Sales consultant Phil Styrlund had an insight about the way markets have evolved in the Internet age that I think is relevant to information systems consulting in general and to "agile" and "lean" services in particular: Everything is a commodity. Anyone can obtain any goods or services they want by ordering them online.
It used to be that companies offering a product or service could distinguish themselves from others offering similar products or services by highlighting the special features of their product or by bringing unique capabilities to the table. Today, customers just don’t want to hear that. They have access to all the information available about your product or service. They already know. There’s nothing you could say about your product or about yourself that would make you any different, in the eyes of customers, from all the others in the market who are trying to sell the same things. You are a commodity.
The world of commodities
Another insight from Styrlund is that customers fall somewhere along a spectrum with "I want value-add from consulting services" at one extreme, and "I want the cheapest possible commodity services" at the other. In today’s world, most customers are clustered near the "cheapest possible" end of the spectrum.
People selling IT services try to distinguish themselves from other sellers by emphasizing the value they can add. Yet, most prospective customers conceive of "value" as nothing more than "low price." Sellers are transmitting one message and prospects are tuned in to hear another.
Your competitors are not your competition
When talking to consulting firms about how I might be able to work with them or through them to offer coaching and training services, I’ve noticed a consistent pattern. Each company sells itself by talking about who they are and what they do. There is an unspoken assumption in the "agile" and "lean" software communities that everyone is already excited about and interested in what they have to offer. The demand is already out there. It’s just a question of describing ourselves in a way that seems to offer a greater value-add than all the other people who are offering similar services. "We’re better at delivering what you already want than the next guy."
This was probably true in the past, but things have changed. Another insight from Styrlund is that when selling our services, our real competition is not the other consultants, trainers, and coaches who are offering similar services; our real competition is our own customers’ preference to defer investment in improvements until the economy improves. We keep trying to sell what we think the customers already want. But they don’t want it.
Our own customers are our competition; we are competing against their inclination to do nothing as opposed to something. We can talk until we’re blue in the face about "value," but if customers aren’t inclined to take action then all our talk is just noise. I had noticed something along these lines as far back as 2008, but I hadn’t put it into clear terms in the context of selling services until I heard Styrlund recently.
In the midst of the financial crash in 4Q 2008, I kept wondering why companies were reacting in fear instead of thinking about how to reposition themselves for the eventual recovery. Clients were cancelling improvement initiatives and halting all capital spending. Consulting firms were laying off people and curtailing the range of services they offered. In December of that year I heard Neil Nickolaisen describe the Purpose Alignment Model for planning IT initiatives, and it seemed to offer an excellent approach to repositioning during slow economic periods, as well as in good times. I have used this model with clients to improve their strategic planning and the connections between the business plan and the IT portfolio on several occasions with good results.
Purpose Alignment Model (PAM) – Todd Little and Neil Nickolaisen
The basic idea is that all initiatives fall into one of the four quadrants shown in the diagram. Things that differentiate us in the market ought to be pursued, and things that keep the lights on (the Parity quadrant) have to be done regardless. Differentiators that are in our sweet spot — we would call them "mission critical" in the context of our own business — are where we ought to focus our best people. Differentiators outside our core area of competence are best handled by partners who specialize in those areas.
At the end of the talk in 2008, one of the participants asked Neil whether his company was currently using the Purpose Alignment Model to ensure they would be in the best competitive position possible when the economy turned around. His reply surprised everyone in the room. He said they were canceling all capital expenditures and they were waiting to see what everyone else did before they made any decisions. The Purpose Alignment Model sounded good in theory, but his company’s true strategic planning approach was the one shown in the quadrant diagram below.
Armadillo’s response to perceived threat. (National Geographic)
In effect, customers today are working exclusively in the Parity quadrant. They’re only doing the things they must do to continue operating. "Agile" and "lean" consultants are selling to the "value" end of the spectrum, but nearly all customers have moved toward the "low cost" end, where they are so far away from the consultants that they couldn’t hear the "value" message even if they weren’t rolled up into a ball, waiting for the threat to pass.
