Organizational Effectiveness – Page 58

Market failures, volume 3

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.

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.
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.
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.

IT and IATA share two letters

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

* * *

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.