Steven D. Levitt: It’s All About Incentives

Next in my mini-series on the seminal economic thinkers who prepared the way for outsourcing  I’d like to look at the more current and less theoretical side of the economics of outsourcing and there’s no better place to start than with Freakonomics and the followup mega-bestseller, SuperFreakonomics.

Steven D. Levitt and his sidekick and co-writer Stephen J. Dubner, a journalist, are more like modern day merry pranksters in their books about the role of economics in our daily lives  with their work exploring “the hidden side of everything.”

Levitt points out, “One of the most powerful laws of the universe is the law of unintended consequences.”

Levitt tells lively and highly entertaining stories that describe how unintended consequences drive the behaviors of schoolteachers, realtors, crack dealers, and expectant mothers. I think this law also greatly affects outsourcing deals as well. In fact, an outsourcing deal that is not well thought out will likely suffer from one or more of the 10 Ailments of  Outsourcing spelled out in my book Vested Outsourcing, including the very first ailment, Penny Wise and Pound Foolish. Unintended consequences also flow by falling prey to the Activity Trap (#2), the Honeymoon Effect (#5), and the zero Sum Game (#7).

Maybe the most pertinent ailment when it comes to unintended consequences is VO‘s #8, Driving Blind Disease, or the lack of a formal governance process to monitor the performance of an outsourcing relationship.

Levitt has not won a Nobel Prize (yet), but he does have two New York Times best sellers and his lessons are well worth the read — and much easier to read than his Big Thinker predecessors.

In outsourcing, it’s really important to heed Levitt’s advice: “Morality is what people should do. Economics is what people do.” If you are structuring an outsourcing deal – know that you always get what you pay for, and try to do the best thing for all concerned.

If you want more than a simple butt in a seat to do your work you need to consider an outsourcing business model that pays outsource providers for their brainpower to add value and solve your real problems and help you achieve your desired outcomes. I think Steven Levitt would support the Vested Outsourcing concept that promotes aligning interest through the use of carefully crafted incentives.

Maybe I’ll send him a copy of my book.

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