Globalization Psychology 1: Outsourcing & The Lottery
Written by praveen gupta
Any of us are sometimes reluctant to make what look like simple switching choices. Returning from a brief stop at London’s Olympic Games this week (no I didn’t run, jump, tumble, or throw; I wasn’t asked), I ignored a faster moving security line at Heath-row in favor of staying put behind an elderly couple who weren’t exactly moving at world class speed. We do this sort of thing all the time: failing to act on what seems like the obvious. Maybe the abandoned line will magically accelerate once we’ve moved on, we figure.
Is there a basis for such “irrational” reluctance and could there be similar tendency among outsourcing market participants?
In fact, there is a pool of research using a lottery ticket scenario that may be insightful to consider. For example, in 2007, Jane Risen and Thomas Gilovich, a pair of inventive Cornell Psychology Department colleagues, asked 50-odd participating undergrads to exchange a randomly- drawn ticket for a $500 prize for another randomly-drawn ticket. Then the researchers went a step further and offered the students an additional $10 cash incentive to switch. (Depending on your undergraduate era, that represents decent beer- or Red-Bull drinking money.)
Even with the added sweetener, the results were overwhelming. A whopping 46% of participants turned down the $10 premium, intuiting that if they made the switch their old ticket would be more likely to win (although a switch would of course have no bearing on the odds).
Prior research with this lottery ticket scenario had attributed switching fear principally to anticipated regret, a fancy way of saying that participants would kick themselves if their surrendered ticket won. The Cornell researchers concluded something else was happening as well. They attribute this tendency to people’s “subjective likelihood judgments.” We convince ourselves that our actions may affect the likelihood of the outcomes.
Perhaps the same belief explains why outsourcing buyers may be reluctant to switch from an incumbent supplier – even if the incumbent supplier is viewed as under-performing.
Unfortunately there is no reliable measure of how many outsourcing buyers don’t switch providers even in the face of under-performance. Numerous surveys have taken up the subjects of failures, switching, and renewals, especially with billions of dollars in contracts reaching the end of their terms. While most such work provides some insight, it focuses primarily on such issues as the frequency with which contracts are renewed and (sometimes) the stated reasons for switching. But no sane buyer is going to say: “I didn’t switch my service provider because then the provider might start to do better.”
Unemployment is already high.
Like the Cornell test in which the students could earn a $10 premium for switching, the outsourcing buyer may also have a hard dollar incentive to changing providers. Frequently, service providers are eager to underbid incumbent service providers. Yet even with the “premium” of lower pricing, we still may irrationally soldier on.
To take the behavioral insights a step further, consider this: In a subsequent test, the Cornell researchers gave study participants the chance to purchase lottery insurance, and found that participants who switched bought significantly more insurance than their counterparts. In other words they had a high belief that their old tickets would win even with no basis for that likelihood.
It is true that for corporate buyers there may be many very rational reasons not to switch from even an under-performing provider. At the least, maybe the “devil we know” adage applies. At the most, they can seek out market and predictive data that can help them determine whether to stay with a particular buyer or a particular location because of forward conditions.
For others, perhaps a deeper more introspective look at our decision-making processes may be worthwhile. Maybe a Rorschach test is in order? (In fact, the 2012 Olympic Logo itself would make a pretty good one; you be the judge.) Back at Heath-row Airport, by the way, my security line outpaced what appeared to be the faster-moving lane nearby (The elderly couple in front of me also benefited from new rules that seniors can leave their shoes on). There was no Gold Medal, but for once I had won the race.
And I’m sure that if I had changed lanes, the line I had abandoned would have smoked me.