Acting like a commodity
In order to sell any services at all, consulting firms have been channeled into acting like commodity service providers, even if they don’t regard themselves as such. Time after time, they place temporary workers at client companies on an hourly basis. The hope is that with time and repeated conversations, they can get the customer on board with the "value" message and grow the business relationship. Maybe the strategy has worked somewhere, sometime, but personally I have never seen it bear fruit. All I have ever seen happen is that the consulting firm continues to place temporary workers with the client on an hourly basis until they just can’t stand it anymore. I have never seen or heard of a case when a consulting firm has succeeded in breaking the mold.
At one consulting firm I’ve spoken with recently, my peers there told me the partners at the firm were going around the office telling people "We are not a staff aug body shop! Don’t tell prospects that we’re a staff aug body shop!" (By "staff aug" I mean "staff augmentation;" that is, temporary labor at hourly rates.) Yet, the company does precisely that, and nothing more. To compete with other staff aug outfits, they slash their hourly rates. The lowest bidder wins (if you call that "winning").
Another firm where I have done some subcontracting and where I have friends was a leader in the "agile" space prior to the 2008 crash. At that time, they lost a lot of business because customers abruptly halted everything they had planned to do, and rolled up into balls like so many startled armadillos. The consulting firm laid off about 25% of its US work force, including nearly every individual who was proficient in "agile" methods. They kept their lowest-priced coders. This is a firm that likes to think of itself as a "thought leader." How have they stayed in business? You guessed it: They place temporary workers at clients on an hourly basis. To compete with other staff aug outfits, they slash their hourly rates.
I met with a third firm where I have friends recently, and we discussed the problems of marketing value-add services in today’s world at some length. They think of themselves as "thought leaders" and they are quite proud of some of the outstanding individual contributors they have on staff. But all they can really do these days is place temporary workers at clients on an hourly basis. They insisted that they don’t play the game of slashing their rates. When I learned what their rates actually were, it was kind of obvious why they didn’t have to slash them.
When looking for work myself, I’ve found that the way job announcements and job searches are structured today is more mechanical and less personal than in the past. Almost the only way to try and find work these days is to submit applications through a website. There’s no opportunity to have a conversation with a real person, in which you might be able to distinguish yourself from a million other people with the same buzzwords on their résumés. On those rare occasions when I can speak with a recruiter directly, the message is always the same: Hourly rates are what they are, and you can take it or leave it. We are merely commodities.
Training is becoming commoditized, as well. Thanks to the success of the Scrum Alliance certification program, training in Scrum was standardized years ago. Now tens of thousands of people are Certified Scrum Masters. Never mind whether they actually know what to do; they’re certified, and that’s what matters. Customers only want training that leads to a certification, even if independent trainers offer superior courses. They don’t care whether the certification means anything. The certification itself is a commodity, too. With the growing popularity of Kanban, Lean Kanban University has created an "accreditation" program whereby, for a substantial fee, they place their seal of approval on a trainer’s course materials. The hope is that customers will tend to prefer accredited training courses. More standardization, more commoditization.
One of the reasons people in the "agile" and "lean" space have difficulty wrapping their heads around the idea that they are merely commodities may be that these communities have tended to think of themselves as operating near the leading edge of the diffusion of innovations curve. Sociologist Everett Rogers postulated a model for the adoption of innovations in his 1962 book, Diffusion of Innovations.
Diffusion of innovations curve (Everett Rogers)
The Innovators are the first people to try a new idea. They are interested in the advantages the new idea might confer on them. Typically, they are risk-takers who try many new ideas and keep the ones that work for them. On the strength of early successes achieved by Innovators, the next group to adopt the new idea are the Early Adopters. They need some evidence that the new idea will be beneficial, but they do not have to wait for the whole world to adopt the idea before they are willing to give it a try. At some point, if the idea gains enough traction, it enjoys a sudden growth spurt and becomes mainstream. The Early Majority are the ones who pick up the new idea and drive it forward in the market.
Between the Early Adopters and the Early Majority is a gap, commonly called The Chasm, a term coined by Geoffrey Moore in his 2002 book, Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers. People within the "agile" community sometimes argue about whether "agile" has crossed the chasm. Purists insist it has not, as most implementations of "agile" are rather poor. Others claim it has crossed, as no new idea remains pure once it has been blended with other ideas in a real-world environment; the influence of "agile" thinking on general thinking is sufficient for us to say the idea has crossed the chasm.
