Software Programming and the Economics of Trust vs. Transactions

In a charming blogpost, Paul Duval says that developers should “Fire your best people and reward the lazy ones.”

As he explains, developer shops often consider “troubleshooters” to be among the best employees. They know where all the hard-coded quick fixes are, and they can spot them like lightning. Trouble is—those hard-coded fixes are impenetrable to other programmers.

Troubleshooters perpetuate impenetrable coding—because it’s faster, and perhaps because they are the beneficiaries of continued arcane language.
“Lazy” developers, by contrast, are those who can’t stand repetition. Every time they encounter a hard-coded arcane fix, they take the time to craft a generic solution that any future developer can understand.

One key fact: Duvals says that for every time a method is written, it’s read (and maintained) ten times—a 10:1 ratio. Suddenly, the “lazy” developer is the one reaping relationship-based economics for the employer; and it’s the “troubleshooter” who is perpetuating a repetitive, transaction-based high cost structure.

So it is that the world of software development is a microcosm of the broader world of business relationships—rewarding transactional behaviors in a non-transactional world.

We live in a world of incredible inter-dependence, connections, networks—and it’s moving ever-faster toward more, not less, of those connections. Yet we live by ideologies that focus on and reward transactions, not relationships.

• In software development, it’s a focus on how fast the problem can be solved—rather than on the systemic cost of solving the same problem over and over.

• In sales, it’s the dominance of linear “models” that begin with a lead and end with a close—rather than on lifetime and network-based models of business development in a sustained relationship environment.

• In investment banking, over the years it’s become about how to get the deal, rather than nurture the relationship.

• In commercial banking, it’s about transaction fees (e.g. overdraft charges), rather than about earnings based on assets under management.

• In mortgage banking and credit cards, it’s become about penalties charges (prepayment penalties and late penalties) rather than underlying economics.

• A major aspect of the subprime mortgage debacle has been the “transactionalization” of what used to be a relationship business. Mortgages have been on the ownership dimension—being sold repeatedly; on the risk dimension—stripping principle from interest; and on the time dimension—dealers in mortgage “products” increasingly get paid from transaction fees for moving on to the next step in the chain, rather than on the underlying interest paid.

• Private equity in its entirety is arguably an example of transactionalization of the corporation, though at the outset it introduced a needed jolt to stodgy bureaucracies. Of late, however, PE firms are increasingly finding earnings based on—you guessed it—transaction fees.

In all these arenas of business, we are seeing a structural challenge to trust. If you disrupt the relationship aspect of business in favor of approaches that are one-off, transactional, short-term in nature, you destroy the natural economics of trust.

Ironically, the long-term economics of trust far outweigh those of short-term transactionalism. But an ideology of get-in-get-out-fast has overwhelmed commonsense. The result is not only housing bubbles, but a paucity of social trust in business.
 

2 replies
  1. John Mulholland
    John Mulholland says:

    Greetings !!

    Thank you for this very enlightening note.  I encourage you to say more,  and to find some economics and business school professors to comment.

    A couple days ago,  as I was listening to yet another report on the current economic crisis,  I noticed the use of the word  "trust",  and realized that I had heard it in previous reports.  This time the report was something like this – "Banks are not loaning money to one another because they do not trust each other."

    I have come to believe that our economy runs on trust,  not on money.  Money should be looked upon not as a unit of exchange backed by gold, or a government, or anything else,  but rather as a unit of trust

    Reading your examples of the new emphasis given to transactions, I am reminded how much game theory has take over the study of economics, and at places like the University of Chicago law school how much game theory has take over study of the law as well.   This do not bode well for a quick recovery of attention to trust.

    I must stop here.   Clearly,  this issue deserves greater attention.  I encourage you to pursue this issue further.  Thank you for this beginning.

    JM

    Reply
  2. Charlie (Green)
    Charlie (Green) says:

    John,

    Thanks for those thoughtful comments.  That post was written over a year ago; you might want to read a few more recent posts that touch on the same issues:

    http://trustedadvisor.com/blog/453 Trust, banks and It’s a Wonderful Life

    http://trustedadvisor.com/blog/457 Trust as a substitute for risk management

    http://trustedadvisor.com/blog/442 Financial and management engineering

    http://trustedadvisor.com/blog/438 Transactionalization of tenure

    http://trustedadvisor.com/blog/425  Measuring ROI on soft skills training

    http://trustedadvisor.com/blog/407 Outsourcing Loyalty

    http://trustedadvisor.com/blog/386 Financial relationships, transactions and trust

    http://trustedadvisor.com/blog/368 How measurement destroys trust

    It’s a pretty common theme for me, because I think it’s important.

    You are completely right about trust being at the heart of financial institutions’ viability.  You could hear that language amping up starting several months ago when the language describing the financial crisis went from liquidity to solvency to trust. 

    I find your comments about the creeping influence of game theory in ecconomics and law both depressing and unsurprising.  It is so attractive to treat social issues quantitatively; all social scientists seem to suffer from physics envy, and business schools suffer from economics envy.  As a result, game theory is irresistible.

    The problem is, big conclusions get draw from tiny data, and the data is severely limited.  Here’s the only finding you need to know from game theory:

    -the more times you play the game, the more you let people playing the game look each other in the eye while they play it, and the more you let the players communicate with each other–the greater the trust and the more successful the aggregate outcomes.

    It’s simple.  Put people in oppositional competitive situations with a single draw of the gun defining the "game," and you get competitive behavior.  That leads to poor systemic results.

    In business, one of the popular phrases is "if you can’t measure it you can’t manage it."  It is a false statement on the face of it, if you just think about it.  Reality is not dependent on our ability to measure it.  We can manage in many ways–fear, love, role-modeling, vision, collaboration.  The measurement-dependent way of managing inevitably involves micro-measuring and monetary incentives.  "Management" by this definition is simply setting up the rat’s maze and adding cheese at strategic points.

    I appreciate the intent of your suggestion about getting more economics and business school professors to comment, but I’ve heard them. I’ve been taught by them, I’ve read them, I’ve heard them at business school reunions, and I think the bulk of what they have to say is simply wrong.  There are better commentaries these days coming out of columnists (e.g. Krugman), blogs (e.g. Firedoglake and TomPeters and David Maister),  and consulting firms (e.g. Bain).  Academies of learning are not the temples of advanced thinking they were 40 years ago.  That’s of course just my not-so-humble opinion.

    And you yourself, John, clearly have a thing or two to say about this issue.  Find your own voice, and add it to the dialogue!  You’re welcome to use some space here to contribute.

    Reply

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