Over the past couple of years I’ve thought a lot about incentives. Much of the thinking has been triggered by things that Ben Thompson has written on his Stratechery blog and discussed with James Allworth on their Exponent podcast.
…nothing matters more than incentives. It doesn’t matter how much money or experience or developers you have if your incentives are not aligned to solve the right problem Ben Thompson — https://stratechery.com/2014/paypals-incentive-problem/
Ben is writing about large tech companies but I think it translates to other contexts as well. Recently I was struggling to understand how school photo companies seem to be able to get away with abusing school parents with exorbitant prices, unfair fees, absurd photo packages (that force most people to upgrade), awful websites and slow turnaround times. But it makes perfect sense if you think about their incentives (and ties in with what I wrote yesterday about who is the customer?).
Photo companies aren’t incentivised to keep parents happy because parents don’t choose the photo company. Instead, they are incentivised to keep the school happy (and probably only one or two people in the school). This is why the same company that tries to avoid talking to parents on the phone and doesn’t hire enough staff to respond to parent enquiries in a timely manner will send out sales staff, in person, to schools to woo them and will provide the school with half a dozen or more skilled photographers and support staff on photo day to help the day run smoothly. To keep schools happy photo companies will also provide all the necessary equipment, take care of all the messy paperwork and payments, provide “free” staff photos and even give the schools a percentage of the days takings.
The photo companies are acting perfectly rationally and, as long as only a few parents complain, the schools are happy too. After all, someone else is taking care of all the annoying bits and the more the photo company charges the more the school stands to earn.
Incentives are useful to think about in just about every area. In schools, what incentives do teachers have to learn new technologies? Are they being given time, equipment and PD to learn a new technology or has it just been dumped in their lap (like the previous seven initiatives that never really went anywhere). Similarly, teachers are often happy to do a mountain of work if they know it will pay off over a number of years so think about how the incentives differ between the school signing a 3 year lease on 1:1 devices vs teachers being told to participate in a 6 week trial.
For those who own a small business, manage an IT department or lead a team it can also be helpful to think about incentives. If you tell staff that customer service is their number one priority but only measure response times or number of cases solved, they will be incentivised to cut corners, close tickets early and avoid difficult tickets.
Incentives can also inform purchasing & contract decisions, particularly when choosing between a smaller company with less ability and experience or a Tier 1 company with a deep talent pool. Being a valuable customer of the “worse” company may actually deliver you better outcomes because they are incentivised to work hard to keep your business. The larger company will be unlikely to offer you anything other than their standard, cookie-cutter approach1.
On a personal level, I am also trying to understand (and shape!) my own incentives. It turns out that quitting my job was a good incentive to build my home office, think through business plans and write more frequently. Not owning a second car is a hassle occasionally but it’s also an incentive to exercise more often and to take public transport when it makes sense. I’ve found making commitments with other people works as an incentive for me to do things I want to do but might otherwise avoid such as exercising and interacting with people.
On the flip side, a small company would often love to win a big customer for the income and for the prestige. However, if the contract is too big, there is a risk of doing too much to keep the big customer happy and slowly becoming less and less attractive to other customers. The more dependent they become on that one customer, the greater the incentive to tailor to their every whim and the spiral continues. ↩