In a Market of Lemons who buys peaches wins, big timesby@enrico.piccinin
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In a Market of Lemons who buys peaches wins, big times

by Enrico PiccininSeptember 20th, 2018
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<strong>1970</strong>. After 3 unsuccessful attempts, <a href="">George Akerlof</a> publishes <em>“The Market for Lemons: Quality Uncertainty and the Market Mechanism”</em>. This paper will grant him Nobel Prize in 2001 and is still one of the most-cited in modern economic theory. Akerlof uses the example of the market of used cars to illustrate this basic concept: in a Market of goods of different quality where the seller has more information than the buyer about the quality of the goods sold, eventually the bad quality goods, Lemons in the used cars jargon, will expel the good ones, the Peaches in the same&nbsp;jargon.
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One CTO of a Fortune 100 Company says:

“We can’t copy Netflix because it has all those superstar engineers, we don’t have the people”.

Adrian Cockcroft, at the time Cloud Architect at Netflix, gives a round look at the badges of the audience, and then replies:

“We hired them from you, and got out of their way”.

1970. After 3 unsuccessful attempts, George Akerlof publishes “The Market for Lemons: Quality Uncertainty and the Market Mechanism”. This paper will grant him Nobel Prize in 2001 and is still one of the most-cited in modern economic theory. Akerlof uses the example of the market of used cars to illustrate this basic concept: in a Market of goods of different quality where the seller has more information than the buyer about the quality of the goods sold, eventually the bad quality goods, Lemons in the used cars jargon, will expel the good ones, the Peaches in the same jargon.

The IT skills market has been for a long time a Market of Lemons, and it still is in many cases. In the last years though we have seen some Companies start buying Peaches. These are relatively young Companies, born and grown on IT. They know how to recognize Peaches from Lemons, because they know well what they buy.

And they are winning big times.

The IT skills Market — Akerlof’s buyers and sellers

The IT skills market? It is the market where Companies buy IT skills, not products. It is the market where Companies hire either their own IT people or Contractors or Consultancy Firms.

Since more than 2 decades, for most traditional Companies this has been a Market of Lemons. This is clear if you look at how traditional Companies buy services from IT Consultancy firms.

The average buyer struggles to find ways to measure the quality of the services she/he is buying. The average seller knows much better the quality it is selling: it knows the teams proposed and the skills put on the table.

Buyer and seller are then the ones of the Akerlof’s theory. With Buyers with much less information about quality than Sellers, the IT skills market has constantly de-priced IT skills and considered them more and more as a commodity.

The seller has accepted this trend with great pleasure, trading less quality for larger volumes and longer contracts. In other words, no Peaches are sold, just more and more Lemons. Margins may be a little lower, but revenues constantly increase. The more Lemons are put on sale, the less the buyers are able to recognize Peaches.

Software is eating the World — Tech savvy business men get just Peaches

“Software is eating the world”, from the title of a famous essay published on the Wall Street Journal by Marc Andreessen (co-author of Mosaic, the first widely used Web browser; co-founder of Netscape; now Venture Capitalist in Silicon Valley).

It is the economy of Google, Amazon, Facebook, Apple and Microsoft. And then Tencent, Alibaba. And then AirB&B, Uber. And then you name them.

These are technology Companies, with Software at the core of their culture, with Software in their DNA. And with Management fully aware of what modern technology is and how important it is.

  • Eric Schmidt: a geek at Bell Labs before being CEO of Google from 2001 until 2017
  • Satya Nadella: degree in Computer Science, master of Azure Cloud, now the CEO of resurrection of Microsoft
  • Jeff Bezos: degree in Computer Science from Princeton, passing through Wall Street, to become the Amazon man
  • Mark Zuckenberg: a nerd become Mark Zuckemberg

These are just some names on top of the ruling megapowers of our economy. These people know Technology. They live it. And they make sure the same is applied to the Companies they supervise. Make sure that Technology awareness permeates their Companies at all levels.

At the same time they are super smart business men.

Since they are smart business men, they have understood before others the importance of Technology. They really treat Technology as the strategic core asset and capability of their Companies. For them IT is not a commodity.

And because they know Technology, they make sure their organizations are able to distinguish Peaches from Lemons. And they get only Peaches.

