For all the talk about Digital Transformation (DT) we often tend to forget one vital aspect – human beings. Despite an abundance of cheap and smart tech toys and gadgets, some apparent options for improved performance and plenty of knowledge about “how-to,” we often seem to miss this golden opportunity. Why is that? How come, despite some apparent options for doing something innovative, we often see organisations chose to do to as little as possible or nothing at all?
My claim: As technical experts, we often ignore a fundamental aspect of human nature – Loss Aversion.
What is the problem?
When you have been involved in implementing Ignition projects with clients for a while, you will probably have experienced the following scenario numerous times:
You have identified an obvious opportunity for doing something smart. You have investigated the pro’s and con’s, maybe even created a small business case to prove viability and done a stellar presentation to the client. But despite all of this, nothing happens. Despite the obviousness of your proposal – something that you honestly believe will make the client’s life more comfortable and better – they either decide against it or more often do not decide anything at all. The latter probably the most frustrating part and challenging to do anything about.
A wise person once told me that “everybody wants development, things to get better, but not that many wants change.” DT projects are inadvertently also organisational projects. They challenge the status quo, the habits and routines of the organisation, and that is not always perceived as a good thing. The following quote from Harvard Business Review also points in this direction.
Digital transformation is not about technology. Why do some digital transformation efforts succeed and others fail? Fundamentally, it’s because most digital technologies provide possibilities for efficiency gains and customer intimacy. But if people lack the right mindset to change and the current organizational practices are flawed, digital transformation will simply magnify those flaws.(Harward Business Review)
In conclusion, the problem is not the available technological solution nor the clear business case you created. The primary opponent is human nature, our resistance towards change, and more specifically, our innate Loss Aversion.
How is Loss Aversion playing a pivotal role?
Loss Aversion is the idea that losses (even imaginary ones) have a much larger psychological impact than gains of the same size. This fundamental human behaviour is well described in a psychological model called “Prospect Theory,” which was developed in 1979 by the two psychologists Amos Tversky and Daniel Kahneman. Later, they received a Nobel Prize for their ground-breaking understanding of how people assess uncertainty. This model describes the essence of Loss Aversion.
The essence of Loss Aversion is encapsulated in the expression “losses loom larger than gains”. The general consensus is that the pain of losing is psychologically two to three times as powerful as the pleasure of gaining.
For the people involved in the decision-making process concerning our DT proposal, Loss Aversion plays a significant role. Remember, this is all about perceived risk, not necessarily logical and rational arguments. These could be considerations about finance, technical uncertainty, and general opposition or at least unwillingness in the organisation to change.
In short, any decision-maker will weigh all of these aspects and because “losses loom larger than gains”, the safe bet is often to do nothing.
How can we get around this?
The simple and honest answer is we can’t. Instead, we simply have to accept that Loss Aversion plays a significant role in any DT project. Accepting this essential part of human nature and learning to play around it is the key to get something happening.
We offer three core ideas, that are all baked into the business model of Enuda, and which helps us counteract the inevitable effects of Loss Aversion.
IDEA #1 The licensing model of Ignition
The modular and extremely transparent licensing model of the Ignition platform helps to reduce the perceived risk on the client-side. The model allows us to start small, test something and let the client experience first hand how it is to work with Ignition.
Additionally, the fact that anybody can download the entire Ignition platform for free and play around in a 2-hour limited version is likewise both unique and convincing. It reduces a lot of risk on the client-side because we can offer to test something without the client having to commit to some more considerable license costs.
IDEA #2 Agile principles
Our entire Modus Operandi is rooted in agile principles, which among other things mean:
- Strong focus on building working software instead of long specification processes
- Prototyping and adjusting as a work method
- Responding to continuous change over following a strict plan
In a situation where specifications for solutions are both more complex and more ambiguous, it is both less risky and more efficient to use prototyping as a working method. Create a simple yet convincing prototype fast and allow the end-user to see how it could work. Everybody understands and acknowledges the limitations of the prototype – that it is not the full functionality, and in our experience users appreciate this interaction as early as possible. We split our work into short sprints. The duration is usually not more than one to two weeks, and we keep a strong focus on delivering output from each sprint.
IDEA #3 We take the risk!
This one is probably our most potent weapon to counteract the effects of Loss Aversion. And it is equally unusual in the industry. We believe so much in both the capabilities of the Ignition platform and our skills to build something valuable that we are willing to offer a prototype free of charge to the client.
My experiences from consulting companies, in general, is a relentless focus on “bill hours to the project”. For whatever reason, companies focus on selling close to 100 per cent of all time produced, and therefore the willingness to try things is virtually zero. I believe in a different model, where we, as a team, invest upfront in building both a relationship with the client and demonstrate how Ignition can create value. The easiest and most efficient way to do that is simply to make something.
Combining the attractive licensing model with agile principles and especially the fact we are willing to make an upfront investment helps us bypass the innate human tendency of Loss Aversion. It does not remove Loss Aversion (not possible since it is an innate human behaviour), but it reduces the perceived risk by the person in the other end. The below video is an example of a project, where we used these principles to convince the client about what is possible in Ignition. They bought into the idea and we did this small project.