Leaky Delegation: You are not a Commodity

post by Darmani · 2021-01-25T02:04:55.942Z · LW · GW · 38 comments

Contents

  Different Product
    Specialized Preferences
    Bundling and Insurance
    Centralization and Production Technique
  Principal/Agent Problems
    Signaling Costs
    Signaling Benefits
    Dark Pattern: Expertise Overkill
  Value of Learning
    Conclusion
    Cheatsheet: 10 Questions to Ask Before Delegating or Buying
None
38 comments

Epistemic status: The accumulation of several insights over the years. Reasonably confident that everything mentioned here is an informative factor in decision-making.

Carl is furiously slicing and skinning peaches. His hands move like lightning as slice after slice fills his tray. His freezer has been freshly cleared. Within a day, he will have a new bag of frozen fruit, and can enjoy smoothies for another month.

Stan stands in the kitchen of his college dorm. His hands are carefully placing ingredients on pizza dough: homemade tomato sauce, spiced pork, and mozzarella cheese from a nearby farmer's market. "I don't know why people will pay a restaurant for this," he muses. "So much cheaper to do it yourself."

Michelle is on her way to her job as a software engineer. She tosses a pile of clothes into a bag, and presses a few buttons on her phone. Later that day, someone will come by to pick them up, wash and fold them at a nearby laundromat, and return them the next morning. Less time doing laundry means more time writing code. Her roommate calls her lazy.

An alert flashes on Bruce's screen: "us-east-prod-1 not responding to ping." Almost like a reflex, he pulls up diagnostics on his terminal. The software itself is still running fine, but it looks like his datacenter had a network change. A few more minutes, and everything is functioning again. Hopefully only a few customers noticed the downtime. His mentor keeps asking why he doesn't just run his website on AWS instead of owning his own servers, but Bruce insists it's worth it. His 4-person company has been profitable for 3 years, and keeping server costs low has meant the difference between staying independent and being forced to take outside investment.
 

---

The four characters above each take a minority position on outsourcing a task. In the past, I saw the decision as simple: if your time is valuable, then be like Michelle and delegate and outsource as much as you can. Not to do so would be an irrational loss. I silently judged the people I met who inspired Carl and Stan.

Years later, I've found myself cooking daily during a pandemic and appreciating the savings, and just finished arguing online in favor of running one's own servers. 

My goal in this post is to share the perspective shift that led to me wholly or partially reverse my position on paying a person or company for a good or service (collectively, "delegating" or "outsourcing") in a number of domains, even as I continue to pay for many things most people do themselves. I've noticed hidden factors which mean that, sometimes, the quality will be better if you do it yourself, even if the alternative is offered by an expert or company with specialized tools. And sometimes, it can be cheaper, even if you value your time very highly and the other person is much faster.

The Internet is full of articles on the generic "buy vs. build" and "DIY vs. build" decisions Though some are written from the corporate boardroom and others from the home kitchen or workshop, the underlying analysis is eerily similar: that it's a choice between spending time (or "in-house resources") or money for a similar value. More sophisticated articles will also consider transaction costs, such as walking to a restaurant or finding your kid a tutor, and costs from principal-agent problems, such as vetting the tutor. In fact, as I've come to realize, the do-or-delegate decision is often not about two alternative ways of getting the same thing, but rather about two options sufficiently different that they're best considered not as replacements for each other, but entirely separate objects with overlapping benefits.

These differences can be obvious for specific examples, as every home baker can give you an earful about why your local supermarket can't compete with homemade bread. My goal is to extract a generalized model describing the hidden ways in which in-sourced and out-sourced versions may differ. By having this gears-level model, you may wind up doing something yourself when everyone around you is paying for it. Or you may wind up doing the reverse.

Different Product

Have a look at Instructables or Etsy or any recipe website, and it's clear that the space of homemade items is vastly larger than the space of storebought items. Something you make yourself is unlikely to match something you could have otherwise acquired. But do these alternatives satisfy the same underlying need?

Naturally, providers do try to fulfill your needs; that's how they get paid, after all. Yet outsourced providers balance the needs of many customers, and face problems you don't. Their offering may be meaningfully different than the homegrown equivalent, sometimes for the worse, even in the face of ruthless competition. And the differences encompass not only the product or service itself, but also the accompanying intangibles.

