Fighting Blindfolded or Informational Asymmetry in Procurement

Information asymmetry is one of the most underestimated typical problems in procurement, especially in the IT categories. Most sourcing discussions focus on pricing, negotiations, supplier competition, or contract clauses. Yet many procurement failures originate much earlier — at the information level. The fundamental problem is simple: one party knows significantly more than the other.

In complex categories like IT procurement, suppliers typically possess far greater visibility into technical sophistication, implementation risks, scalability limitations, support effort, integration dependencies, pricing mechanics, and the real economics of delivery. The buyer, meanwhile, often makes decisions under conditions of incomplete visibility. This creates a structural imbalance long before negotiations even begin.

Adverse selection

One of the classic forms of information asymmetry is adverse selection. This occurs when the buyer cannot properly distinguish between strong and weak suppliers before contract award. In public procurement practice, organisations often assume that competitive tendering automatically solves this problem. In reality, competition alone does not eliminate informational imbalance.

Weak suppliers can appear highly competitive during tenders because they aggressively "low-ball" costs, and overpromise capability. Real costs are then recovered later through annual price escalations, change requests, proprietary technology or support dependency.

Stronger suppliers, on the other hand, frequently price risk more realistically, disclose limitations more honestly, and allocate larger budgets toward governance and delivery capability. Ironically, this can make stronger suppliers appear less commercially attractive during evaluation.

This is one of the reasons why procurement maturity cannot be measured through “savings” alone. A sourcing process that produces the lowest initial price does not necessarily produce the highest long-term value. In fact, aggressive savings targets can unintentionally amplify adverse selection by systematically rewarding suppliers willing to hide future costs or risks.

SaaS market specifics

The SaaS market amplified this problem significantly. Many companies still approach SaaS procurement as if they are buying commodities, while in reality, they are entering long-term commercial ecosystems controlled largely by the supplier. SaaS vendors often control pricing visibility, usage metrics, renewal structures, upgrade logic, roadmap transparency, and technical dependencies. The customer frequently lacks sufficient visibility into the long-term cost structure of the relationship.

Moral hazard

Information asymmetry does not disappear after contract award.

In many cases, it becomes even more problematic. This is where moral hazard emerges. Once dependency increases and switching costs rise, supplier behaviour becomes more difficult to monitor. The customer cannot fully observe the supplier’s effort, internal staffing quality, prioritisation decisions, or cost optimisation behaviour.

Typical symptoms become familiar very quickly: deteriorating service quality, excessive change requests, declining responsiveness, hidden resource substitution, annual price escalations, or steadily increasing complexity. The buyer eventually discovers that the contract did not eliminate uncertainty. It merely redistributed it across the relationship lifecycle.

Principal-agent problem

Another important dimension is the principal-agent problem. Information asymmetry does not only exist between suppliers and buyers. It also exists inside organisations themselves. Consultants, integrators, advisors, internal IT teams, and even business stakeholders may pursue objectives that differ from those of the organisation as a whole.

• An integrator may maximise billable hours instead of implementation efficiency.

• A consultant may promote technology from a strategic partner rather than the most suitable solution.

• Internal teams may resist transformation in order to preserve legacy systems, processes or controls.

• Business users may bypass governance entirely through shadow IT or decentralised SaaS adoption.

  
  

In all these cases, the “agent” acts on behalf of the “principal” while operating under different incentives.

This becomes particularly dangerous during digital transformation programs because complexity itself increases informational imbalance. The more technologically complex the environment becomes, the harder it becomes for non-specialists to independently validate supplier claims, implementation assumptions, or future operating costs.

You may attempt to solve these problems through excessively detailed contracts. Unfortunately, this approach has limits. IT procurement increasingly operates under the conditions of uncertainty, rapid technological change, evolving business requirements, AI disruption, and incomplete visibility into future scenarios. This directly connects to the theory of incomplete contracts.

It is simply impossible to fully specify future integrations, business requirements, regulatory changes, technological development, etc., inside a static agreement. Contracts inevitably leave gaps, and those gaps create space for renegotiation, dependency, and opportunistic behaviour.

Procurement = Managing the imbalance

This is why mature procurement professionals focus less on contractual perfection and more on governance capability.

Strong procurement is not about eliminating uncertainty.

It is about managing informational imbalance more effectively than others. That usually requires a combination of supplier due diligence, benchmarking, phased implementation, proof-of-concept validation, KPI structures, SLA governance, incentive alignment, relationship management, and adaptive sourcing strategies.

Ultimately, one of the most important procurement questions is not “Which supplier is cheapest?” but rather “What does the supplier know that we do not?”

That single question fundamentally changes the entire game of sourcing.