B (3:37)

Excellent. You describe the book as a detective story about supplier induced demand for our listeners. What does that term mean? And why do you see it as so consequential for modern markets?

C (3:50)

Yeah, I hope I'm not overstepping. It may be indeed useful to think of the book as a detective story set in contemporary services economy. Right. The mystery I'm trying to solve is supply induced demand, or SID for short. Sort of poking around the parts of the economy that is not easily visible to us. Now, SID happens when experts, as you mentioned in the intro, consultants, lawyers, bankers, don't just respond to demand, but help create it. Nudging buyers towards services that buyers do not need. Sometimes it could just waste time and money. I call it the weak form of sid. I don't know, think of needless accounting checks or consulting research. Sometimes it leaves buyers worse off. Think of ill informed reorganizations that disrupt employee morale, value destroying mergers and acquisitions, unwinnable lawsuits. That's the strong form of sid. Now, there are two important caveats. So first of all, SID isn't uniform to me, it's both lazy and inaccurate to claim that professional services squander value across the board. The book is precisely about the conditions that make SID more likely. It's not a blanket indictment. And the second, Supply Induced Demand is not really a morality play. Most professionals aren't villains. And SID is not about unethical behavior. SID emerges when contemporary markets mix very specific conditions such as high uncertainty, asymmetric expertise and weak feedback loops. And in this volatile combination of forces, the center of gravity shifts from buyers defining needs to suppliers shaping them. Now why does it matter? Well, because the conditions for SID are spreading, not shrinking. So the economy, in my view, is moving toward more supply induced demand as opposed to away from it. And I'm sure we'll delve into these Conditions more throughout the conversation. But the economy is becoming more complex, more uncertain, and the expertise gap between buyers and suppliers of professional services is widening. And the economy level risks are also real. So SID can push organizations and professionals toward motion over outcomes, misallocating capital, time and attention. That's fairly obvious. It could potentially undermine organizational growth and competitive advantage. More so, it could result in systematic misallocations in the labor market, redirecting some of our brightest talent, brightest minds to work that's superfluous or worse yet, value.

B (6:32)

Destroying bas that we train.

C (6:36)

Yeah.

B (6:38)

And a central argument is that professional services thrive in environments of high uncertainty like we have currently. So why does uncertainty open this door? And isn't there some pushback coming from people who buy the services? Isn't there greater skepticism that they're not getting the value that they anticipate or. Or this is the uncertainty so high that they're going to go for these, they're going to buy into the professional services regardless?

C (7:09)

Yeah, so let me maybe take these questions one at a time. So let me start with uncertainty and why it's so critical for supply induced demand. Supply induced demand, at its core is a form of social influence. And scores and scores of research show that social influence is more likely under uncertainty, especially if social influence is coming from experts. Now, if I can unpack it a bit more, I encourage the listeners to envision a conference from a boardroom from the 1950s. You have paper ledgers, clear problems, lower costs, sell more, and fast forward to today's complex knowledge economy. You have technology issues, cross border law, cyber risks, AI, esg, capital markets, and everything braided together. So in the book, I describe how uncertainty in the modern economy stems from essentially the increasing complexity of work. One element relates to what David Townsend and colleagues describe as detail complexity. So this concept relates to the available knowledge, data, analytical techniques, frameworks that could be used to solve problems in a given domain. So, for example, take strategy consulting. Strategy consulting back in the days used to be pejoratively described as drawing curves. Now, strategy consulting work may incorporate scenario planning, game theoretic analysis, computational modeling, as well as mining volumes of data using natural language processing, network analytic and machine learning techniques. And you probably know this because we train students to do this exactly for our clients. Now, moreover, various domains intersect with others in fundamental ways, which is described in research as dynamic complexity. So the other challenge with respect to complexity is that nothing happens in a single lane. A lawsuit isn't just legal. It's finance, strategy, communications, data operations, et cetera. Any merger would touch on hr, it, regulations, balance sheet, et cetera. And so the result is a world where the real action sits on the intersection of different highly complex domains now under the hood. If you look at how we structure companies, whether it's buyers or sellers of professional services, there are complex structures, cross functional matrix governance sort of wires this all together. So in addition to domain experts, you need people who can bridge disciplines, scaffolders who speak more than one expert language. And the technical bar keeps rising. You've had on the podcast a few people talking about the proliferation of AI. There's quantitative modeling, machine learning, etc. All that shapes how decisions are made. And by the way, just if you start serving execs, they'll tell you that for them, that ever growing complexity is daunting. There's a survey by KPMG, Economist Intelligence Unit, they consistently find that about 80% of executives single out complexity in their work is the most critical challenge. Now, this complexity, this is really important for the argument creates at least three kinds of uncertainty. One is what's the real problem? The second is what should we do? And the third is what will happen if we do it. For scholars, it's the problem uncertainty, the action uncertainty, the outcome uncertainty. And what's really important to realize is that it's vastly different from a classic conception of markets where the buyer knows what they want and go and choose the best supplier for the day. By contrast, organizational executives often start pondering if they need yet another restructuring effort, if they need an additional debt offering, a lawsuit, whether an acquisition aligns with the best interests of their business, et cetera. Psychologically, research shows unambiguously that we don't like uncertainty. It vexes us, it unsettles us. We lose control. And in these situations, we're much more likely to turn to experts, professionals, and be more receptive to their advice. That's the lever and that's why uncertainty under uncertainty, demand migrates from buyers to sellers. So experts start shaping what we think we need. Now to your question about why is it that clients are not pushing back concurrent with this? Because for now, a few decades, we've been outsourcing fairly complex work to professional service firms. With this outsourcing, we've also been outsourcing expertise as buyers of professional services. And so that's what's created a widening expertise gap between the providers of the services and the buyers. I'm not talking about mundane services like back office, hr, finance, routine transactions. I'm talking about the frontier of professional services. When you talk about Cutting edge strategy work, predictive analytics, AI infused work. In my interviews, executives, senior executives from clients would tell me, Maxim, sometimes it's so complicated, so esoteric, I don't even know what questions questions to ask. That's one of the antecedents of this problem.