In the Digital Economy Quality is not negotiable and Technology is not a commodity

Sometimes you can hear “We can not afford top quality”. The reasoning is “I can not afford a Mercedes-Benz 500, with my money I can just get a VW Beetle. At the end of the day, they both bring me where I have to go, just with a difference in comfort.”

Well, in a world which is eaten by SW, this is not the case. In this world you need to build products which your customers love, you need to be able to change them fast since tastes change fast, you need to change them safely because you can not afford sub-optimal service. Otherwise you run the risk of being out of business suddenly, without the time of even understanding why.

You can achieve all of this only if quality is embedded in what you do since the beginning, if quality is at the root of what you do. Without quality you can not build products that delight, change them fast and offer top service. Quality is not a nice-to-have, is a precondition for success and, maybe, even for just survival.

This is something the winners in the digital economy have clearly understood. Therefore they are interested only in Peaches.

There is good news

The good news is that there are still Peaches in this market dominated by Lemons.

There are Peaches in the IT of traditional Companies. They are often buried by piles of “stuff to do” or always firefighting here and there. We need to find them, free them, empower them to set the strategic decisions when it comes to Technology. Think about it: often our best people are just kept in the basement, they fight to keep the lights on, while less experienced people, maybe coming from the outside, are asked to make the architectural strategic decisions for the future.

There are also Peaches in the consultancy and contractors space. In order to get them though, clients have to find a way of procuring them and establish a mutually satisfactory relationship.

If we want to leverage the Peaches which are around us, we first need to spot them and then relate to them in a new way.

Spot the Peaches

To spot Peaches you have be able to see their shape and color, different from those of Lemons. This ability require to have sensitivity and experience in how complex modern systems have to look like. It may be a bit of catch-22 problem. To get the right experience you need the right people, to get the right people you need the right experience. With some pragmatism though we can address this point.

What is crucial though is to understand the nature of the problem: if technology is strategic then we have to treat is as strategic.

Traditional Companies start recognizing the need to rebuild their own internal technical capabilities, because technology is strategic. They get the OK from HR, because technology is strategic. But it may happen that they start this journey hiring “Junior Developers”, because this is all the available investment allows.

Well, certainly you need Juniors to nurture, but to nurture them you need the right experience, experience with the right skills. Maybe building a Senior Technical Leadership, with real experience in building modern SW systems, and let them build their Peaches team could be another approach to consider.

You hire senior people, promote your internal Peaches, but then get off their way and let them shape the Tech strategy.

What is then the role of the Managers? Facilitators, those who free the way for those who are in the best position to make decisions, Servant Leaders as they are sometimes described. It is tough, it is crucial, but maybe it is the right way to sail these new seas.

Relate to Peaches

If Technology is strategic, tech people are strategic. So Companies have to relate to them as important people, from an economic standpoint as well as from a status, recognition point of view.

Peaches need to have a career path that recognizes such centrality. They need to have space to be heard at all levels when strategic decisions are to be made. They need to have the freedom to express themselves and be empowered to decide. And there must be space for failures too. There is no innovation without failure. The key is to sense failures soon, stop when costs are still low and not repeat them.

Some Peaches can be procured also from the market. In this case, again, it is the Company internal technical competency which is the best judge to evaluate what is offered. Your technical senior leadership has to make the call about who is the best fit for a certain endeavor. And for this choice to be the right choice, you need real technical seniority within your ranks and you need to empower it.

Responsibility and Trust

For all this to work, people employed in technical work have to take responsibility. People and teams who are empowered to decide, must feel responsible for the final outcome, for the value they produce with their decisions and their work.

Management need to build trust on these people. Need to move away from the role of the “Controller” and become the “Facilitator”. As Adrian Cockcroft says, Management has to “get out of their way” and let them work. Yes, some control remains, but it is the constant control on the outcomes and not on the activities. It is the control that asks: “Can we help you meet OUR goal?”

Sure, there is some risk in all of this. Can you really trust them? They are not used to make decisions? Will they make the right decisions?

Well, certainly there is some risk. But if you have to go to an hospital, would you prefer to have the diagnosis made by senior Doctors or by the Management team of the Hospital helped by some junior students?

If Technology is strategic, you look for Peaches, you stay with them and have them stay with you

Get off their way

Every Board Member, every Manager, every Strategic Consultant today states that Technology is strategic, no matter what the business is.

But do they behave and act accordingly?

Looking at whether they look for Peaches or for Lemons is a good sign to see whether they act coherently with what they preach.