Specialized Preferences

When my housemates and I walked into the restaurant, we were greeted by an exquisite ambience and jazz music. Our hearts sank."Given its ratings," one explained, "the better the decor, the worse the food."

I found a man whose business is helping descendants of German Jews reclaim their citizenship. The references he gave all spoke glowingly of him. Yet it only took me a few minutes after calling them to decline. "They all said you were invaluable because they didn't speak German. But I do speak German."

You are the only person who wants the exact things you want.

The corollary is that, when you buy something, some of its cost goes into things that you do not want.

Central providers must set their offerings to appeal to a broad base of consumers. When your preferences differ from the median, then you are paying for products not optimized for you.

For instance, on most days, I'd gladly sacrifice the taste of my food for convenience, cost, and health, and so I'd happily pay a local restaurant for a nutritious pile of unappealing glop. But I can't find such a dish nearby — too small a market. And unlike most customers, I don't eat bread, yet I don't get a discount when I ask them to remove it. But when I cook for myself, I can aggressively optimize for price and convenience against taste. And thus, in spite of the high value I place on my time, I still cook.

Perhaps this is because my particular takes on health put me well outside the norm, and so I am uniquely dissatisfied with local restaurants. But no-one is close to the median in everything, and plenty more go through phases of unusual preferences. For instance, ever notice that most of the recipes in diet books are things you will never find in a restaurant? 

Outside of arbitrary tastes, your distinct preferences can also come from your position in life. For instance, common market wisdom is that it is nigh-impossible for an individual to beat market index funds. But an index fund is an off-the-shelf product, selling a standard package of risk. And, as Buck explained [LW · GW], what you actually want is a package of risk that anti-correlates with your career. And so, an American software engineer can "beat the market," in terms of maximizing their personal overall future wealth, simply by not buying US tech stocks.

And while the description of a standard product should fit in a line, or at most a webpage, things you build for yourself or coworkers can have boundaries which are quite complicated. For instance, engineers are permitted to build very janky components for internal use, yet must build with a high degree of polish when producing for the outside world. As I'm writing, I am working on a tool for proving small C programs equivalent. For the time being, I only care about running it on a corpus I've been given as part of a larger project. If I were to release the tool tomorrow, I'd either need to extend it to all of C or write documentation detailing the hundreds of tiny things it doesn't support because they don't appear in my corpus. But I am building it for my coauthors (or, realistically, just me), and so I don't need to. Meanwhile, in a different project 9 years ago, I found that the Java standard library comes with a number of options, which, after searching a large corpus, appear to be literally never used. I wonder how much code is written "for completeness" that will never be used, simply to avoid needing to explain its absence.

Off-the-shelf offerings are designed by distilling the preferences of a large group of people into a few simple components. In contrast, you are able to craft a very complicated deal with yourself, containing exactly what you want and no more.

Bundling and Insurance

Accommodating many preferences often comes in the form of bundles. Anyone who's ever dealt with a TV or phone subscription is aware that products often come with many things they may not use. The economic view is that those who use less are paying for those who use more. Or, put more bluntly: does your plan come with unlimited customer support? Then you're subsidizing the most demanding customers. Did you fly Southwest Airlines and not use your free checked bag? You're subsidizing everyone who did.

But lesser known is that there is a version of this in every physical product you buy, because, when you buy a product, you are also paying for the risk of the average user. This comes from the modern doctrine of strict liability: that companies are by default liable for damage caused by their products, even without identified fault. The rationale was given in a  famous concurring opinion in Escola v. Coca-Cola-Bottling Co. (1944) (a.k.a. "the exploding Coke bottle case"): companies are much better able to provide "insurance" to their customers by raising the price tag slightly than customers are able to buy insurance themselves.

In other words, some portion of every mass-market product you buy is paying for potential lawsuits that result from that product. This is generally a good thing and a reason to outsource, as you'll be in much better shape financially if your house gets burnt down by a malfunctioning toaster than by your hand-sculpted wood-burning oven. But that also means that, even if your house is fireproof, you're still paying for the risk because someone else's isn't. If you buy a chair, you're paying for the potential injuries because someone else assembled it incorrectly. In general, if you think you'll be better informed or more careful than the average consumer, then you are losing out.