B (12:07)

Do you think AI actually increases the demand for these services rather than decreases it? And could you also speak a little bit more about what you mean by social influence as opposed to what is the opposite term that you would use, as opposed to social influence?

C (12:26)

Yeah. So AI with respect to supply induced demand specifically.

B (12:30)

Yeah, let's start with that.

C (12:31)

You know, Alfie, that's probably one of the aspects that's hardest for me to predict the outcome. I've been thinking about this. So on the one hand, one could anticipate really progressive, forward thinking buyers of these services to climb up the learning curve faster so they can leverage AI to close the knowledge gaps or expertise gaps, et cetera. Conceivably, professional service firms, investment bank consulting firms, advisories, et cetera, would do the same and use AI to test and provide better solutions. But in the long run, what I suspect could happen is something what Andy Abbott wrote about back in the days under the rubric of jurisdictional contestation, which is as clients, AI begins to eat up smaller, more mundane tasks that would inevitably push professional service providers toward the frontier, even more so than before, toward the most esoteric work, toward the work that requires more of that detailed complexity and more of that dynamic complexity. So cutting across the different verticals and that creates conditions that are ripe with supply induced demand.

B (13:46)

Now, as far as because the buyer doesn't understand what the seller could asymmetric information, they may not understand what the seller can provide.

C (13:55)

Yeah, and exactly. Not just human information, but even knowledge and expertise. Right. Which is harder to rectify to your social influence pieces. There are multiple elements in play. But let me start with the fact that if people start reading research on professional service firms, one of the central pillars that accounted for their rapid rise and growth is the fact that they mitigate uncertainty for clients. Now that happens in an environment where the work of professional service firms, again I'm talking about the esoteric cutting edge frontier work, is not easy to measure and evaluate. And we can talk about this later. And so what happens is a lot of what professional service firms do does rely on proxies of excellence. So for example, there's established work showing that professional service firms, more so than any other sector, recruit from top tier schools. Right. And they're not hesitant to showcase their clients that their employees come from these top tier schools. Anyone who's interacted with professional service employees knows that they're typically eloquent, confident they can hold their own. And in situations when the essence of the work is very difficult to assess, we often begin to rely on these proxies of social influence. How confident the person is, how well they present themselves, what's their educational pedigree, et cetera. And again, recognize, please, that that influence often operates at an unconscious level. It's not that someone's coercing you in a particular solution or problem. It's akin to this classic work where you see a formally dressed individual jaywalking in a red light and you're much more likely to follow them. Right. That subtle, very nuanced element of social influence.

B (15:48)

Top management is accountable ultimately to the board into how well the companies do in the stock market. And they can always say that we've done all the due diligence, we've hired the right consultants. These were decisions that were made with the best minds that we could hire to help us with the decisions. So if the decisions go awry, they have an escape hatch.

C (16:17)

Right.

B (16:17)

Is that part, part of what's going on here too? So they, they, they're borrowing from the, the, the, the, the, the, the top tier MBA schools as a, as saying that they, they have included people with this, this kind of knowledge in our decision making and we didn't proceed unless we, we got the best expertise available. Even if it fails, even if the, even if the direction fails. Because no matter what you do, in some circumstances, you're going to fail.

C (16:49)

Yeah, look, some of that talent selection is happening deliberately and consciously, but some of it, and Lauren Rivera's beautiful book Pedigree illustrates it super eloquently, which is some of that selection is deeply culturally ingrained and it's not immediately visible to professional service actors themselves. So, for example, you can select a candidate based on the activities on their resume. Right? Oh, you know, you do dressage. I do dressage too. You play lacrosse? I play lacrosse too. And that happens to over represent sort of elite schools.

B (17:23)

Well, I have this feeling, though, from listening to various podcasts and reading some things that I get from McKinsey that I think that the, the consultants themselves are also, the big consulting organizations are also very confused about where AI is going to lead them and what role they're going to play. Are you sensing that too? To some extent?

C (17:46)

Well, again, it might be premature to be too confident in these assessments, but I can tell you that I've recently spoken to a senior consultant and she shared with me that the flow of the work is changing a bit. Where previously she is in tax and audit and previously they were proposing solutions to clients, but now what clients do is they use AI to essentially come up with a list of preliminary solutions that could work for them and then ask consultants to render judgment or select from those solutions. So some of the sequencing in that standard workflow begins to change. But beyond that, again, I think it's too early to comment, at least from my vantage point.

