Tomicide Solutions, January 2010
Eight Ways Lowest Bidders Can Wreak Havoc In IT CompaniesBy Tom "Bald Dog" Varjan
Podcast version: MP3 Version. Right click the link and click "Save As".
"The lowest bidder: It's unwise to pay too much, but it is worse to pay too little. When you pay too much, you lose a little money - that's all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing it was bought to do. The common law of business balance prohibits paying a little and getting a lot - it can't be done. If you deal with the lowest bidder, it is well to add something for the risk you run. And if you do that, you will have enough to pay for something better." ~ John Ruskin, English author
Many buyers select service companies based on price. They are seeking lowest bidders, and try to achieve breakthrough results using the cheapest help.
Imagine a high school graduate who wants to become a doctor. She has the aspiration of becoming a world-renowned brain surgeon, and then the question comes up...
"Jamie, what is your next step of becoming a world-renowned brain surgeon?"
Then Jamie says...
"Well, I'm still collecting competitive bids from medical schools, so I can select the cheapest one where I could study to become the world's best brain surgeon."
I may be slow in the head but something just doesn't add up here for me. And this is exactly how too many IT buyers operate.
They create requests for proposals, send them out and then hire the lowest bidders. This is probably the most typical in governments. Governments all over the world are famous for seeking out and hiring the lowest bidders.
But have you also noticed that governments all over the world are in deep shit? Morally too, but here I'm thinking of the financial trouble they're in. They are financially in the hole, morale is low, employee pilferage and absenteeism are sky-high, performance is rock-bottom.
Maybe this explains why most people in this world don't trust their own governments. It also shows that most people who choose to work as government bureaucrats are hopelessly incompetent at their chosen and studied professions, and now need well-paid jobs to hide their incompetence.
These are the people who couldn't sell their "expertise" in the free market economy. So, they take overpaid, state-protected jobs in governments where they can do anything they want to because there is no such thing as accountability.
When you ask the average people what words come to their minds regarding politicians, most would say something like "double-talking liars" and "spineless bastards".
How does this play out in the business world?
Rather interestingly.
"We want to become market leaders, so let's flood our company with minimum-wage people to keep the costs low. We have lofty goals and want to achieve them on the cheap."
Or, on a slightly stronger note...
"I want to have a great romantic relationship, so let's go to a whorehouse in the city's slum and pick up the cheapest hooker."
So, how does this play out in the business world? Here are some headlines from Craigslist...
"World-class company is looking for marketing director. Pay: $9.50 per hour."
"Market leader company is hiring a sales ace. Pay: Straight commission (5% of sales)."
"Marketing company serving the Fortune 500 market is looking for business development managers. Pay: $8.00 base wage + 10% commission."
And when these poor bastards hire low bidders for these jobs, they get surprised that the situation doesn't improve.
Well, anyone who is willing to accept a job for $8.00 per hour is not the kind of person who can make much difference in terms of creating wealth for the company.
It amazes me how many companies hire $8.00 per hour receptionists, not realising that receptionists are the first contacts from enquiring prospects, and receptionists can adjust these prospects' perception of value based on how they interact with them.
And how do you think $8.00 per hour receptionists interact? Well, yeah.
So, here we look at a few reasons why you should run very far and very fast from lowest bidders before they can wreak havoc in your company. And the same applies to low-paid employees too.
1. Poor Mental and Emotional Preparedness
Lowest bidders operate on volume. They have lots of low-margin projects and split their time and attention between them. So, the attention per project ratio is very low. This is where the ultimate quality of their service suffers. They run around like headless chickens and achieve nothing. They run from appointment to appointment, and are always hyper busy. They have no time to relax and recharge their batteries.
Their brains are always racing, they are always in hyper mode. Their states of mind undermine their creativity, so the quality of their service is barely mediocre. Due to their busy-ness, they're always busy and exhausted. They are the prisoners of their professions.
Also, lowest bidders operate from the perspective of "I don't deserve more". Their lives and work are riddled with fear, guilt, need and the desire of proving themselves. It means this is what they instil in their clients.
In contrast, premium professionals work fewer hours because they can sustain their earning potentials without becoming workaholics. They work with small and appreciative clienteles. That allows them to dedicate plenty of time to their families, friends, hobbies and skill building.
In doing so they become more relaxed and present themselves for their clients in better "quality". They also have more time and money to invest in learning new skills that they can turn into client value in various shapes or forms.Also, since their personal needs are fully satisfied, they don't project their own neediness onto their clients. Have you ever had a service professional told you things like...
"I spent the whole Sunday working on your project without spending time with my family".This is a projection of their unmet needs. These people are toxic, and you had better run from them very fast and very far. Their ability to help you is blocked by their own unmet needs.
