Matt Mayfield's Blog on Business

Definition of Experience:  A rich history of the many horrible mistakes one never wants to repeat

I touched on this subject in “Lawyer Rant No. 1” — Get paid for the risks you know you are better able to manage or at least are perceived to be better able to manage.  Let’s break this down a bit more and see what insights it brings.

In a market-based economy we sell products and services to willing buyers.  These could be as simple as an apple by a street vendor or as complex as an enterprise-wide information system.  But in its elemental form, I suggest that you can only sell a combination of five basic things:

1. Raw materials such as iron and oil mineral rights
2. Labor
3. Expertise as in intellectual property and knowledge transfer
4. Economies of scale
5. Management of risk.

The first three are obvious and the fourth, as it applies to the first three, is also obvious.  Let’s consider the last two in their pure forms.

An example would be an efficiently working bank.  You put money in savings and they then loan it out to others.  Why not just loan your money directly to the borrower without the bank?  Because we believe banks have economies of scale and a better ability to recognize and manage risks.  In addition, because of their size, the law of large numbers (the statistical rule that makes sure casinos always win in the end) also reduces risk.

Another example might be the hiring of IBM to run your data center.  IBM buys the parts from manufacturers in Taiwan (like everyone else), they will likely hire staff from the same local market as you would and they will use subcontractors that you could engage directly yourself.  You pay IBM because you believe that they have the experience (as well as the materials, labor and expertise) to manage the risks in your data center and you also assume that their large size (economy of scale) will allow them better pricing than you could get directly.

Now think about your own company’s products and services.  What economies of scale advantages do they provide?  Are you exploiting them fully with your customers?  Do your customers recognize this value in the form of better contractual terms?

Next, what risks can you manage better than your customer?  A good start would be to list what you know better than your customer.  Consulting (or consultative selling) is the art of educating the customer in a way that they will either pay for more education or they will recognize your expertise as a company that can manage risk better than they can.  The components of how to consult or do consultative selling are probably best left for another blog, however, the basics of selling risk management, in my opinion, are:

1. Communicate the complexity and risks in a way the customer will recognize as true and applicable to their situation.
2. Explain the options and their consequences and trade offs.
3. Concentrate all the possibilities into two or three comprehensive choices based on clear criteria that is well known to the customer, and then let them choose.
4. Lastly, implement and communicate results in such a way that the customer’s choices are never used against them.

To summarize, you first need to identify what risks you can manage better than your customer.  Once your customer recognizes this you need to put together a limited set of business propositions that will transfer the customer’s risk exposure to a risk that you know your company can manage profitably.

We often think we are selling products or services.  In fact, in a great many cases, our customer could do it themselves if it were not for the fact that we can manage risks better and we have better economies of scale.