Thankfully, toasters don't often burn houses down, and so this cost is low (under 1%) for most products. (I'm interested in examples of physical goods for which this is not the case.) But it's alive in your gym membership (over 1%), decisively high in risky physical activities, and also substantial in, of course, actual insurance. When someone with good oral hygiene chooses to forgo dental insurance, they are in essence in-sourcing. On a grander scale, I'm now curious how much a company of health nuts could save by underwriting their own health plan, and whether any have done this. ^[1]

Several of the other factors here have a common theme: you pay more because of information you don't have about the product or service. This one is the reverse: you pay more because of what the seller doesn't know about you.

Centralization and Production Technique

In physical products, the constraints of centralized production, distribution, and storage may cause specialized producers to use techniques different from the DIYer. In different circumstances, this can result in a superior or inferior product.

For example, Carl in his kitchen has only disadvantages compared to commercial producers of frozen fruit. Commercial producers use blast freezers, which both results in a better tasting product (by virtue of fewer ice crystals) and higher throughput. They peel the fruit cutting with blades not so dissimilar from Carl's knife, and their centralized location gives them access to fresher ingredients than Carl.

In contrast, storebought tomato sauce is also different from the homemade version, but in a negative direction. The tomatoes are peeled either by immersion in a caustic solution (requiring dye to compensate for the loss of color), or by subjecting them to a sequence of scalding and physical trauma until the skin falls off. The long storage times require either preservatives or pasteurization. I cannot presently find a source, but I once read about someone who sampled a batch of factory tomato sauce prepared without the additives: a bland, gray glop.

Centralization means scale, and scale creates its own problems. Compared to Stan, the tomato sauce manufacturer pays for scale by degrading health and flavor. The family farm selling spiced pork pays regulators by building a full parking lot. Even for virtual products, centralization makes a big difference when shared physical resources are used to satisfy many customers. For example, Amazon AWS faces the risk that customers with VMs on the same machine may attempt snoop on each other. They pay for this by degrading performance: by expensive mitigations against information-flow attacks, and by wiping disks each time they're connected to a newly-booted VM. Both might be unnecessary if all such VMs served the same company, as is the case for someone running their own Eucalyptus cluster.

Centralization itself also has a cost, which you pay for in the form of overhead. When you buy frozen fruit, you are also paying for a frozen transport chain, shelf space, and the cubicles of designers making packaging and advertising — and also subsidizing unsold product. When buying enterprise software, you are also helping to pay for the vendor's entire sales, HR, and finance departments, thus creating a pricing deadzone that inflates 4-figure software into the 5-figures.

Differences of production method are likely to be a factor when your homegrown solution is pitted against a centralized provider with expensive capital. It's the reason why Carl's knife-labor is orders of magnitude more expensive than the milliseconds-per-strawberry needed by the frozen fruit factory's machines, and why Bruce's bare-metal machines may be an order of magnitude cheaper than AWS's virtual machines. And the lack of it is why Stan doing cooking and Michelle doing laundry wouldn't be so different from a restaurant or laundromat.

Principal/Agent Problems

Delegation is a coordination problem, and solving it means solving principal/agent problems, of which the main ones are communication and risk. Every manager has stories about hiring an employee or contractor who turned out to suck up more manager time vs. if the manager had simply done it themselves, whether because the hiree couldn't deliver (risk) or required too much help to understand the task (communication). An application to charity is discussed by myself in  Cause Awareness as a Factor against Cause Neutrality [LW · GW].

These costs are widely understood, although often underestimated by the inexperienced. Yet even when buying something well-defined, and even when in-sourcing carries the exact same risk of failure, there are extra costs not often considered. These costs involve information: you pay to learn things about the provider, and (as in the "Insurance" section above) they charge for their uncertainty about you. But when you do it yourself, you and the provider both have perfect information.

Signaling Costs

When I cook a roast for myself, I might toss it in the oven and come back a few hours later, not bothering to set a timer or use a meat thermometer. It might taste worse as a result, but it doesn't give any information about my ability to make a nice steak when I want to, which involves salting it overnight and leaving it in a dry environment.