A (18:33)

The holidays are coming up and I have relatives and friends visiting and that means I need to put them up. Happily. I have a couple of guest rooms. Unfortunately these guest rooms need help and I go for help to Wayfair because Wayfair has everything that you need to spruce up your guest rooms and also your bathrooms and so on and so forth, Wayfair is really your one stop shop for all of these things. Bedding and linens and throw pillows, accent chairs, towels, cookware, plates, utensils. You name they have it and they can get it to you quickly and free because shipping is free at Wayfair now. I personally bought a couple of comforters and some pillows for my guest rooms and it was extraordinarily easy to order them. They came in a few days and as I say, shipping was free. So this saved me time and I just had a great experience. So Wayfair makes it easy to tackle your home goals this holiday with endless inspiration for every space and budget, free and easy delivery all your seasonal must haves. So get organized, refreshed and ready for the holidays. Free for way less. Head to Wayfair.com right now to shop all things home. That's W a Y F A I R.com Wayfair Every Style Every home it's.

D (19:40)

Okay not to be perfect with finances. Experian is your big financial friend and here to help. Did you know you can get matched with credit cards on the app? Some cards are labeled no Ding decline, which means if you're not approved, they won't hurt your credit scores. Download the Experian app for free today. Applying for no Ding decline cards won't hurt your credit scores if you aren't initially approved. Initial approval will result in a hard inquiry which may impact your credit scores.

E (20:08)

Experian this episode is brought to you by Lifelock. It's Cybersecurity Awareness Month and Lifelock has tips to protect your identity. Use strong passwords, set up Multi Factor authentication, report phishing and update the software on your devices and for comprehensive identity protection, let Lifelock alert you to suspicious uses of your personal information. Lifelock also fixes identity theft, guaranteed or your money back. Stay smart, safe and protected with a 30 day free trial@lifelock.com podcast. Terms apply.

B (20:39)

And in this case, the incentive on the part of the providers of this service is that they maintain their billing essentially and keep up the sales rather than provide ne. It's hard to gauge whether they've been effective. So as long as they keep up the their sales, they're doing fine internally in terms of how they're being evaluated.

C (21:08)

So may I challenge that a little bit?

B (21:11)

Okay, sure.

C (21:12)

Which is, look, I hear you and a lot of criticism of professional service sector comes predominantly from the incentives lens. I get it. It's sort of blindingly obvious, right? I'm doing it because I'm ramping up my billable hours. But in the book I develop an argument that I think is more appropriate for what we've seen if we look at the evidence across decades. So in the book I talk about this shift in institutional logics in the field from professional advisory to commercial. So in fact, in writing the book, that was the biggest surprise for me just how much the sector itself. The sector itself has transformed in the last few decades. So for those who know institutional work, you will be familiar with Pat Thornton and Willie Ocasio's concept of institutional logics. Essentially, it refers to assumptions, beliefs or rules by which individuals make sense and provide meaning to their reality. Rules of the game. And what's important to realize is that for decades, professional service firms ran on a professional logic that emphasized their independent advisory prowess. They were partner owned and based on apprenticeship culture. Seniority mattered. Poaching partners from other firms was taboo. Partnership was akin to tenure in academia, a guarantee of permanent employment. Advertising felt heretical. And discussions about growth and revenue and profitability were highly, highly uncommon. Starting at about 1980s, the wind started to blow in a vastly different direction toward what I call a commercial institutional logic. So growth and profitability became key imperatives. Professional service firms grew much bigger. Larger firms acquired smaller firms. Ownership opened up to external investors. Some professional service firms went public because they need even more capital to fuel growth. So many investment banks, advisories, and even law firms outside of the US Are publicly traded now. The path to partnership also changed dramatically, placing primary, if not exclusive, emphasis on the individual's ability to generate revenue, acquire clients. Underperforming partners are no longer protected by permanent employment. They could be let go and in fact are now routinely let go. Advertising took center stage. One of my favorite quotes that I came across in writing this book. So it's from Alan Woodrich's work in 1997. So what is it? Almost 30 years ago, he cites Robert Duboff, who was a senior leader of Mercy management consulting Firm, who said 10 years ago, again, the reference point is 1997. He said, 10 years ago, if I'd suggested we advertise, I would have been shot. Five years ago, I would have been whipped. And then Wooldridge proceeds to argue that already in the late 90s, this firm routinely placed ads in the Forbes magazine. So professional service firms conference rooms hum with discussions of dollar figures, financial metrics, for example, profit per equity partner, et cetera. There's a change in language too, for management scholars and sociologists. Here you probably remember the influential work by Paul Hirsch and how change in language can shape our cultural frames. So now phrases like eat what you kill or hunting grounds are fairly commonplace in professional services parlance. But here's where I depart from the pure incentive story, which is the change in the professional to commercial logic. Because it's so ingrained across beliefs, frames of seeing the field, the profession, it didn't just change how organizations function, professional service firms, it rewired professionals identities for professionals. There's quite a bit of work in this area is that they work crazy long hours and they're so vested in their work that work is not just often what they do, it's who they are. And then when the dominant logic rises, billings, visible impact, doing things for clients, organizational client and personal success become associated with more change, more projects, more deals. So that creates, in my view, a cognitive frame where doing work for clients, staying in motion becomes synonymous with creating value. And doing more work became synonymous with creating more value. And that's the bridge of supply induced demand. And by the way, the reason I think that's an important nuance is because if we understand this deeply through the lens of logics and the change in identity, it becomes strikingly obvious that none of this can be fixed with simple ethics interventions. It's just not going to help. It's a lot deeper and more ingrained, more insidious than just correcting a few instances of unethical behavior. I'll pause here.