My view is that "agile" has crossed the chasm. This does not mean everyone who has adopted "agile" has implemented it fully or correctly. It only means that pretty much everyone is familiar with it, or at least familiar with something labeled "agile." If we think of "agile" as a small vial of cobalt-blue liquid, and we think of the status quo ante in information technology as a large pool of clear water, then the "agile movement" consists of pouring the contents of the vial into the larger pool. To say "agile" has crossed the chasm does not mean the entire pool is now the same shade of blue as the original vial of liquid. It only means the pool now has a slight bluish tint, if one happens to catch just the right lighting to glimpse it. That’s really all it means for any idea to cross the chasm, in my opinion. The world doesn’t really change, it merely adapts new ideas to itself.
Thus, in the early days of the "agile movement," practitioners were Innovators and the companies who adopted the ideas early on were Early Adopters. They were willing to take risks and try unproven ideas in hopes of gaining a competitive advantage. That being the case, what are the characteristics of the two groups that take up new ideas very late in the game — the Late Majority and the Laggards?
Well, the most apparent characteristic is that they are not risk-takers. They want to be very sure an idea has merit before they are willing to try it. They tend to copy what has worked for others rather than to experiment on their own. That is the very reason they were not among the Innovators and Early Adopters, or even the relatively conservative Early Majority. They are the people who are constantly asking for "studies" and "proof." They are the people who seem to expect "agile" to function as just another methodology. They are the people who expect their methodology, and not themselves, to be responsible for the outcomes they achieve.
That is the mindset that leads to conclusions such as those described in a recent report published by industry analysis firm Voke that "the Agile movement might very well just be either a developer rebellion against unwanted tasks and schedules or just an opportunity to sell Agile services including certification and training." It is the perception that most companies have of "agile" consultants. Yet, most "agile" consultants believe themselves to be selling into a market of Innovators and Early Adopters; people who are already excited about "agile" and eager to learn it.
That’s not what the Late Majority market looks like. It looks like this:
Although most people in the "agile" community perceive themselves to be leading-edge thinkers, in fact the services they offer today are geared for customers who are looking for commodity services at low prices. The majority of the "agile" community sells and re-sells the same packaging of first-generation "agile" thinking as was devised in the late 1990s and early 2000s. A minority of that community has taken the lessons learned from the last decade and moved on, seeking the next frontier of innovation and early adoption.
Because of this mis-match between self-perception and the reality of the market, agile practitioners are often frustrated that they are unable to gain very much traction with clients to effect positive organizational change. The reason is that customers are only looking for commodity "coaches" to show their teams how to "do iterations" and so forth. They aren’t actually looking for genuine value. That is also the reason for the emphasis on certification and accreditation. Commodity services have to be standardized. By definition, things that are certified or accredited conform to a standard. Innovation stops cold.
Third Box thinking
So, what if we want to work with customers who are really interested in value? There are a few of those out there, after all. Let me mention Phil Styrlund again, as he has an interesting model for selling he calls Third Box thinking. Consider these three boxes:
Third Box thinking (Phil Styrlund)
You (the first box) want to sell what you have to offer. You believe in your product or service. You think it will genuinely add value for your customers. If your approach to selling is to emphasize how great your product or service is, then you are engaging in First Box thinking. You believe demand for your product or service already exists, and "selling" means persuasion. You must persuade customers to buy from you instead of from the next guy.
But remember: Your competition is no longer "the next guy." Your competition is your own customer’s preference to defer investment. In today’s commoditized, highly-connected world, customers can satisfy their demand for products and services with a few clicks of a mouse. They aren’t interested in listening to you talk about how great your product or service is. They aren’t looking for value-add in the Differentiating quadrant of the Purpose Alignment Model. They are looking for the lowest price for commodity services in the Parity quadrant.
If you want to approach customers toward the left-hand side of the spectrum, you have to reverse First Box thinking and use Third Box thinking. Begin by understanding what it is your customer’s customers are looking for. Next, you need to understand how your customer can most effectively satisfy their customers’ needs. Finally, you need to understand what capabilities you have that align with your customer’s strategy for satisfying their customers. It isn’t about persuasion, it’s about alignment.