Now imagine a restaurant that sold both a $5 roast, prepared as cheaply as possible, and a $50 steak. A consumer of the first is less likely to share a judgment "The $5 roast is worth $5," and more likely to say "The food here sucks."

Every provider must invest in signaling mechanisms which are correlated with quality, but do not directly contribute. A modern business needs a sleek website. McKinsey has dedicated PowerPoint "Visual Graphics" teams to design the "million-dollar slide deck" at the end of every project. And personalized-health startup MetaMed found their research would be more trusted with a grey-haired doctor to deliver it.

Similarly, every provider must avoid visibly cutting corners, even when doing so would benefit the customer. If you tell your house cleaners there's a specific area you don't care about, I predict they'll clean it anyway. This happens a lot also in academic work, where a researcher needs to do work of questionable utility to placate a reviewer with illegitimate criticisms. I've faced this myself, and I can think of two colleagues who had to invest in grunt performance engineering for papers about proving software correctness guarantees.

All of these are things that would be useless if the consumer and producer had enough shared knowledge. The upshot of this is that, when buying on the mass market, you are paying for presentation, and the cheapest options might not even be available.

Signaling Benefits

First date: Dress up; make the best first impression possible. Twentieth date: roll out of bed.

But if outsourcing means buying information about the provider, that means there's an extra benefit to outsourcing: the information can be reused in future transactions. While a restaurant still may not sell you a minimal-work $5 roast even after they've proven to you their quality, this is very true of hiring professionals: you are also buying a relationship.

The first time I hired a designer 3 years ago, I wrote a job description and tested a dozen competing candidates. Now, all I do is exchange a couple messages with the winner and get automatically billed a week later. With this low friction, I can outsource tasks as small as sprucing up a single PowerPoint slide.

Dark Pattern: Expertise Overkill

In Deep Work, Cal Newport writes: for every task you do, think about how much training it takes for someone else to do it, and outsource or eliminate it if it's too low.

Well, skilled professionals routinely do tasks beneath their training and charge full price for it. This comes in the form of the unscrupulous auto shop that bills their minimum 1-hour of mechanic time for a tire change, but also in the form of the honest high-end lawyer who needs to do some low-level contract review in the midst of a larger engagement. For an extreme example (albeit as a TV special rather than a normal sale), see a world-famous psychologist doing textbook marriage counseling.

This clearly occurs because of bundling and coordination costs, but it also occurs because high-end sellers have an incentive to convince you that everything they do is worth the markup. This is a "sales dark pattern" akin to the Dark Patterns in UX design, where a company e.g.: makes the "Buy Now" button look like the "Cancel" button. As an example of both: my first time doing taxes, I got upsold on paying for a service that would help me in the case of an audit, with a full refund if I cancelled within the year. I later learned they actually did little more than be a middleman for IRS communications (sales dark pattern), and then needed several phone calls to cancel (UX dark pattern).

For physical products, this takes the form of convincing buyers that some superfluous aspect of their product is highly beneficial, or otherwise implying users are buying more than they actually are. This occurs subtly in the techniques restaurants use to make their portions look larger; explicitly by some sellers of "natural" and organic products and by the entire multivitamin industry; and overtly in the case of Red Lobster, which displays a tank of Maine lobster in the front of every restaurant but sells a lobster bisque made of langostino and rock lobster, cheaper shellfish unrelated to "true lobster."

The apocryphal engineering consultant charges $10,000 for a chalk mark on a malfunctioning coil: $1 for the mark, and $9,999 for knowing where to put it. The apocryphal Picasso charges 5000 francs for a 2-minute sketch, because "It took me my whole life." But the management consultant who forms the butt of jokes will tell you what you want to hear [? · GW], "borrow your watch to tell you what time it is," and sell you on satellite imaging when all you needed was a pair of eyeballs. If you paid for an answer that took either a lifetime of training or an hour of Googling, could you tell the difference? How about a drip marketing channel that was either based on unique insight or copied from HubSpot Academy? If a technology firm talked you into a more expensive solution than you need?

Providers distinguish their offerings from DIY versions and justify the price by bundling added value, be it a cafe's ambience or the confidence of an expert's eye. The sophisticated buyer is one who can see when a component of that bundle isn't pulling its weight, and is prepared to craft their own to compete. A fool and his money are soon parted, but the reverse is also true. Or, as actually happened to a friend: when your income is large, there will always be people willing to sell you $12 avocado toast until it's not, and wealth comes from learning to say no.