B (26:06)

For example, are the typical engagement of a professional service organization by a client? Is it done at the behest, typically, of the client who comes to the professional service organization? Do they essentially send out a bidding process, or is it the other way around? Is it that the professional service organizations are in Regular contact with leadership in the organizations, and they are always suggesting to the organizations that they want to serve new projects that they could do for them. Or is it some combination of the two? What is that like? And I guess that's all about social influence. How do the people in top leadership, are they regularly relating to the people in the consulting community and in these other communities, or are they just. When they need somebody, do they suddenly get on the phone or get on, I don't know, today, maybe not the phone, but on the Internet or in their email or how would they do it? Yeah, how does that relationship develop?

C (27:17)

So in the process of writing this book, in addition to doing over 80 interviews and crunching through lots of quantitative data, I also logged hundreds of hours of field observation, including sitting on pitches by consultants, understanding how work is sourced and offer it, et cetera. So it's typically both. So in some cases, clients have a fairly good idea as to what they need and they might request that help. But any advisor, any professional worth of their salt will tell you that once they're with the client, they're actively looking for new business, new fields of play is the language sometimes being used, new hunting grounds, et cetera. So they proactively offer new opportunities. My empirical case, as you know in the book, is in the context of patent infringement litigation. Same dynamic ensues there, which is patents and products are both public spaces. And it's fairly common for IP litigation firms to come to clients and say, well, we've analyzed the market space of potential, say, medical devices or products. We believe that these products infringe on your patents. We'll be happy to initiate patent infringement litigation on your behalf. That happens too. But the nuance here is that sometimes the path to supply induced demand starts with the buyer. And I believe that the responsibility for this rests not just with the seller, but with the buyer too. And one concrete example is exactly what you surfaced, which is, we bring professional service firms, we bring advisors for no good reason. And these no good reasons are in abundance. Anyone who's done research in this sector, who interviewed professionals who worked perhaps in this sector would know that One example would be, oh, the company already knows what they want to do and they just invite professional service firms as a stamp of approval. Another one, it's difficult. Exactly. Another one, it's a difficult decision and they want to distance themselves from that difficult decision, essentially saying, oh, it's the advisors that recommend that course of action. There are many more examples of that entree. But I think what's important to Realize is that once you have that entry point, supply induced demand can begin to proliferate. Because in my research, what I find is that it's exactly when you have ability for continuous contact and close physical proximity with the client that supply induced demand is more likely to. To amplify and proliferate.

B (29:53)

How often is there real competition? Let's say a top leadership team comes up with a need and they can formulate some kind of problem. Will they send out their. Will they seek solutions from competing groups or will they tend to rely on the ones that they're comfortable with from the past?

C (30:16)

Yeah, it varies depending on the nature of the relationship with the advisor. In some cases, it's a competition where multiple parties respond to rfp. Some senior leaders tell me that they are of professional service firms tell me that they're eager to get their foot in the door by saying, we want to be your second call explicitly to clients. So if you feel like there is something of a problem with your primary provider that historically has done this work, please call us. Or you feel like, for instance, that they're overwhelmed, please call us. So in some cases, it's completely in the hands of the service provider. So my field work quotes to the tune of I would, from a senior partner of a professional service firm would be, I would propose something to the client and the response would be, oh, I trust you, great idea, just tell us how much it would cost. So both the scope of the offering and the pricing sometimes rests purely in the hands of the professional service provider.

B (31:21)

When do the clients become disaffected? Are there examples? Do they, do they. Does their disaffection actually have a reputational effect on the service providers? Does it become known that X dumped Y because they thought it was crappy service or they made a huge mistake as a consequence? There are, I mean, there are these famous McKinsey cases where, you know, the opioid crisis, where they contributed there and some of their activities. But those are not the kind of, you know, what I'm trying to get at. When do they know that they're not getting what they want? Do they ever know that the clients.

C (32:08)

So that's where it gets really tricky. And I really appreciate you raising that point, which is, yes, there are these ethical scandals in professional services. I think by virtue of their standing in the broader economy, they get a lot more visibility and spotlight. But my book is not about the ethics of it. Right. My book is about something a lot more insidious and does not at least openly clash with the classic kind of ethical dilemmas. So let me elaborate. I believe that supply induced demand in individual cases is very, very difficult, if not impossible to detect. My view is that can be convincingly established, which is what I do in this book, in large samples. And I'll play out why it's difficult to detect. But because it's so difficult to detect, it's difficult for organizations to learn. So let me take a step back and say that if I have some listeners on the podcast that end up going through the book and end up reading through the empirics chapter, they will see that what I established there empirically is that the companies that hire professional external legal counsel or for IP litigation and when that legal counsel is in close proximity to them, so continuous contact under uncertainty, these companies file more lawsuits, these lawsuits last longer, hence being more expensive for firms and companies are less likely to win in these lawsuits. So a reasonable question could be is so you have si supply induced demand where the bill climbs without their outcomes, wouldn't experience fix that? But when you look carefully at all the work on organizational learning, effective learning for organization from these sorts of experiences requires two indispensable conditions. One is access to comparable cases, ideally several, many is better. And the second is availability of clear performance feedback. And the argument I advance in the book is that in professional service markets both of these conditions are routinely violated. So let's take for example the comparability of cases. First of all, again just to emphasize supply induced demand is unlikely to surface in routine work. It's more likely to surface in high end complex esoteric work. Lawsuits, reorganizations, m and as they don't happen in large numbers for a given organization, the sample is typically small and even when they do, they're highly customized. You have unique competitive regulatory technological context to unique client demands. So conditions are shifting and you can't repeat that experiment under control. The sample is small and non comparable, which is not ideal conditions for learning. And the second, which is even tricky, is that it's very difficult to get reliable performance feedback. In much of professionals work outputs are hard to measure cleanly. And by the way, for that buyers are also to blame. So for example, in my field work, the challenge emerged where some advisors come in and they start measuring their work very very narrowly. And there's pushback from the buyers saying oh you know, that's too narrow of a measurement. If you essentially save me $2 but we lose money elsewhere, I'll be out of a job. That's a quote from my field. If advisors start to measure their Outcomes more broadly, at the level of the entire organization, they similarly get pushback, saying, well, you're taking credit for things that are outside of your control. It's not you, it's us, the management team of the buyer that contributed to these superior outcomes. So they're sort of in between rock and a hard place where it's not easy to measure outcomes more. So imagine that you have a situation such as an acquisition, a lawsuit, that didn't live up to expectations. Any senior leader will tell you, whether on the buyer, on the seller side, professional service leaders, buyer leaders, that there is an abundance of competing narratives explaining what happened. Was it a bad decision from the start, Was it bad data, was it good decision but poor execution? Did the competitor somehow played brilliantly, did external conditions shift, et cetera. And please also recognize that naturally, if I am doing this work, my first instinct is to make external attributions. So if I'm an advisor responsible for this work, I'm not going to start by blaming myself. I'm going to blame external conditions. What's even more interesting is that the buyers who now have vested interest in this work, who've committed to this project, for them, reputation, sunk costs, all these elements also point them to not easily admitting that it was a flop.

