Many agencies of the US federal government, including across the military, follow a procurement policy that goes by the name Lowest Price Technically Acceptable (LPTA). The rationale behind this policy is for the government to select the lowest cost provider among all suitable providers for any IT project it wishes to undertake. However, it almost always backfires. Here’s an illustration that explains why.
Let’s say you want to purchase a bag of apples, and you have three choices: one bag costs $10, and every apple in the bag is crisp, fresh, and delicious. One bag costs $2, but you can see that several apples in the bag are spoiled. The third bag will set you back $5, and while the apples in this bag aren’t exactly spoiled, they are getting soft and you can tell they’ll be mushy and starchy when you eat them – and you’d better eat them all right away.
If you follow the LPTA approach to buying apples, you would meet ahead of time and decide that for apples to be technically acceptable, they should not be spoiled. So sure enough, you end up selecting the $5 bag of apples. You get it home, but your kids take one look and refuse to eat them. After all, they’re mushy! So they sit in your fridge for a few days until you throw them out.
On the other hand, if you had purchased the $10 bag of apples, your kids would have eaten them all – and you and the spouse would have had some too. After all, they were crisp and delicious. Sure, the bag cost twice as much, but you got no value at all out of the $5 bag. In other words, $10 bag has the best total cost of ownership.
I see this same pattern repeat itself time and again across the government, and many other organizations, either private or public sector, who have a similar purchasing policy. If you choose the lowest cost option among all the technically acceptable options, you will inevitably end up with the option that is just barely acceptable – the one that nobody really wants, but just crosses the line.
This argument also applies to hiring people. If you always choose the least expensive person who can do the job, you’ll end up with people who can just barely do the job. That’s no way to run a business!