Some friends at Pitney Bowes invited me to hear Clayton M. Christensen speak on innovation. He has a new book out and said a lot of fun, provocative, interesting things.

One of his little b-school style charts is reproduced here greatly simplified:

The point of this chart is that over time a firm’s product offerings begin to outstrip the ablity of the customers to absorb all the functionality the product offers. He goes on from there to say all kind of interesting things; for example that the firm is drawn to high margin customers as this happens.

But this got me to thinking about a syndrome I’ve watched unfold at more than one company.

Consider the gap between those two lines. On the left, when the company is young, the company is faced with strong demand from it’s users for improvements. The customers are highly aware that they could absorb more functionality if only the vendor would provide it. The vendor is embaressed by the short commings of the product and strives to fill that gap.

On the right the mature firm has succeeded in fufilling a huge range of demands that customers have. Now the customers are embaressed! They are fully aware that they aren’t utilizing the entire power of the product.

This is all bad, bad, bad!

• bad: Your customers are embaressed, so they fall silent.
• bad: So the institutions in your company that design products are running on vapors!
• bad: As they chasing demand your drawn to serve higher and higher end customers
• bad: Higher end, higher margin customer demand longer sales cycles – your value creation shifts into sales rather than product.
• bad: You move up market. You abandon the low end customers. That creates oportunities for competitors.

All in all it reminds me of a classic behaviorist training schedule where you
start by providing clear signals for the desired behavior and then you shift to a more intermitent reward schedule so the behavior becomes more deeply engrained. Thus in this scenario the entire marketing, engineering, design culture of firms is trained at first respond to the strong customer demand for new features. Over time that strong reward loop grows weaker, but the trained behavior just become more deeply engrained as the reward appear fewer and farther apart.

The bizare result is that you think you’ve evolved into an extremely customer oriented firm. You have a very sophisticated sales team. You have a very muscular product design function. So it must be true. But meanwhile you have embaressed your installed base so they can’t even open their mouths to complain. If they could they’d say: “I don’t need all this cruft. I was sufficently satisfied by the previous release. I don’t want to learn how to use all these new features! I’ve got better things to do with my time. Leave me alone! Why aren’t your prices falling, haven’t you learned anything!”

Curiously the only way you can get a good signal out of your users it to
fail to fill all their needs as was the case in the early days. It’s good for the vendor to be embaressed. It’s bad for the buyer to be.

One thing I puzzle about is why some things are done inside of a firm while others are done outside. Data storage or product shipping are two examples but there are hundreds. I found this an amusing way to look at the problem: Brad DeLong quotes the abstract of a paper by Olivier Blanchard and Michael Kremer that attempts to puzzle out why output declined so far in Eastern Europe after the collapse of the Soviet Union.

Under central planning, many firms relied on a single supplier for critical inputs. Transition has led to decentralized bargaining between suppliers and buyers. Under incomplete contracts or asymmetric information, bargaining may inefficiently break down, and if chains of production link many specialized producers, output will decline sharply. Mechanisms that mitigate these problems in the West, such as reputation, can only play a limited role in transition. The empirical evidence suggests that output has fallen farthest for the goods with the most complex production process, and that disorganization has been more important in the former Soviet Union than in Central Europe.

To me the point is that when you have a single supplier it creates habits that are fundimentally at odds with the habits demanded when you have multiple
suppliers. To put it another way that managing in the face of diversity is a entirely different from managing in a strong heirarchy.

Thus while it seems like a fine idea in the abstract to outsource this or that function it is usually very difficult in practice because the entire day to day relationship between the function and the firm has to be transformed. It’s a demands a culture change and that in turn makes it a social reengineering problem.

Another place I see this: Microsoft, Oracle, IBM, Sibel, etc. Many firms have a single supplier relationship with for their platform, IT, CIO, etc. needs. In the abstract it may seem like a fine idea to shift to a more open market relationship for these functions pulling it off demands a very complex shift in culture.

All this is a huge part of what slows the adoption of open source solutions. In contexts where open source creates the platform of standards for an industry the vendors tend to be numerous. The buying firms then have to have an entirely different culture for managing the set of vendors from one time period to the next. More information has to be managed; information that sums up into the answer to the key question “Can I trust this vendor?”

When you settle into a single vendor, or in-house or out, there is a tendency to become lazy aobut these issues. “Incomplete contracts” and a “breakdown of bargining” indeed. The challenge of maintaining trust displaced and the habits of authority, strong loyality, and maybe an occational game of golf take their place.