Risk Mitigation Costs Too MuchNovember 16, 2012 · 3 minute read · Comments
Many large organizations work exceptionally hard minimize “risk”. Ironically, by working so diligently to reduce risk they are paying for it anyway, and reducing innovation at the same time.
From Joel Spolsky’s Camels and Rubber Duckies: (with some minor editing)
Software is priced three ways: free, cheap, and dear.
Free: Open source, etc. Many big companies are still apprehensive about open source. They want someone responsible with deep pockets who will take their call when something goes south. Open source feels risky because there is no one else to blame.
Cheap: $10 – $1,000, sold to a very large number of people at a low price without a salesforce. Most shrinkwrapped consumer and small business software falls into this category.
Dear: $75,000 – $1,000,000+, sold to a few big companies using a team of slick salespeople that do six months of PowerPoint meetings just to get one sale. The Oracle model.
All three methods work fine. Notice the gap?
There’s no software priced between $1,000 and $75,000.
The minute you charge more than $1,000 you need to get signoffs. You need a line item in the budget. You need purchasing manager involvement and competitive bids and paperwork and approvals. So you need to send a salesperson out to the customer to do PowerPoint, with his airfare and $19.95 movies at the Marriott. The cost of making one successful sale is going to average about $50,000. If you’re sending salespeople out to customers and charging less than $75,000, you’re losing money.
Big companies want to avoid “risk” when choosing commercial software. They study, research, call up references. In order to sell to them you need competent sales people who can spend weeks just to get a one hour meeting; People who understand how to build consensus and can “tick all the boxes” for security, compliance, internal audit, business continuity, etc.
Ironically, large companies protect themselves so well that they drive up the cost of enterprise software, which mostly goes towards the cost of jumping over all the hurdles that they have set up to minimize risk.
Is it worth it? It depends on circumstances but I think the engine of innovation is the ability to try and fail, and learn.
“I have not failed. I’ve just found 10,000 ways that won’t work.”
- Thomas Edison
It seems counter intuitive - but in many companies one way to lower cost and increase innovation is to embrace a little risk. Lower the hurdles. Lower the “shame” of failure and innovation can thrive.
Companies that won’t take risk and punish failure tend to be the least innovative – and even worse their costs aren’t any lower either.