Value of Learning

A paradox of outsourcing: the better you can do something yourself, the less valuable it is to do it yourself.

There's a simple reason: when you do something yourself, the value is in both having it done and learning how to do it. Doing laundry may be busywork to the habituated, but doing it for the first time also comes with the security of not being dependent on others, and the ability to not be hoodwinked if the laundromat returns wrinkled clothes, claiming "that's just what happens."

The value of the learning differs greatly between individuals. In my case, my career is in software development, and my business, turning good software engineers into superstars, takes students from a vast array of specialties. I have a lot to benefit from learning to run my own servers, even if I wind up never doing it again. Yet my ambition in cooking ends at "Be able to impress guests a few times a year," and so I'm not likely to benefit from practice handcrafting pizzas except by handcrafting more pizzas. In contrast, a French chef may learn useful things about his suppliers from growing his own vegetables, or gain insights from branching out into making his own tortillas.

You must also ask: what kind of learning is involved? Some kinds of learning may expand your knowledge in the world, while others may be more like muscle memory, and only let you do specific things faster. That's the main dichotomy, but I'm going to expand on it in the next few paragraphs by with some of my (admittedly scant) knowledge of cognitive science.

My current ability to give precise characterizations of learning comes from my recent study of ACT-R, a cognitive architecture able to, from just a few parameters, reasonably predict millisecond-level timing of human performance on an array of memory and learning tasks.

The ACT-R model offers several mechanisms of learning. Several forms of learning relate to enhancing and growing one's web of concepts, and several more to learning and applying the tiny cognitive operations that act on it. As this web grows, relationships are formed between new and existing concepts, offering enhanced recall of both. These kinds of learning lend themselves to general utility.

Yet there's another form of learning, called "knowledge compilation" or "production compilation," which serves only to specialize knowledge: turning a general operation like "recall the next digit of my phone number and then say it" into a specialized one like "say 'seven.'" I expect that this form of learning provides the most apt modeling of Carl's knifework, refining a general procedure for observing the fruit and choosing a cut with a sequence of preprogrammed motor actions applicable only to peaches. Whereas trying a different food may result in learning new things one can do with a knife, this kind of learning serves but one purpose: cut peaches faster. Knowledge compilation can only take general skills and make one faster at specific applications. Summarizing: there is more value in basic learning of a new concept or skill than in taking a skill and making it automatic.

Conclusion

Simple questions are welcoming. "Should we have Mexican or Chinese" is, from a coarse-grained perspective, a request to select from a fixed set of options, and, from a fine-grained perspective, a complex weighting of several logistical, nutritional, and social preferences. As one moves away from the daily minutiae into choosing the objects and processes that control our lives, it is tempting to continue to apply the comfortable coarse lens. Yet, to the eagle-eyed observer, a posed choice between simple alternatives belies substantial differences. And there is value to be had in spotting them.

Cheatsheet: 10 Questions to Ask Before Delegating or Buying

1. Are there aspects that I don't care about but providers take great pains to provide?
2. Do I believe that my preferred set of tradeoffs differs substantially from the median?
3. Do I have reason to believe I'll be savvier than the average consumer of this product or service?
   1. In particular, is there catastrophic risk associated with this offering, and do I have reason to believe I am much less susceptible than average?
4. Do providers have access to some kind of specialized capital or technology for which I lack good substitutes?
5. Do providers have substantial overhead that I would not? This includes regulatory burden and security.
6. How much of the cost is spent on signaling quality?
   1. Do I hope to have a lot of repeat business with the same provider?
7. How much of the price is spent on transaction costs?
8. How do I know whether and when the special expertise claimed by the provider is beneficial?
9. How much do I value the learning from doing it myself?
   1. Do I expect to use the knowledge gained?
   2. Is the learning involved overly specialized?
10. Are there other ways in which the thing to be bought is substantially different from what I'd do for myself?
     

1. ^{^}

   Update August 2023: Since writing this, I've learned that many large organizations (e.g.: universities) actually are self-insured. Third-party companies administer the health plan, but claims are paid out of funds controlled by the organization.

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