garrett Hardin a century and a half later, the tragedy of the commons is what happens when someone with access to a shared resource gains an economic advantage by using as much of it as they can. It happens because everyone will do the same, collectively wreck the commons they all rely on.

Sadly, most of the easily recognized examples are political or politicized, as in the case of The Cuyahoga River, which runs through Cleveland. It was, in the 1960s, a waste disposal resource. Because it was both shared and unregulated … that is, everyone relied on market forces to allocate it fairly and efficiently … any company that wanted to could and did dump as much as they wanted into it.

Not only was there no economic incentive to avoid overusing the Cuyahoga, the opposite was true. For every industry in Cleveland, dumping their pollutants into the river was cheaper than any other waste disposal alternative.

As a result, the Cuyahoga River became flammable, leading to one of Randy Newman’s better songs and the birth of the Environmental Protection Agency.

Not to mention how the fire department probably responded when the call came in. I see Bob Newhart, or maybe Lily Tomlin plays the part of the fire chief: “What’s on fire?” A snort. “So what do you want us to do — aim our firehoses at it?”

But you’re leading IT, not the Cleveland fire department and your commons isn’t a river, it’s the collective IT architecture.

If you’re a monopoly provider, you can control access and use because it’s your commons. You own it. You don’t let anyone else make any changes to it. You rent its capabilities to your internal customers, with rent payments coming in the form of chargebacks.

But then you’re a monopoly provider, which makes you a cause of IT market failure — see “Market failures, volume 1,” KJR, 5/22/2017).

You could open the technical architecture to all comers, resulting in shadow IT gone wild. It would be like a housing development where someone buys a lot and erects a 20 story hotel there because land and property taxes are lower.

And then, because the one hotel is profitable, other hotel chains do the same thing, all connecting their buildings to water and sewer systems designed for a collection of single family houses.

This doesn’t happen in the suburbs because municipalities have zoning laws, regulating the use of their shared services.

But, as The Economist pointed out a long time ago, analogies aren’t the same thing as being the same thing. IT isn’t a municipality, so I’m not sure there’s a lot a CIO can learn by exploring the differences between how, say, Washington DC, Lake Forest, Illinois, and Beaver Bay, Minnesota manage their respective commons.

Instead: If you must run IT as a business, don’t want to be a monopoly, and still want to preserve the integrity of your company’s technical architecture, here are a three steps you can take that let the business gain the considerable advantages to be had from shadow IT, without it trashing the IT commons.

  1. Establish enterprise architecture governance: Returning to the urban metaphor, standards are IT’s zoning laws and enterprise architecture governance is how IT sets its standards. Shadow IT is just fine and dandy so long as it’s in the right zones.
  2. Culture is the new governance: As pointed out in this space and in The Cognitive Enterprise, there’s nothing in an organization so slow that a committee can’t brake it even more. So while you need zoning laws and zones, their enforcement should be 90% cultural — defined as “how we do things around here” — and only 10% through formal committee-driven reviews.
  3. Create a Superfund: If you’re running IT as a business and some shadow-IT-based application messes up your technical architecture, whoever made the mess should pay you to clean it up. You’re already charging back. This is just another line item.

Not that I’m advocating running IT like a business. But if you’re going to do it, you might as well prevent market failures as you do.

Comments (4)

  • Great article. But at the very top and down through the very bottom of an organization, it has to be enforced that there is such a thing as the “common good”, which in a profit making company is sustainable profitability within the law. In a non-profit it would probably be sustainable of service providing to target communities.

    But that also means that winning at all costs, “winning isn’t everything, winning is the only thing”, never has the power of governance withing the organization, as I believe this, as an entitlement, is the fundamental dynamic that leads to The Tragedy of the Commons.

    Thus, the organization needs to be prepared for some surprising but extremely nasty fights within the organization, and it must win every one of them, even though that will mean the inevitable loss of some valued talent.

    But inside or outside the organization, a person has to do what a person has to do.

    Thanks for your highly articulate article.

  • Very interesting analogy/cautionary tale…

  • Hi Bob,

    Looks like “Market Failures volume 1” also contains the second cause of market failure or is there a link to another article somewhere?


    B. Scott Marley

    • The first two volumes each discussed two causes of market failure. I suppose I should have titled the first post “volumes 1 and 2” and the second “volumes 3 and 4,” but it didn’t occur to me until I read your post.

Comments are closed.