Market and Social world

A paper by Gill Seyfang summarizes the intent of the UK government that time banks serve: “the need for informal mutual support, volunteering and community self-help, to grow strong communities and build capacity for regeneration among deprived neighborhoods.” But I was still wondering, why time banking works.

A concept from Daniel Ariely’s book “Predictably Irrational” offers some insight. Ariely argues that we live in two worlds simultaneously: The “Market World” where everything is rooted in the exchange of money, goods, competition and cost/benefit analysis; and the next is the “Social World,” where we do favors for other people, volunteer for charity and community organizations. Ariely has a useful example to illustrate what happens when you mix the market world with the social world: A day care center was discontent that parents picked up their children late. They introduced a fine to solve the problem, but instead of reducing the rate of tardy pickups, the rate rose up. Why? By introducing a fine the day care center switched from the “Social World” to the “Market World,” and the parents felt it was ok to pick up their children late because they pay for it.

My experience with Non-Profit Organization has echoed this result: when you start paying volunteers for basic activities, their motivation drops sharply. So, if time credits serve as a currency, do time credits introduce the “Market World” into the volunteering sector? It seems like the contrary is the case, and time banking could serve as an engine for mutual exchange and co-creation of services within the “Social World.”

Goals and Results of time banking

First, time banking recognizes that everyone is equally capable of making valuable contributions to the community. This empowers members of the society who are excluded and feel empowered by sharing their skills, resulting in higher self-confidence and well-being. A study of the University of Wales concludes that time banking lead to increased volunteering and engagement of citizens.

Second, it has a positive effect of “knitting together” community organizations and people. It creates social networks for people and organizations and increases the spectrum of opportunities.

Third, the co-creation of tailored services and help between people and organizations solve problems.

Obstacles and constraints of the model

Seyfang summarizes in her study the obstacles of time banking. People have problems to “getting people to understand the difference between Time Banking and ‘traditional volunteering’ as the coordinator describes it. While members like to give time, they are reluctant to ask for help themselves.” There are not enough spending options, and you need an office and a full time staff to facilitate the time bank. Finally, government regulations, institutions and social policy is sometimes incompatible with the time banking model.

I want to focus on the last point: Time banking may be an instrument to spark interaction within a community that faces social disparity. However it cannot replace social policy like affordable housing. Government needs also to re-think the top down approaches of social policy, which treat citizens like “problem customers.”

To ease the exchanges between people, some cities, like Lower Mainland Vancouver, are using web platforms to facilitate the exchange. Anyhow, I am still skeptical about this idea, but it seems worth observing its development in the future.

OKCupid gathers personal information based on community-submitted questions that users answer. This allows the company to better match couples based on the unique values of each person. Their slogan is: “We do math to get you dates,” which includes going so far as to create decision charts that visualize the formulas leading to love (or at least a date) for various individuals. With their data, OKCupid reveals information about the effectiveness of various romantic approaches, male and female attitudes and biases, insights on what behaviors result in conversations, behavioral changes based on age, and a variety of other findings.

From a research perspective, OKCupid is a fascinating subject. I’ve references them before in a post about labor incentives. Today’s post is about the potential for data-enabled business models and new markets for user data. Even more insightful than some of the racier findings from OKCupid (such as the sexual appetite of the average 40-year-old Floridian woman), user activity on this site generates a tremendous amount of data that extends beyond the realm of dating and could be useful to other groups and industries.

For example, OKCupid is able to generate detailed demographic and geographic data about political views, social issues, and public opinion on issues ranging from contraception to First Amendment rights to acceptable means of protest.

What OKCupid is doing not unique—often the collection of data can yield new insights and provide additional contexts beyond its intended purpose. As more and more customer and user processes become digitized, what we’re going to see over the next few years will be the growth of data-driven strategies that gather, interpret, and present data for new uses and new audiences. The abundance of data and relative scarcity of reliable sense-making information will create a flourishing market for data and analytics. In a recent nGenera survey we found that already over 40% of respondents say that data from external sources leads to competitive advantage.

Two years ago I wrote about how the idea that online social networks will make money selling eyeballs (advertising) or products is missing the entire value proposition of a social network. The real opportunity is in harnessing the rich data that is created by those participating in conversations and interacting with each other. Companies that have social platforms are increasingly seeing a business model around providing free services and aggregating anonymized customer and user data for sale.