2. Constant Neediness
Lowest bidders usually have cashflow problems. They are operating on a hand-to-mouth basis, and when they work with their clients, their neediness will overshadow their intentions to help. They have dollar signs vibrating in their eyes because they are concerned about their ability to pay their own bills. This approach can't lead to healthy relationships. They always do their best to please their clients because they have to hang in for dear life to pay the next bill.
Premium advisors usually have healthy financial reserves, so they are likely to tell clients what they need to hear, not only what they want to hear. They become truly helpful not merely friendly. The ugliest form of prostitution is when "low budget" professionals "play the client's game" to make sure they get paid and they can secure the next piece of business to feed their own needs.
They try to please their clients, and in their fear of possibly losing a client, they say whatever they have to say to make their clients nod in agreement. Only when you have independent wealth, you can be of serious help for your clients. You can truly focus on your clients' issues, without being wrapped up in your own financial difficulties.
You can also say what your clients really need to hear not what they want to hear. Your clients may want to hear about the next shot of morphine to ease the pain, but what he needs to hear is how to handle the amputation of his gangrened leg.
3. Inferior or Obsolete Skills
Lowest bidders operate on wafer thin margins, and that wafer thin margin goes towards paying bills and operating expenses. So, how much do you think they have left to invest in skill-building? None really. Not a sausage. So, what quality of work can they offer to their clients? Well, low quality. They cost little but the return on investment is equally little.
Charging premium fees means that service professionals can invest more in their own skill building. Let's look at the basic premise. You're likely to hire a professional when you have unresolved problems. Who is a more valuable to help you to solve those unresolved issues?
Someone who charges low fees and spends weeks to help you to solve your problem? Or someone who charges high fees, points out the problem over lunch, so by the time you finish lunch, the solution is mapped out on a serviette? I go for the latter.
In both cases you pay pretty much the same, but the way I see it hiring economically priced service professionals with inferior knowledge is a pretty dumb decision. Hiring a Jay Abraham (Many people - me too - regard Jay as the Mozart of marketing.) calibre marketing guy for one hour at $5,000 per hour is more valuable than hiring a college kid and paying him $15,000 for a year.
Yes, the college kid is reasonably priced and makes an impressive chair warmer in the office, but Jay can help you to solve your problem in an hour. A seasoned marketer has more to offer in five minutes than the college kid in five years.
4. Poor Physical Health
Lowest bidders carefully consider how they spend their money, and are highly unlikely to invest in "luxuries" like improving their physical health/fitness.
But what can you expect of professionals who can't even go through your projects without falling ill a few times and undermining the whole team's energy? And while they're lying in bed, your project s stalling, driving up your project costs and making a pig's ears of your timeline.
Now we know that there is a very tight correlation between physical health and the quality of work we can provide. Vigorous exercise floods the brain with oxygen, blood and endorphins, which drastically improve overall creativity and mental alertness, two key ingredients of quality work.
This is where you win with premium professionals. They charge premium fees partly because they put premium value on themselves and the work they provide. But the good news is that they can see their clients through their projects and provide long-term support if necessary.
5. Exposure to Limited Perspectives
Lowest bidders work on volume, so whatever time they have left, they have to dedicate it to their core competence. That means they can't develop peripheral competence, thus they can never see their clients' business as a holistic entity. They see their expertise in isolation. But life doesn't work in isolation.
For a few years I've been watching British chef, Gordon Ramsay's programmes on TV. Yes, he's a kick-arse chef, but I believe what makes Gordon so unique is that he understands food as a business. That is, an entity in which people with expertise serve people with money.
Gordon has a broad perspective on the whole industry, and is not limited to the narrow perspectives of most chefs and almost all cooks.
Since premium professionals spend less time doing client work[1] because they don't work on high volume, they can participate in seemingly irrelevant activities, which they can turn into value for their clients. Several clients have hired me because of my military and skydiving backgrounds.
They translated them as experiences that create good decision-makers and action-takers. And since at that time they needed a ruthless disciplinarian to blast through the hopelessly thick wall of inertia and maintain momentum, they hired me.
And the funny thing is when clients ask me how I know that, and I tell them that I learnt it from a fellow gravedigger when I worked at a graveyard or I learnt it from a fellow butcher when I worked at an abattoir.
I have learnt over the years that the more peculiar the experience you have gone through, the more valuable you can be to your clients. After all you are bringing in a broad range of pretty damn rare perspectives.When you are willing to pay more, you can get someone whose expertise goes way beyond deep and narrow subject matter expertise, so she can look at your issues from multiple perspectives.
So, when you want to get the bird's eye view of a situation, then don't bother to buy the world's best microscope.
Just look at one of the greatest innovators of history, Edison. He had only three years of schooling, and many years of real self-directed education.
The North American school industry churns out a brand new business graduate every 97 seconds. All these graduates are the same. Dress the same, speak the same, think the same and act the same. Nothing unique, nothing distinct.