B (36:58)

They want to show success.

C (37:00)

Exactly. And so what ensues is what we know in organizational research is this causal ambiguity, which is you don't know exactly what happened or why there's this fog where organizations cannot extract clear lessons and markets therefore don't self correct. And so again, I'll come back to this, which is one of the challenges with this is that what makes it so difficult to deal with is that it's difficult to conclusively establish SID in individual cases. My point is that as opposed to going after individual cases, we need to be very thoughtful about understanding the conditions for supply induced demand. And the best way to rectify the status quo is to try to instill new processes that would systematically dismantle those enabling conditions. But again, I know it might sound disappointing to some of the listeners or some of the executives, in any given case, you will probably not know if you've avoided supply induced demand.

B (38:01)

You could always say, we could have been a lot worse off had we not hired these consultants. Which is a narrative logic.

C (38:09)

Exactly, exactly.

B (38:11)

Or you can say, okay, we lost this big IP suit, but we created a nuisance for our competitors.

C (38:19)

Oh, I've heard all sorts of explanations, which is, oh, we lost the suit, but in the future we created more of a deterrence for future, you know, infringers, or we drained our competitors even more so than ourselves in terms of financial and managerial resources. All sorts of narratives.

B (38:38)

Would it be possible? This is just something that occurred to me to create experiments. So create pilots, like hiring two or three different consultants to approach the same problem and have them each carry out a pilot and then, you know, after and have rigorous outcome measures that you have at the beginning and say, okay, you won, we trust you more and we're going to feed you to continue. But people don't think that way, do they? Regularly, they don't think experimentally and testing in this, in a way I'm describing it anyhow, it wouldn't be perfect, I'm sure.

C (39:18)

So some of these experiments have been done in other fields. So for example, in economics, some scholars who study credence goods, just to be clear, that's different from what we see here because they look at blatant ethical transgressions. So some scholars studying credence goods, they took a perfectly functioning car to multiple repair shops and compared the diagnostics reports. In medicine, where the question is not ethics, but the question is different understanding of the situation, doctors would be presented with similar patient vignettes or similar images of a given patient and ask for a diagnosis. In fact, in some studies, unbeknownst to the physicians, they were shown the same image more than once and the nature of the experiment was well, would they render the same diagnosis based on the exact same image that they've just reviewed in the previous pile? So some of these experiments have been done. Of course, it would be much more complex and time consuming and require I think a lot of more ingenuity to do them. With respect to professional services work, but not impossible.

B (40:31)

I think leadership changes, do they throw out the prior consultants and do they or do they want continuity? What's your sense on that issue?

C (40:42)

So that's another example where I find that the buyers are at fault often for supply induced demand. Where the standard story is you have a leadership change, a new CEO comes in with a new chief executive officer, new team, the natural desire is to make a splash. The natural desire for a new leadership team. Most organizations is to be known for something for some sort of change or.

B (41:09)

Motion, you know, the most nine months to show that why what you're doing.

C (41:14)

Differently, I mean it's, it's, it partly it's look, it's a function of the labor markets too. When you're looking for your next job and you're coming for up for an interview it's very deflating to say, well, what'd you do? Well, I just maintain status quo. Right, Everything goes fine, let's start the situation. Exactly. And so a lot of these executives are looking for ways to make a splash. And that's where advisories, investment banks, whether it's M and A activity, legal counsel for some clever legal solutions, they come into play. And again, what that creates is this entree for potentially supply induced demand down the road. So unknowingly and unintentionally, by engaging these professional service firms when there's no actual need, we open the door for exactly what this book is about.

B (41:59)

Well, that I once had a person who did mergers and acquisitions at a major food company speak in my class and he said, I don't answer any of the calls. He was looking for acquisition activity all the time. He would have like 100 different candidates on his radar at any particular time. Said, I don't answer call from the law firms in New York. They're like realtors who are trying to sell me properties I don't want to buy. They have vested interests in what they're selling.

