The Price of a Specialist Skill

Having a rare skill means that a small increase in demand may translate to a large increase in the the rate your work is valued at, the rate you can charge. If so, focussing on that specialism should lead to greater profits, right? Maybe it can, but there are other forces at play. To demonstrate this, here is the story of a (fictional) thatcher and his business. Disclaimer: I've never been involved in the thatching business, but I've seen a roof thatched slowly, day by day. And believe me, it takes a long time.

The Story of the Thatcher and the Cottage-Owner

The thatcher lives in the countryside. He doesn't spend all his time thatching, in fact, most of his work is joinery for a local farm. But his own house is thatched, and he has kept his thatching skills fresh.

The houses nearby now mainly have tiled rooves, the mark of industrialisation increasingly stamped over the houses. But one cottage at least still has a thatched roof, and it inevitably needs repair from time to time. The cottage-owner has not lived there all his life, and is certaintly no expert on thatching.

One day, a storm damages the roof of the cottage: part of the surface is blow off, and some parts look susceptible to rain. The cottage-owner realises he needs his roof fixed, and goes out looking for someone to help. The first people he finds are tilers: tilers are plentiful and local in this landscape.

The first tiler replies: "We can't fix a thatched roof. We'd have to tile this for you. We'd have to start from scratch, and it will cost a lot of money." The cottage-owner goes to find another.

The second tiler replies: "Sorry, this roof is thatched. We can remove the thatching and tile it, but it will cost a lot of money." The cottage-owner goes off again.

The next person the cottage-owner stumbles across is our thatcher. The thatcher looks at the roof and says, "Yes, I see the surface damage." He investigates a bit further: "Let me look inside … ah, some damage from rodents." At this point he uses his own judgment to conclude that he has investigated the situation to an appropriate level, and presents his findings: "It will not be easy to fix, but I have the skills, and this is my day rate. It is moderate, if not cheap." The cottage-owner decides that the thatcher is the best person to help.

The thatcher makes progress on the roof, and  for a while, everything is fine. Then, as he tears up the damaged thatching, he realised why some part of the roof got so badly damaged in the storm: the beams underneath were rotten. He describes this situation to the cottage owner, and that he'll need to hire help from the farm to fix it. "I know how to do this, but your roof will collapse soon if it is not taken care of."

"But… I can't afford to pay more, I was hoping to be able to patch up the damaged part of the roof." the distressed cottage-owner explains.

And so, the thatcher is caught in a dilemma: does he continue to apply his specialist skill, which is now revealed to be suddenly less valuable than before (the amount of work has increased, but not the money paying for it); or does he tell the cottage-owner that he would be better to have his roof removed and rebuilt (possibly tiled), and lose this business forever? There is not even the possibility of finding another thatcher, because there are no more in the area. The cottage-owner, it turns out, does not want to "waste" the money invested so far, and so the thatcher continues.

The thatcher hires two farm workers, without whose help he could not hope to fix damage of this scale. Slowly but surely, he rebuilds and rethatches the roof, encountering more underlying damage along the way. Eventually it is complete, finished to the best of the thatcher's ability, but at great expense to the him, and at great sacrifice to his joinery work.
What is the the problem solving thinking behind this, and what is real economic situation?

The goal of the cottage-owner was to stop his roof leaking in, even if he believed his goal to be to rethatch the roof. The goal of the thatcher was to provide a means to stop the roof leaking in, which in his case he could do by thatching. We'll assume that the goal of the thatcher was not simply to rethatch a roof, as much deeper problems emerge when the goal of both supplier and customer is to apply solutions in search of a goal. (You could re-think this in a less utilitarian way if you include the aesthetic value of a thatched roof.)

The problem the cottage-owner observed was storm damage. The problem the thatcher observed was more complex, due to some underlying damage. The problem neither saw, nor could see, was structural damage. (Please forgive me if the thatching example here is tenous, as I disclaim knowledge of the technical skills here!)

The initial chosen solution was to rethatch the roof. This made economic sense until the point when deeper structural problems were found. Here, the thatcher is now well aware of the dilemma: to abandon or to subsidise his customer. But what he misses is the application of the sunk cost fallacy: the cottage-owner not wanting to "waste" the time and money invested.

