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Re-run date: 6/15/2015

One of my daughters got married this weekend, so neither my thoughts nor my schedule had anything to do with writing a new column. Instead, here’s a re-run about yet another example of market failure. Unsurprisingly, the air travel industry is involved.

I enjoyed re-reading it. Maybe you will too. – Bob

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What makes me mad isn’t that the airlines want to shrink our carry-on luggage. It’s that they think we’re complete idiots.

In case you haven’t run across this little firestorm, the International Air Transport Association (IATA) has announced a new standard. Conforming luggage will be about 20% smaller than what you’re used to carrying on. The IATA’s spokespeople say, “… it will lead to an improved passenger experience.”

Not content to insult our intelligence with that little gem, the IATA went on to say, “The Cabin OK initiative does not require passengers to buy new baggage. Cabin OK is not a revenue generating scheme for the airlines.”

Okay, let’s get this straight. It won’t require us to buy new luggage, because … we can shrink the luggage we own with a hacksaw and duct tape to make it fit?

And if passengers can’t pack as much into their carry-on luggage, none will have to check larger bags … for a fee … to bring enough clothing and shoes for trips our old carry-on luggage was big enough to handle?

I’m surprised they aren’t calling it “best practice.”

Passenger demand for overhead space has increased. The airline industry’s response is to reduce the supply. If you were running a business, would you reduce the amount of something your customers were demanding more of?

This is a clear case of market failure. Among the causes of market failure, in addition to monopolies, tragedies of the commons, and the dollar auction, we can add the failure to think like customers, I guess, or maybe simple denial of the obvious — characteristics with which the airlines long-ago proved they are amply supplied.

For example: With approximately one exception, air carriers argue they have to change ticket prices every 37 milliseconds because the laws of economics compel them to do so.

That this is insane was pointed out quite a long time ago by C Alan H. Hess in his brilliant “If Airlines Sold Paint” (if you haven’t read this, stop now and click the link — you’re in for a treat). That it’s completely wrong is evidenced by which carrier is the most profitable in the industry — Southwest, which doesn’t do this.

And now, not content with pricing that’s merely insane, some carriers now offer multiple pricing tiers, based on position in the plane and whether they provide enough legroom to avoid the need for amputation.

To be fair, position in the plane and amount of legroom are attributes fliers value. But there’s an attribute we all value more: Not being crammed into the furschlugginer center seat.

Do you know of any carriers offering a center seat discount? Me neither. And if any carrier did figure this out, you can bet they’d offer aisle-and-window-seat premium pricing instead … exact same thing, only most business travelers would not be allowed to book a seat labeled “premium.”

Talk to any experienced traveler about their preference for not checking luggage and you’ll find price has little to do with the choice. Most of us are frequent fliers on at least one airline, but still carry our luggage on board, even when the first bag is free.

Why? We both know the answer. We carry our luggage on board to make sure it (1) arrives at our destination; (2) undamaged; and (3) with its contents undamaged, too.

Which leads to the KJR solution: Charge ten bucks per checked bag — enough to make money; not enough for business travelers to care — and do what Domino’s Pizza does: Guarantee fast delivery, with the goods in good condition, or your next flight is free.

If I was confident my bag would be waiting for me in baggage claim when I got there, in the same condition it was when I handed it over, I might even start checking my computer bag, too.

What does this have to do with running IT? Not much. The IATA just ticked me right off and KJR was waiting here for me to write about it.

But there is this, which you can take to the bank: If IT wants its users to behave in a certain way, the starting point isn’t to set and enforce standards.

It’s to look at the world through their eyes, not IT’s, setting standards and writing policies that are more attractive than the alternatives.

Most of the time, in most situations, enforcement is the lazy alternative to empathy.

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“Markets don’t fail. They always allocate goods and services perfectly,” a correspondent explained in response to last week’s column about market failure and how its sources might apply to IT shops that act as independent businesses selling to “internal customers.”

My correspondent’s position was, however, unassailable: Markets do always allocate goods and services perfectly, so long as your definition of “perfect” is “whatever allocations the marketplace delivers.”

With non-circular definitions, though, market failures are very real. Take my favorite example, covered in this space almost a decade ago:

The Dollar Auction

I auction off a dollar. There’s just one change to the usual high-bidder wins auction rules: The runner-up has to pay me his last bid too. So if the winning bid is a nickel and the runner up stopped at 4 cents, the winner would net 95 cents, I’d get 5+4=9 cents, and the runner up would be out 4 cents.

Except the runner up wouldn’t stop. He’d certainly bid 6 cents instead of losing the auction. And so on, and so on, until the high bid is a buck and the next highest is 99 cents. The second highest bidder now has to either bid $1.01 for my dollar — losing a penny on the deal — or stop, losing 99 cents. As losing a penny is better than losing 99 cents, there’s no end to the escalation.

Which, as I wrote in 2007, looks a lot like a politically high-stakes project that’s going off the rails. The sponsor can either throw good money after bad or cut her losses. But as each click of the throw-more-money-at-it ratchet looks to have a better ROI than losing everything invested thus far, and also avoids the political embarrassment of backing a loser, the train wreck continues into the indefinite future.

Customer Incongruence

The term “customer” involves three very different roles: Decision-maker (true customer), consumer, and wallet. When the same person fills all three roles, call it customer congruence, and market forces do what they’re supposed to do.

Customer incongruence (my term) happens when different people occupy the different customer roles, as when the family goes to McDonald’s for a Happy Meal. Be honest. It’s the kids who made the buying decision. Consumers? That’s the whole family. Mom or Dad are merely the wallet.

Healthcare provides another example of customer incongruence. The patient is the consumer, the insurance company is the wallet once co-pays and deductibles have been left behind. But who makes the buying decisions for your health care? For most of us it’s our doctor, who tells us what drugs to take and what surgeries to undergo.

That’s right: The seller of healthcare services holds the most important customer role: decision-maker. Which often leads to such inconveniences as buying a very expensive pharmaceutical solution when a relatively inexpensive alternative would be just as efficacious.

Which is not to suggest we should all prescribe our own treatments. Even with WebMD, few of us know enough. So while neither physicians nor IBM’s Watson are perfect diagnosticians, the alternative — self-diagnosing and self-prescribing patients — would result in a lot of unnecessarily dead people.

It’s a customer incongruity, which explains, at least in part, why the U.S. healthcare system is such a mess.

But IT organizations that act as a sellers to internal customers create customer incongruities that are just as challenging. The parallel with healthcare providers is, I hope, clear: Business executives and managers know where it hurts, but selecting or building IT solutions is complex enough to require professionals who know the field. They have the needed expertise.

As a result, to a very real extent, the IT organization acts as both seller and buyer of the company’s portfolio of information technologies.

The [partial] solution involves both formal governance and informal relationship management: Governance in the form of an IT Steering Committee or the equivalent — business managers who acquire enough expertise to oversee decisions about the company’s IT investments; relationship management in the form of the same trust-building you engage in with your doctor (and vice versa), and for the same reasons.

The better, admittedly partial solution is to not consider the rest of the business to be IT’s customer in the first place. It doesn’t do much for dollar-auction situations — what’s needed there is an executive culture that makes risk-taking safer by accepting that risk means some efforts must fail to pan out.

But customer incongruities go away when IT has no customers — when IT and everyone in the business collaborate to figure out and implement desired business changes.

I don’t know if it’s good economic theory. My experience, though, tells me it works quite well.

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