C (42:31)

And, but, but see, again, I think that this is where our view of the professional services field can be more nuanced. Which is, I think that in some of these calls there's, there's value for the buyer. Just the problem is how do we instill these processes so that supply induced demand, which, which is this unneeded demand, right, for services that is superfluous or detrimental, doesn't creep in as much. Right. It doesn't proliferate. And again, that doesn't mean never picking up a call from your advisor because they might spot things that you don't see. It's just that on average. So look, the analogy I always, I have in mind, and I had in mind when writing the book, is my long standing frustration with this notion of sunk cost and escalation of commitment. Right? So economists for years told us, oh, you've invested in the past, you know, it's a failing course of action, don't invest anymore. The question I always had is like, how do you know? How do you know that the next investment will not turn around that project.

B (43:31)

And that persistence isn't the key to success. You know, you just keep plodding along.

C (43:37)

We know that our honoring of sunk cost and this notion of escalation, of commitment to a failing course of action does exist. And in fact, there are beautiful experiments and studies illustrating that. In fact, I'll mention that sometimes I joke with My students that if I had more time, I would do this famous $20 auction, which is you begin to auction a $20 bill to the group. You start the bids at $1 and you increase at $1 increments, you cannot top your own bid and you cannot jump bid. So you cannot bid in from 1 to 3, you have to bid from 1 to 2. And the key condition of that auction is first, the top bidder pays me their bid and gets a $20 bill, and the second highest bidder pays his or her bid to me. And so what happens in that situation is that people start bidding. You have 18, 19. People get a little apprehensive as they get to $20, but once they get to $20, there's a gasp in the room because the second highest bidder, knowing that they have to pay their bid to me, bid 21. And then it continues. And so it's strikingly obvious, right when you're bidding $50 for a $20 bill, which I've gotten there even higher, something is awfully wrong. But in real life, you simply don't know in real life, whether it's a long term investment project where it's an employee that you've hired and you've committed to and you keep investing in that employee hoping that they turn into a superstar. You just don't know. That's the analogy I often have with supply induced demand, which is in any individual case, it would be very, very difficult to discern if that's in fact supply induced demand. But just like with sunk costs and escalation of commitment, we can think systematically through this process guardrails that make it lesser than, more likely over the course of time.

B (45:31)

What might be the process guardrails.

C (45:36)

Involved.

B (45:36)

In constructing contracts with professional service providers on the part of a firm? What kind of guardrails would you put into the contract? And are there standard contracts right now that have any very good guardrails in them?

C (45:52)

Look, I appreciate the question, which is I think that there's certain things that both leaders of professional service firms and leaders of buyers can do on their own. So I can come back to that point if it's of relevance. But in terms of the large scale, perhaps policy intervention, the one reform that I keep coming back to is this idea of separating diagnosis and delivery. So think of healthcare. For centuries, many systems have barred physicians from both prescribing and selling medications. And recent research shows that on average, that works. Meaning that various studies that try to get to this notion of superfluous medical services, it's less likely when you have the separation of prescription and selling of medications. If we apply the same logic to corporate life, we can hire one firm to diagnose the problem, say a strategic gap, and the second to implement the fix, rework marketing plant, Ito or whole investment banking. One firm can advise on the need of an ipo. The second could actually execute the ipo. And splitting the roles could create that guardrail, that buffer, right. Where a single provider can both sort of find and fix the problem, real or imagined. And by the way, I believe that there could be an added benefit of this approach where such handoff would necessarily require better documentation. On the diagnostic side, imagine rich documentation that can trail what the problem is. And this can spark richer debates as to whether recommended action is truly necessary. It also creates a record that you can more easily revisit later on, hopefully spotting repeated miscalculations.

B (47:39)

So when, like in medicine, I think about the analogy, like, you'll see your cardiologist, but then if you have a real bad problem, he'll refer you to a surgeon. Is that sort of what you're saying? The cardiologist does the diagnosis and says, let's say your heart beats are. The EKG suggests a problem that has to be corrected by a surgeon. Here's the surgeon. I'll send this information to the surgeon and he'll do this. And how does that. Why does that help? Can you give us a little bit more of a sense for why that helps, that separation of diagnosis from problem solution? I guess so.

C (48:15)

That would be analogous to what you just described. Another analogy would be think of executive education in business schools where you can conceivably get a few academics to come in and diagnose the problem for the organization, the opportunity, which skills they need. Right. What areas of the organization need a bit more work and then somebody else would design and carry out the program. What it would fight is this desire to link motion to value, where I believe it would create value, better preconditions, especially in the diagnostic phase, to say that, you know what, at this point, status quo is just as good as any change we can recommend. Or maybe we should wait and see before we recommend something else.

B (49:01)

You're taking away the vested interest in the. In the firm creating further business for itself.