And therein, I believe, lies the true price of a specialist skill: that without being able to refer your customer to alternative providers, it may become at some point economically rational to abandon them, but to do so would significantly impact the customer's situation, and may trigger arguably irrational, but (due to their origin in human nature) unavoidable negative consequences. The thatcher would certainly have good reason to believe that a half-finished thatched roof in the area would not do much good for his reputation as a thatcher.

What solutions can be applied to improve the situation?

Some of these problems can be tackled more-or-less directly. If the thatcher had ensured that the cottage-owner understood that the true total cost could be as high as having half the roof rethatched, then rebuilt from scratch, the risk of being financially squeezed would have been removed; but due to our habit of treating estimates as commitments, this may have been as likely or more to push the cottage-owner to having his roof tiled, even if that would have been a more expensive solution and less desirable solution. Sadly, our current educational system does a poor job of teaching essential knowledge of statistical variation, so it falls upon every software developer to educate their clients on the matter.

Then there is tackling the sunk-cost fallacy. Unfortunately, while that is sometimes easy, it can be as hard to break in programming as it is in poker. More significantly, breaking your own logical fallacies is limited only by your own willingness to challenge your own assumptions; helping your customers break their assumptions is another level harder, and not something they will always want to pay for, even if they need it. (From experience, this is not an uncommon situation.)

What are your thoughts?

Have you been in this situation? Does any of it resonate? Are there faulty or unstated assumptions in the story which means it can easily play out a different way? Have you encountered other problems, or do you have other solutions? All ideas are welcome below.

Updates

I have edited the conversation around the initial investigation ("The next person the cottage-owner stumbles across is our thatcher…") to clarify some of the terms of the arrangement (the meaning is unchanged).
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5 responses
Well, maybe it was a really good thatcher but certainly not very skilled in running thatching projects and hence is punished by the market and driven out of the business. There are several ways how he could have avoided the situation or softened its impact:

- Spend a bit of time and energy to assess the damage first, maybe charging a small fee. Essentially, as I understand, the owner had a choice of re-thatching the roof or opting for tiles instead as a substitute. The decision would depend on the economic expediency and the information provided as part of the initial assessment would have had value to the home owner in its own right.

- Once the contract is signed it's not a matter of choice for the thatcher whether to continue with repairs on own expense, it a legal matter that can be in-forced by the cottage owner through court.

- The thatcher could have bought professional indemnity insurance to delegate the risk to a third party.

- The thatcher could have signed the contract on time and materials basis, explicitly leaving the risk of additional work with the cottage owner. In this case it would only be right for the thatcher to let someone else assess the damage for the customer to avoid the conflict of interests.

- Finally the thatcher could have done the work on project basis charging more for the risk he takes and then hope that over a series of engagements he will still be able to make profit. As a variation he could have specified a contingency within his initial estimate agreeing with the customer that the contingency can only be exercised based on customer discretion should additional work becomes apparent upon stripping.

The problem here is lack of generic project management skills and experience on the thatcher's side and specifically estimation, contract and risk management.

— John Stern
John, thanks for your detailed reply. Sorry I could not respond sooner. I realise that my writing was imprecise in places, so I've edited the story very slightly to describe the situation better.
To clarify: the thatcher in the story did actually do some investigation upfront. I've changed the wording slightly to emphasise this. The problem in general, though, is how do you know when you've done enough risk assessment? The only way to eliminate _all_ risk is to actually do the project, but that is clearly way beyond the point of diminishing returns! But doing _no_ upfront inspection is flagrantly reckless.

Also to clarify: the thatcher did in fact work on a time and materials basis. However, I only vaguely alluded to it, and I've improved the wording again. It's interesting though that you assumed it was done fixed-cost-and-scope - I suspect that is the default situation people assume.

I'm interested by your suggestion of using professional indemnity insurance - how would the thatcher have used this? Can it be done in a win-win, none-confrontational way?

Finally, while I've included enough detail to describe a "full" project, the problem I wanted to emphasise was how (given both parties realise they are partially through a project of questionable value for either side) do they to resolve it in a mutually satisfactory way?

No matter how experienced the thatcher, or how carefully he manages the risk, there will always be a project lurking out there he had no way to prepare for. Improving at your job means being caught out by more difficult problems, as the easy ones you handle almost intuitively.

— Ash Moran
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