OKCupid has a very open approach to data, but it’s easy to imagine a variety of groups—lobbyists, politicians, economists, sociologists, and so on—that might be interested enough in this type of information to pay for it, especially if presented in interactive charts that let the user filter based on factors such as age, race, gender, employment, and so on. If you think about the possibilities available when data extends beyond the realm of online dating, you see that companies in a variety of industries could use customer-generated interaction and polling data to gain a deep understanding of what drives purchasing behavior, brand loyalty, and even the desire for new products.

There are a lot of reasons for this success – but the one I want to focus on today is around the strategic use of purchasing thresholds. Like Woot.com, Groupon.com applies a maximum threshold to create urgency for customers – buy now before it’s too late! But the more interesting thing Groupon does is use minimum thresholds - the offer is only valid if enough people sign up.

There are two things that make this interesting. The first, and more obvious, ties to viral marketing. It’s typically hard for a company to “make” a marketing message, or sales offer, go viral. But by putting a minimum threshold on the offer (i.e. only valid if 50 people sign up), Groupon creates a natural incentive for interested customers to promote the offer through Facebook, Twitter, the blogosphere, and other channels.

The second ties to the ability to test price discrimination strategies. In these early days, Groupon members represent new customers for most merchants using the platform. In a typical case, if a company wants to test offering a discount to draw in new customers, they do so rather blindly. If (say) only 2 people take you up on the offer, it probably wasn’t worth the effort – let alone the cost if you have to communicate the message through traditional media channels. The minimum threshold gets around this – merchants can select whatever price / quantity combination makes sense for them, and walk away (without paying a penny) if the threshold isn’t met.

There are many other interesting aspects of the Groupon story I’ve been following in our research (you can read about a couple of other companies I’ve been watching closely here), as well as interesting challenges and opportunities the company will soon have to deal with. Given that Groupon has been so successful in using the Web 2.0 to create business around collective buying (while hardly being the first to have tried), they are definitely worth paying attention to.

1. At an individual level people suffer from cognitive overload. As people get busy and collaborate across a multitude of projects, the brain gets distracted, and the quality of the output suffers. In short, one person can only do so much.
2. At a project level where you run into a situation of ‘too many cooks spoiling the broth.’ In short, only so many people can do one thing.

If you put the two of these together, the worst-case scenario is that in an individual could join a project as the Nth person who ‘spoils the broth,’ while the time they dedicate towards doing so distracts them from their other work – which, continuing the cooking metaphor, leads them to burn the toast as well.

The problem is, it’s very difficult to apply a scientific approach to measure exactly how many people per project, and conversely how many projects per person is optimal. The most well-known study around this is Dunbar’s Number, which sets “a theoretical cognitive limit to the number of people with whom one can maintain stable social relationships” at 150. In terms of collaborative overhead, Dunbar speculates that “as much as 42% of the group’s time would have to be devoted to social grooming.” Now that might be acceptable for the hunter-gatherer societies described in Dunbar’s anthropological study, but I would imagine this amount of “grooming” time would be extremely unproductive in an enterprise context.

In his book Collaboration, released this month, Morten Hansen, a professor at the University of California, Berkeley and INSEAD, identifies two costs related to enterprise collaboration. The first is the opportunity cost collaborating (i.e. the opportunities individuals could have been pursuing had they not been collaborating), the second is the cost associated with fostering co-operation. In both cases, as the number of projects or the number of individuals grow, so too does the potential for diminishing returns.

At the project level, I feel as though most people have general understanding that there is a certain point at which there are simply too many stakeholders and collaboration breaks down.

However, at an individual level, I think we are less cognizant of – or less willing to admit – our own limitations. I’ve seen many cases where an enthusiastic and eager collaborator was clearly overburdened and well past the point of optimal effectiveness. Incidentally, my personal hypothesis is that this point of optimal effectiveness is a fairly small number of projects per person. My main “proof” for this is anecdotal, but I notice that the busier one is, the more likely they are to quickly skim a topic and provide feedback in short (sometimes valuable) chip-shots without contributing to a better in-depth understanding of the topic space. Worse, in some instances perceived value comes from dissenting, so instead of constructive feedback, you get wildly varying opinions with no one working towards a coherent solution.