Downward pressure on rates
Rates for consulting services in the "agile" and "lean" space are in decline. I’ve observed a direct correlation between the decline in market rates and the commoditization of services. When the customer has engaged you for the purpose of adding business value, they pay you accordingly. When they have engaged you to carry out routine activities that they could obtain from "anyone" at a low price, they pay you…accordingly.
I read a job announcement today for an agile coach with "deep" knowledge and experience in Scrum and agile and a demonstrated ability to transmit knowledge to all levels of management and all roles in the organization. Sounded like a good fit. Note that there are, maybe, 300 to 400 people worldwide whose experience and skills genuinely live up to the description in the job announcement, without fudging the definitions of words like "deep" and "ability." They are offering $43 per hour to work in one of the most expensive locales in North America, the state of Connecticut. I’ve seen rates in the range of $30 to about $47 per hour for roles like scrum master, agile coach, and project manager in other expensive locales such as southern California and the New York City area. American dream? Maybe tomorrow. Maybe yesterday. Not today.
Downward pressure on rates comes from multiple sources.
- Customers want to defer investment in improvements (armadillo behavior)
- Customers mistake "cost" for "value" (cost-based thinking vs. throughput thinking)
- Service providers use First Box thinking in a Third Box world, and can’t think of any way to function other than to slash their rates
- The industrialized world has been flooded with temporary workers from developing countries who are willing to work for very low pay
- Professionals have never had to explain to their employers or to prime contractors how to sell differently; they don’t know how
Deferring investment in improvement only worsens the situation. The company becomes progressively less able to respond to changes in the market, less able to fulfill executive management’s vision, less able to innovate. It is false economy to roll up into a ball like an armadillo. Slow economic times are the right times for introspection, reassessment, and restructuring. There will be an upswing eventually. The slow times are the times when we need to get positioned to take advantage of the upswing, when it comes.
Business people generally need to move away from a cost mentality in favor of a value mentality. We are taught all about cost accounting in business school and the way in which companies are operated tends to reinforce it. In the IT area, which is almost always a cost center, it’s all the more common to focus on cost instead of value. We need to look at things differently. Throughput Accounting, an offshoot of Theory of Constraints, offers a value-focused way of looking at costs and benefits. When looking for outside help in areas like consulting, training, and coaching, you should be looking at the net benefit and not just the immediate price tag. You get what you pay for, after all.
Even service providers who deserve to think of themselves as "thought leaders" tend to present themselves to the market in very conventional ways. They emphasize the products and services they offer, and try to distinguish themselves from other companies that offer similar products and services. They assume customers already understand the value proposition and want the products and services; they assume the demand already exists. It doesn’t. Customers aren’t looking for "agile" or "lean." They aren’t looking for Scrum or Kanban. They’re looking for ways to impact their own customers positively. We must shift from First Box thinking to Third Box thinking.
When customers have 5,000 applicants for the same position, their résumés all look alike, and they’re all willing to work for low pay, they see no reason to pay more. Since they are already operating strictly in the Parity quadrant due to fear of risk, the job performance of the temporary workers doesn’t have a visible impact on the bottom line simply because the work they are doing isn’t Differentiating. The customers just don’t see the difference between one temporary worker and another.
Four young, single men from India can share an apartment and an old car during a two-year assignment in Australia, the UK, or the US. They can earn $25-30 per hour and save plenty of money for their future lives as husbands and fathers, while gaining valuable work experience they can bring to bear later in their careers. Customers get used to paying low rates for any and all types of work because there are thousands upon thousands of young, single people using their jobs as contract workers to see the world. I don’t blame them. I would do the same.
Customers forget (or don’t care) that domestic talent can’t maintain a decent standard of living on the same pay as a single guy sharing an apartment with three friends while he sees the world. A 45-year-old professional with a family and a mortgage can’t make it on the same pay as a junior contractor from a developing country…unless one of the business goals of our corporations is to reduce the overall standard of living of their own home countries. There comes a time when managers must see that hiring one experienced person at $100 an hour is a better investment than hiring 4 novices at $25 per hour. As soon as they try to move from the Parity quadrant to the Differentiating quadrant, they will be in for an object lesson.
Until these realities change, we will have limited opportunity to add real value for our clients.