Adverse selection applies to those who manage law departments. First, however, a short explanation of the term. One example of adverse selection is where more people who need insurance buy it and healthy people forego it. An incentive system drives out the good and leaves in the pool the worse (See my posts of Jan. 1, 2008 on agency theory and adverse selection; and July 14, 2006 on poor law firms driving out good law firms.).
Think about law departments. If you impose too-tight restrictions on your law firms, the better firms may decline to represent you while the worse or needier firms will continue (See my post of Nov. 27, 2007 on when law firms fire Fortune 500 companies.). If you do not pay your lawyers at least around the going rate, your better lawyers will move on, leaving you with lesser lawyers. If you charge back inside lawyer time, client groups that have few legal needs may not pay the fees, yet the troubled groups may not have the funds to hire you. If your technology is not interesting, up-to-date, and appreciated, over time adverse selection will leave you with weak IT support (See my post of Aug. 27, 2005: less than one IT staff for every 24 in-house staff.). Adverse dispossession anyone?