As a business leader, you’ll often find yourself in the position of working with external subject matter experts (SMEs) to supplement your team’s knowledge base, or help you with a particular task that your team isn’t built to complete on its own.
These SMEs are often critical and can be helpful in many ways: they can help you find the right information to make a decision, or point you in the right direction when investigating a problem. But often, we over-rely on them by letting them make decisions for us.
SMEs are not properly positioned to make a decision or solve a problem for us. We should keep them close at hand in the right circumstances, but it’s a mistake to hand them the rudder. They’re poorly-positioned to take charge for 3 reasons:
- The expert may feel they need to have a rapid answer
- The expert may be misaligned
- The expert has the “curse of knowledge”
The following story outlines my own experience working with a corporate lawyer to help me with a real estate business, demonstrating that SMEs can be misaligned even when their intentions are to help you as well as they can:
An excerpt from Stop Guessing: the 9 Behaviors of Great Problem-Solvers
A more interesting kind of misalignment is the risk-reward calculus for the expert and your organization. Often, SMEs are fundamentally conservative: their reputation depends on not screwing something up. A hundred happy customers lead to referrals, but a single very irate one can kill a career. It is critical to avoid the risk of being blamed if anything goes wrong.
Isn’t some risk-aversion a good thing? Yes, if the risk and reward are all in the same place. But most SMEs are positioned to be conservative by spending your money.
A few years back, I was investing in a couple of single-family homes for rent. It’s quite common in this situation to set up a Limited Liability Company (LLC) to protect your other assets in case something goes wrong with these investments. Someone might trip and fall down the stairs in one of your rental homes and then sue you, wiping out everything you own. Often, people set up separate LLCs for each property they own, so if there’s a problem in one, it doesn’t impact any of the other rental homes.
When I was structuring my investment, I instructed my lawyer to set up one LLC for both rental properties. The reason is that I hate paperwork, and two LLCs sounds like twice as much paperwork as one! I also did my research on the likelihood of being sued, and it turned out to be very small. As it happens, I did this research by talking to a friend who is an industry expert. The calculations we did showed I was over 1,000 times better-off on average just having both in one LLC.
The lawyer was of course very insistent that I create two LLCs, and it took a lot of fortitude to prevent that from happening. Luckily, I’ve had some experience at effectively managing experts. The lawyer would have been paid twice as much for two LLCs, but I don’t think this was the motivation. It’s a more conservative move, but no business person should make the decision to have two LLC’s in this situation. You can imagine that if the lawyer sets up 10,000 of these and one goes wrong, that’s the story that gets reported: he might have gotten “burned” had he recommended a single LLC for multiple houses, and his client lost both houses in a lawsuit rather than one. It’s easy to be conservative with other people’s money: don’t ask SMEs to make business decisions for you without stepping back and considering a possible conflict of interest.
For more information about Stop Guessing, please click here.