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  • Adam Walter

Incentive


Often when I am evaluating potential partners and resources I ask myself: "What is their incentive?". The purpose of this exercise is to avoid conflicts of interest. Often we have healthy partnerships that go sour because there is an incentive for one party to behave in a way that does not benefit both partners.

Recently we had a major hailstorm in Nebraska and I was left with the task of dealing with insurance, banks and contractors. So I broke down their incentives.

  • The insurance company wanted to pay as little as possible to meet the terms set forth in my policy.

  • The bank wanted to make sure the house value was maintained.

  • The contractor wanted to pull as much cash out of the policy as possible.

I felt like I was thrown in the water with sharks swimming around my boat each wanting a different piece. Sure enough eventually the contractor hit a wall with my siding repair. Upon realizing they would not be able to expand the project scope they stopped talking to anyone as their incentive was reduced and therefore their interest.

Were any of the parties malicious? No, they just had different incentives, the contractor was only interested as long as it was profitable and the insurance company was only going to stretch so far as was reasonable.

In business this is the daily battle we fight. Especially when outsourcing. How do we balance our contractors? What is our their incentive and how do we keep these in balance? When dealing with complex service agreements I would have resources available in house to help me determine what is healthy, eg a purchasing department, legal department, or financial department. These experts were always available to help me protect the best interests of the company. We also place incentives on our employees such as bonuses, benefits and don't forget the ever popular food.

Balance is hard. The trick is balancing the incentives so that the parties are focused on our goals.

How do we translate this to technology. Well as business owners we want our business to run efficiently and meet goals we set forth. Often we find a contractor to service our needs. The contractor will consistently up sell services and maintain the ones that allow them the maximum profit while keeping you happy. How do we switch the incentive here? I believe we have a few options. We can start a RFP process on a rotating schedule, we can hire a third party to evaluate technology needs, or we can hire an in-house expert to manage these things.

What solution you choose to use is up to the business structure.

Full Time Employee:

  • PRO: Fringe benefits can be offered at different levels to offer proper incentives for full time employees. The incentive of the internal employee is usually clear.

  • CON: Internal employees in technology may be more focused on the tech than how the business runs.

RFP:

  • PRO: Keep a contractor honest in their offerings and ensure a scheduled review by competitors.

  • CON: Extremely time consuming, also the switching cost for MSPs and Developer Firms is very high.

Third Party Review:

  • PRO: Cheap, reliable, incentive is clear.

  • CON: Be wary of back end deals. Ensure that your third party reviewer does not get kickbacks or have incentives to favor one firm over another.

Obviously my company prefers the third option but each business owner needs to decide what works best for them. When I was doing my home repair I had the bank available to call upon to inspect the work done by the contractors and help me choose what to work on next. I wish they would have acted like a general contractor but I can't have everything.

Business owners are sharp, we may not have all the knowledge but we are all good at leveraging resources. We need to use that strength and balance out the incentives each of those resources have. At that point we can maintain healthy partnerships that will make our businesses flourish.


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