Try to look a bit further in the professionals you hire than the highest degree in their subject matter expertise.
The world is riddled with people who hold MBA degrees in marketing. But when they decide to learn real marketing, they wind up in Dan Kennedy or Jay Abraham's workshops. And neither Dan nor Jay has anything beyond a high school education.
6. Lack of Courage to Act
The business world is full of low bidders who dole out obsolete advice and watch from a safe distance, or maybe from the safety of a steady paycheque from a large firm, and observe what their clients do with their advice. For their low compensation they are not interested in being involved in the project above and beyond giving advice. For that low payment they refuse to get dirt under their fingernails.
There is the same difference between martial arts and real combat skills. Martial arts teach you how to score points. Combat teaches you how to kill. Huge difference.
When you are looking for a security guard to protect your family who do you choose? A martial arts master with trophies, who knows how to score points, or an ex-commando who actually has been real action? The former knows a sport and how to collect trophies. The latter knows how to render a threat harmless. Even by killing it if necessary. They know how to act.
However, a martial arts master is a lot cheaper to hire and there are many more available. Not to mention that their resumes are more impressive. People who've seen combat don't like talking about it.
Business is the same. There are the diploma holders, and there are the front-line warriors who have been bloodied and scarred in the real "battles" of business they had fought over the years and learnt from them.
Some people go for the safe and secure "college way", but some go out to the trenches with a practical business viewpoint. That can be called street-smart business experience, and that doesn't come cheap.
You see there are very many fuzzy-headed theorists who are happy to tell their clients the best way to run their businesses. A lot of theory with little practical application. And this non-applied "knowledge" - actually memorised information - is always available at competitive(ly low) fees and prices.
7. Preponderance of Clients
Low bidders are forced to work on high volume to put food on the table. Since premium firms have fewer clients they can dedicate higher level of focus, attention and support to your issues.
Let's take most Internet companies. They are pathetically poor at communicating the value of their services, and most of them are competing on price. As a result, they work with lots of clients, but in doing so they sacrifice the quality of service.
Call most Internet companies and you will end up on their voicemail systems with no hope in hell to ever have your call returned. Email is the same. You receive automatically generated messages, saying that you have been queued up in their customer ticketing system. Then you can wait until you die.
They could hire some women with pleasant phone manners who could handle incoming phone calls, so they could raise their fees on this "premium service", and the new money would pay for the women's salaries a few times over. The whole initiative would pay for itself within three months. But this goes against conventional wisdom, according to which technology companies are supposed to treat their customers like shit and eliminate human interaction from their communication. Isn't it surprising that CRM companies have the highest level of customer attrition? Hm.
I have heard this phrase from Tom Phillips of Phillips Publishing at a Jay Abraham seminar...
"Hire the best and cry only once."
Although his phrase was regarding hiring employees, hiring external help is exactly the same.
So you can either hire outsider professionals that are competitively (cheaply) priced and stretched to the hilt of their capacity or you can hire premium professionals that handpick their clients and provide kick-arse services.
8. Competing Client Selection
One huge problem with lowest bidders is that they work with many clients at any one time, so very often they work with direct competitors. However, because of the way their operations are structured on competitive(ly low) fees and prices, they are forced to accept any client, and can't walk away from conflicting businesses.
So, while one morning a professional helps one client to develop something, the same afternoon the same professional takes that morning idea and applies it to the direct competitor, thus ends up working against his own morning client.
We can rebel against the idea and say we don't do that but we do. It's human nature. We don't tell the afternoon client that we've just applied this very strategy to their competitor this the morning, but we do.
And even if the morning clients doesn't find out about it, we create a conflict within our moral fibres.
The factor that makes premium service firms premium is that they work with carefully selected clients and in most cases don't accept direct competitors within a given time frame. In my case, as soon as I start working with a system integrator in Vancouver, for instance, I don't accept another system integrator until and unless I get the green light from the first client. They may be doing different kind of system integration, but I prefer to clear it with them. When hiring a low bidder firm that competes on volume, you often find that the same professionals are engaged in projects with your fiercest competitor.
Do you remember when in the movie "The Good, The Bad And The Ugly", a former soldier, called Baker hires Angel Eyes (played by Lee Van Cliff) to kill another former soldier, called Stevens? Baker offers Angel Ayes $500 for the hit.
Angel Ayes shows up at Stevens' hacienda and tells him that he was about to die. Upon hearing this, Stevens offers Angel Eyes $1,000 to go back and kill Baker.
So, Angel Eyes gives Stevens a little education...
"When I'm paid, I always see the job through."
Then he shoots Stevens.
Then Angel Eyes goes back to Baker, telling him that Stevens is dead, so he gets paid. Then Angel Eyes tells Baker about the $1,000 Stevens gave him to kill Baker. Baker laughs it off, but it doesn't help.