C (49:07)

Essentially, yeah, I think it'll create over time. It's not going to be an instant effect, but I think over time it'll create an easier way and a more accepted way to walk away from business on the professional service side. So let me provide a quick Illustration. So let me just illustrate with an example. One way this can play out too is even if individual cultures at professional service firms can make it easier for professionals to recommend inaction or walk away from business, I think that would help. And the story I wanted to share is. So it was part of my field work. Ajay, a senior manager at the top advisory firm. He was offered a multimillion dollar project. Importantly, he was up for promotion to a managing director that year. So it's a big deal for him and he says no to that project. It's a multimillion dollar deal. He walks away, not a fit for his team. The choice was unusual, to say the least. Daring even. In fact, in my field work, some executives repeatedly mentioned to me that they've never ever seen professional service providers walk away from business. Now, Ajay told me that in his own words, he felt sick about that decision. But in cultures built to resist supply induced demand, that's exactly the move we should celebrate. Not just acknowledge, but celebrate valuing the client over the sale. And it means advising no action and sending work elsewhere. So let me fast forward what happened next. So Ajay kept the relationship. The company got acquired. His original contact called the incoming executive and said, you can trust this guy, he'll be honest if there's something he can't do. That referral led to business that was four times as large as the deal he had initially turned down. So Ajay is a senior partner at the firm now. The story has a habit of replaying in my mind because on the one hand, it serves as a captivating illustration of essentially a blueprint for cultures that should not only resist supply induced demand, but actively reshape themselves against it. It also demonstrates that letting go of business, which is a necessary cultural feature of supply induced demand or combating supply induced demand doesn't have to equate to diminished career progression organizational outcomes. On the other hand, the story also makes me wonder, had it not resulted in such an unexpected windfall, would Ajay still have shared it? Would he even still be with the firm? And to me, the true test of a desirable culture would be exactly there.

B (51:46)

It makes him into a hero. But you would think that these professional organizations are really their strength comes from relationships rather than transactions and they need to have credibility over time. If they're just taking any work for any reason, then it seems to be like a very good move in terms of relationship management. The story that you just told, and I'm surprised that it, it may not occur more frequently as a check on the supply induced demand.

C (52:25)

Well, let's see. And that's where one of these real complications, which is if we were to approach it as an ethics problem, supply induced demand would be less likely to surface in these, we call them embedded relationships. Right. When you have continuity of contact, prior history, etc. What my research shows is actually it's more likely precisely in these relationships. And that's why it's important to recognize that it's not a pure ethics place. I sincerely believe after seeing the evidence, spending so much time in the field, that in many situations these advisors are trying to do what's really best for the client. But for them, what's best is motion is staying in motion. I call it action bias, which is delivering value if you're not doing something for clients. The words that are routinely used in my field work are complacency or negligence. So the idea is that it's well beyond incentive. It's the fact that how you view value of your profession, your value to the profession and your value to the client.

B (53:30)

You talk about cognitive biases, and we know now that in financial economics they talk a lot about behavioral biases and they try to warn us. And we still fall into these traps all the time. Just an awareness of these biases. Can you talk about the biases? Would an awareness help improve these relationships?

C (53:51)

Well, Daniel Kahneman, the late Daniel Kahneman, who is the founding father of this research, usually tells no, that awareness does not help.

B (54:01)

I know my awareness has not helped me.

C (54:05)

At the risk of disagreeing with a Nobel laureate, I hold at least some hope that awareness can help. And there's some research actually indicating that that's in fact the case. But I would say the key bias that drives this link from supplier, from the conditions enabling supply induced demand to the supply induced demand is exactly this bias for action, right? Which is as professionals shifted into commercial logic, they're more likely to equate value with visible activity. A bias for action is systematic tilt toward action over inaction. And doing again, as I just mentioned, becomes in a way a badge of value in the eyes of the professionals, while hesitation is labeled, as I mentioned, complacency or negligence. Now again, if there are buyers of professional services listening, do a gut check. How often have you heard from professional service providers, we can't help you right now, or let's wait and see, compare it to the frequency of offers of new services. That's bias for action in the wild. So I would say that this, and in the book, I also dwell on some kind of Supplementary biases that enable that supply induced demand is really translate into concrete purchases.

B (55:30)

Totally pervasive is this, is there some industries, some companies who overindulge in a terrible way and have really hurt them? And are there others that have been more aloof and have stood outside this overuse of professional services and to their benefits? Do you have any insights about that? That's a hard one, I think. I mean there must be some industries where this is like more used more. All the professional services are used much more commonly than in other industries.

C (56:04)

So that is indeed a hard question to answer. But let me first of all start by saying where I situate the argument for this book, which is I'm squarely in professional services, right? So the classic kind of Annie Abbott's frame of vocations built on specialized body of higher education knowledge guided by shared norms. So that typically covers law, accounting, management, technology, consulting, engineering, insurance, brokerage, marketing, pr, architecture, actuarial work, computer design and software, information systems and specialized design. It's huge.

B (56:40)

It's everywhere.

C (56:40)

It's a massive sector. Indeed it's. It's massive. If you look at the combined size of that sector, next year it's going to be roughly the size of two large European economies. Wow. So close to $8 trillion.

B (56:54)

Wow.

C (56:55)

Now to your point, do I expect these dynamics manifest elsewhere? Absolutely. So medicine is the clearest parallel. In fact, the earliest work in supply induced demand comes from healthcare economics. So in the book I start with this perplexing case of tonsillectomies that were so widely popular in the 30s and the 40s and now are considered undesirable. Contemporary research in healthcare estimates that somewhere between 10 to 30% of practices in healthcare may result in little to no benefit to patients. There are some unusual suspects in this field of play. So just recently I talked to an executive who read my book and he is an auto and he said Maxim. I felt eerie, similar to some of the dynamics you described in the book when a third party vendor pitched software for EV batteries to us. So he explained to me that in EV manufacturing, so hardware is one piece, but unbeknownst to many of us, software is really, really intricate and complex which determines how energy is stored, how it's used, et cetera. And he said on his team he had quite a bit of expertise in hardware, but none in software. And again, we're back to the situation that I articulated earlier, where in some circumstances leaders of buying companies don't even know what questions to ask. And that's exactly how that executive felt.