On the subject of cognitive overload, a recent Deloitte report notes, “Even a Sunday newspaper contains more information than the average 17th century citizen encountered in a lifetime. Add to that the stress of decision-making amidst uncertainty, corporate change, and a tidal wave of tasks. Never before in history have workers been asked to absorb and make sense of so many data points.” One more sensational study even suggests that information overload is more damaging to the brain than smoking pot. I think we can certainly make an argument that where collaboration is most likely to break down is at the individual level.

This brings up another point: What about the virtues of solitude? Are we losing our capacity for individual decision-making? Moreover, who’s actually doing the deep thinking needed to solve complex problems? We talk about the multitasking Net Gen brain that is not actually doing multiple things at once, but rather switching more efficiently. Does constant switching allow for deep analytic thought?

So what is the solution? Overall, I’m wondering if there’s a Dunbar Number for the optimal number of simultaneous projects per person (small and large). How is this number affected when you take into account broader ecosystem participation and places where quick feedback from multiple participants is actually desired over in-depth participation?

As a start, I think collaborative technologies can help by streamlining different types of feedback. So, for example, a project can have 1,000 collaborators if they are providing feedback via a prediction market. Conversely, if only three people are collaborating on a document, perhaps a wiki is most effective.

One possible model for managing cognitive overload is letting individuals self govern – i.e. everyone decide where they can add the most value. Of course, this also raises many issues, including: people, especially in high-performance cultures, tend to overextend themselves; people tend to pick project that interest them, but that may not add the most value to the organization; and people tend to be social and so will gravitate towards the same projects, thus contributing to project inefficiency.

In order for this to work, you would have to architect a system that would allow people to allocate their own time in a structured way (similar to the Freiburg budget example). I’m envisioning a system where resources are finite but can dynamically allocated; where employees are guided by decisioning logic that identifies the projects that provide the most value to the organization; and where limits are set that prevent projects from being staffed by too many people and that stop people from taking on too many projects.

As an example, a recent study by Skidmore economist Sandy Baum and the College Board, approximates the real lifetime value of a college degree at about $300,000. This estimate is based on the assumption that those with college degrees earn an average of $20,000 more per year than non-graduates, and takes into account the average cost of tuition and books, as well as annual inflation over a forty-year career. This estimate is down from previous calculations of an approximately $1 million payback. Mind you, this is for undergraduate degrees. It begs the question: What about more specialized and more expensive graduate degrees (expensive both in terms of tuition and opportunity costs)?

MBA degrees are a specific point of contention. While conventional wisdom will have people flooding into MBA schools, there is also a sense that maybe professionals should seek to upgrade through less conventional, more productive means. Indeed, the sheen associated with an MBA is tarnished by the fact that many of the financial decision makers that perpetrated the economic downturn were themselves alumni of some of the most respected business schools.

Some recent interviews I’ve done seem to corroborate these findings. Fast Company staff writer and author of Generation Debt, Anya Kamenetz says:

“I’ve never been an advocate of people going back to school and incurring large amounts of educational debt just to have a degree. [...] I’m very interested in what the long term developments are going to be because I think that higher education has been resistant to really fundamental types of innovation and change for far too long. We’ve seen information technology sweep every other industry and raise productivity and raise the potential of what you can accomplish. I think that in higher ed, they’re still working off a 14th century model. It’s lecture classes and it’s seminars and it’s educational requirements that don’t necessarily match where the jobs are these days. So, I think that you’re going to see a lot more students and families re-evaluating the other options out there; whether that be online education, vocational programming, certification programs, or programs that are run by employers. I think it’s actually going to be a fantastic area of growth for the next decade and a half or so.”

Penelope Trunk, author of Brazen Careerist is more colorful in her analysis of the value of graduate programs:

“People are going to grad school for stuff that has no bearing on the workplace. It’s not like we have more critical thinking because somebody knows the history of the little War of the Roses, right? And so, who cares? I don’t see any corporation placing a premium on any kind of graduate degree, except a top 25 business school degree. I mean most MBAs are from shitty schools so they don’t place a premium on that. Most law schools are shitty and people have to go into some other profession besides law because their degree is so bad. If you get a Masters in French and then try to get a marketing position, you’re penalized. You’re actually penalized because you look like you don’t have a clue about how to manage your life because you just spent four years learning French and you’re not using it. To me that just screams obsessive with details, scared to go out into the job market, and purposeless. I mean, I just don’t think anyone is placing a premium on graduate degrees.”