Angel Eyes repeats his unique selling proposition to Baker...
"But the pity is that when I'm paid, I always follow my job through. You know that."
Then Angel Eyes unceremoniously puts a pillow over Baker's head, shoots him and walks away with $1,500.
And low bidders are more likely to operate on the moral level of Angel Eyes than premium professionals.
While you may enjoy the competitive price from outside professionals, you may not appreciate the fact that they help both you and your competition at the same time. Premium firms work with small clienteles with deep relationships, so working with direct competitors is highly unlikely.
Rest assured that the external professionals that help Mercedes to improve performance don't work with BMW. It is also important to observe that Mercedes and General Motors don't use the same professionals. As the saying goes, birds of the feather flock together. High-end clients tend to use high-end external professionals. Purveyors of cheap scrap metal use lowest bidders. It is just logical.
The cream of the crop (e.g. Ferrari, Mercedes or BMW) don't use the same professionals as the crap of the crop (e.g. General Motors). They are in two distinct categories. And this applies to any industry.
9. Seriously Limited Access
Since lowest bidders operate on high volume, their clients have seriously limited access to them. This causes unnecessary delays and creates a fertile breeding ground for miscommunication. Little mistakes are hard or even impossible to correct. Contingencies cannot be planned because there is a very limited time to correct errors.
Basically the whole project feels like herding cats. And as the video below proves (by the Moscow Cat Theatre) that herding cats is possible, but it can feel like pushing a piece of string uphill.
Premium professionals offer ample access for their clients, knowing that it will take a few tries to get things right. You may be shocked here, but by getting it right only 30% of the time, Babe Ruth became a Hall of Fame baseball player. So, don't even think of getting things right the first time. Hey, do you know that for most couples it takes several "tries" to conceive a baby? Anything that is worthwhile doing takes a bit of effort and hardly ever happens on the first try. That is why it is important for clients to have preponderance of access to their professionals.
Summary
The problem is that most clients kick up a fuss when great service professional solve serious problems in a short space of time and charge a truckload of money. Clients are more comfortable with low-priced professionals who come in, tinker with the problem for a week or two at a competitive(ly low) hourly rate, and then either alleviate the problem or just shake their heads in bedazzlement.
Every now and then I apply for business development jobs to see what's going on in the marketplace. I've also found this approach helpful to me as a facilitator for my career management students.
I've recently applied for a business development position at a local company, and the big boss' biggest concern was how many hours I would be performing clearly visible and documentable activities. I asked him what he wanted to achieve but he kept going back to the number of working hours. Well, he's a lawyer, and in his mind time is money, So a professional's stock in trade is his time.
After the interview, he never responded to my emails. I think he got upset when I indicated that I didn't need micromanaging but I was looking for collaborators to achieve great things.
And of course the pay was an issue too. While he pays his programmers and other techies up to $150 per hour, to sell all that stuff, he offered me $15 per hour plus commission.
But why would anyone waste her own, money, energy and sanity trying to sell something no one knows about? She can go and find a sales job at a known and reputable company whose brand is relatively easy to sell.
Clients of professional services must learn that they don't pay for the time of the professional but for the long-term positive impact of the professional's engagement. I regularly review proposals for IT companies before submission. I often can find ways of doubling or even tripling the fees on their proposals in 10-15 minutes with better chance of getting their proposal accepted. So, it's not the time.
Yet, I charge the same $1,000 for the review. My fee is not $4,000 an hour per se, but clients invest $1,000 to increase their chances of obtaining the extra $5-50,000 in fees. Yet, only 2-3 out of 100 callers are willing to invest the money, which only confirms that most people follow the herd, and have absolute no conviction and confidence in their own businesses.
That is why most people can easily invest $30,000 in General Motors in the form of a new car, but would never invest the same amount in their whole lifetimes in building their own skills.
On the final analysis, money is the walk of the talk. When you ask buyers to invest money in their own visions, goals, dreams and aspirations, you will learn very quickly how serious they are whether or not they cough up the dough.
And the way I see it is that trying to save money by hiring lowest bidders is just as retarded as trying to save time by stopping your watch or ripping the battery out of your Blackberry.
But again, I reckon Einstein was right when he said...
"Only two things are infinite, the universe and human stupidity, and I'm not sure about the former."
Did he mean clients of lowest bidders? Maybe. Maybe not. We'll never find out for sure, won't we?
[1]The time of doing the project has nothing to do with the value the client receives by doing the project. Continue where you've left off...
Come and let's discuss this newsletter issue on my blog...
Attribution: "This article was written by Tom "Bald Dog" Varjan who helps privately held information technology companies to develop high leverage client acquisition systems and business development teams in order to sell their products and services to premium clients at premium fees and prices. Visit Tom's website at http://www.varjan.com.