B (58:22)

And that's a vulnerability that the suppliers are taking advantage of all the time.

C (58:27)

I suppose, sometimes unknowingly, because what happens is just envision yourself presenting to an audience that doesn't ask critical questions. One inference could be that everybody is on board. And when you asked me earlier about what social influence is, if you start digging deeper, and that's exactly what I do in the book, is sometimes it's what's known in research as Abilene paradox, which is, you know, as an advisor, I might not be 100% sold on a solution, but by the way, as a buyer, you expect me to be confident in my proposals. I cannot use with buyers phrases such I think, I believe or I hope. And at the same time, if I'm presenting to the buyer and the buyer doesn't push back with critical questions, I assume that the solution is palatable to them. So sometimes we might end up with these weird situations where both parties converge on a solution that no one truly believes in or understands. That's also possible.

B (59:18)

A great conversation for that. We also have to have some. We have to our listeners, we have to care about our listeners. We don't want to extend their time too long. If somebody in a top leadership team asked you what are the three or four things I should be really careful about my relationships to these professional providers of services, what would be the three or four key points that you would tell them?

C (59:53)

Well, first of all, let me be honest about this, which is I think that combating supply induced demand and finding the strategies to fight it in a compelling way is a lot harder than identifying the problem. I just want to be honest about this.

B (60:09)

I appreciate that.

C (60:10)

However, if I were to give advice to the buyers, I would say that one principal piece of advice is selectively insource difficult, complex work, especially when these outcomes are uncertain, when stakes are high and uncertainty is high. Don't ship all that complexity out of the door because when you do that, you also outsource expertise. And by the way, this is where I.

B (60:40)

And the company loses that expertise too, because.

C (60:43)

Exactly. And I would launch a critical remark against transaction cost theory here because I think it blinded us to the fact that when we make these decisions, part of the element that we really deeply have to care about is who owns the expertise, who ultimately will be able to effectively control their decisions, where the locus of control over key organizational actions will lie. And so I would recommend developing or hiring internal specialists for complex litigation, advanced stack implementation, M and A. Their job would be to close that expertise gap. If that Proves too difficult or too expensive. I would focus on maybe stopgap temporary solutions, which is you can think of creating these SWAT teams on really important projects. So think of retired executives, think of academics, think of seasoned outside specialists who are not vested in the work who can help you think through the scope of work, its outcomes progress. Again, the goal for that SWAT team would not be to micromanage the project. It would be to potentially spot creeping or unnecessary work.

B (61:58)

Well myself thought transaction class economics misses something because to be really good at buying externally you have to have a lot of expertise internally or else it'll be like that example you gave about the EV battery manufacturer and I think that's well known in our literature. So I think you're saying that internal consulting is actually very, very important.

C (62:24)

Yeah, I would say that it's important to preserve expertise internally, at least to some degree in this core areas that for now decades we so swiftly outsourced.

B (62:36)

The general counsel, for example, in a company has to be in the law. Internal law team has to be really strong if they're not going to get fooled by an external law lawyers who come in and just take over and overcharge them. We probably should bring this to an end in the final chapter. Well you talk about possibilities for reform and we've gone over that. But what are you working on currently? You probably have six projects going and find out your productivity level. But what are you working on currently? What really excites you right now? Are you continuing with this? Are you going in new directions?

C (63:19)

So I appreciate you asking about this. Lately I've been deep in this world of legal and regulatory entrepreneurship. So the idea that companies don't just comply with laws and regulations, they actively shape them to their advantage. So think of strategies such as lobbying, choosing friendly venues for incorporation or litigation with ensuing precedent, or working with agencies to shift who has jurisdiction over a given matter or even co constructing, co creating what compliance means right in a given case. So I've got a forthcoming Academy of Management Analyst piece on this with Anusha Kalapur from Michigan, Ross together with Sean Hyatt from USC and Pinar Ozjian from Oxford. We're editing a special issue of California Management Review on this topic. So I'm extending an invitation to the listeners to please submit now. Why does it matter? Because when firms shape laws and regulations, they don't just gain private advantage, they reset the playing field for everyone else. And here's an interesting twist through the supply induced demand lens, which is we usually assume that the locus of control sits inside the firm doing the maneuvering. But when this machinery runs through lawyers, lobbyists, consultants, how often does that control shift over to mediators? So when does we're shaping our legal environment become our advisors are shaping it for us and through us. So essentially nudging choices toward action, more services and potentially creating new rules. And by that I mean laws and regulations for everyone else.

B (64:58)

This is an area actually that some of my early research it was about and I don't know if you know that, but in any case, I, I once did this paper on whether companies should use trade associations or do their lobbying internally. I think that's kind of similar to what you're speaking about. We, we use transaction cost economics. I was basically based on logic, logical thing. So this has been really great and I hate to bring it to a close because I think there's so much more we could say. And this is fascinating, just fascinating. And so this was my conversation with Matson Stitch, author of the Influence Economy. You've been listening to the New Books Network. I'm Alfred Marcus, and my podcast explores the frontier where strategy and ethics meet. Thank you for joining us. If you have any comments and you have suggestions for books that you would like to have me be a host for and do a podcast on, you can always reach me at amarcusmn. Edu and stay tuned for future conversations.

C (66:06)

Thanks for having me, Alfie. I enjoy the conversation.