From what I’m hearing, it seems as though college age students are making important decisions about where they’re going to invest education dollars. Some of them are backing into junior colleges or community colleges; others are choosing to forgo higher education because of their financial situations. This would be especially true if their Boomer parents are now struggling with layoffs or delayed retirement. On the demand side of the equation, numbers from the U.S. Bureau of Labor Statistics suggest that overall, the United States will need 18 million new college degree holders by 2012 to cover job growth and replace retirees but at current graduation rates, the country will be six million short. Will this trend towards delaying or abstaining from higher education reinforce the impending knowledge gap among entry-level workers? Some interesting food for thought…

As part of a project I’m working on that deals with talent issues in the current recession, I recently had a chance to chat with Cali Yost, CEO of Work+Life Fit and Fast Company expert blogger. Cali talked to me about flexible alternatives to mass layoffs, whether or not there’s still a war for talent, employee engagement in recessionary climate, and the need for a new enterprise mindset around agile talent and the execution of talent strategies:

Can you give me a little bit of background on Work+Life Fit and what you guys do?

We are a business-based, work/life flexibility strategy consulting firm. We develop flexibility strategies which are a way of operating. That’s different than viewing work/life flexibility as a benefit or a policy. It is a way of being; it is a way of operating in today’s world. It’s a business strategy that allows an organization to respond rapidly to challenges but also opportunities. We help companies use flexibility to manage resources, manage costs, service clients, and manage talent in order to be competitive and agile. So, it takes work/life flexibility out of the HR sphere and puts it into the business management sphere, which is where we believe it belongs.

Why is it so important that work/life flexibility be more than an HR issue?

If it’s an HR policy, a program, a benefit, it’s not agile; it’s not part of the day-to-day decision-making process of the organization. And that’s what we do. We develop it so that it’s a strategic lever; it’s part of the management process. HR is a partner in the process, but it resides in the business. HR is there to support it. HR is there to make sure the systems align. HR is there to make sure that it’s being accounted for correctly and that the benefits are aligned correctly. But, HR is not there to be the executor of the strategy; it’s not. The execution of a flexible strategy happens in the business unit, and that’s where we need to shift our mindset on this.

How do you make this happen? What’s the process for moving to a more strategic, enterprise approach to workforce flexibility?

Essentially, what you need to do is you need to brand it from the beginning as a business strategy. I know it sounds really simple, but it actually doesn’t happen. Most flexibility strategies are branded in most organizations as a policy for women. As a result, they are not seen as a core way of operating; a core business model. It’s seen as a nice thing to do to keep moms.

What about the Gen Y, or what we call the Net Generation; aren’t they a factor as well?

I will say that’s a driver. That’s becoming more of a driver in organizations. It’s one of the reasons organizations are looking at flexibility again because it’s such an expectation of young employees. Historically, the target has been moms. The more recent driver that’s getting flexibility back on the radar screen is ‘this something we need to do now to try and get young people to work here and keep them.’

You’ve written a lot about flexible downsizing, the idea that instead of large scale layoffs, companies can look at flexible options such as shorter work weeks, salary reductions, job sharing, forced furloughs, and so on. In your column on Fast Company, you said one of the main reasons for the wholesale layoffs is that financial analysts reward companies for this type of cost cutting without realizing the true cost of layoffs. What tradeoffs are they missing in their analysis?

They’re not understanding the cost in engagement. For example, when you cut a workforce, you impact morale; you make people very afraid; you challenge their loyalty to the organization – all of those things impact engagement. Reduced engagement directly impacts the bottom line.

What are some of the measures of engagement? Well, some of the core measures are: your desire to stay with the organization; your job satisfaction; your motivation; your willingness to recommend the organization to another person; your productivity, do you feel like you’re being productive and working smarter and better. Those things are all impacted by a layoff and yet they’re not being included in the calculation of the cost of a layoff.

As an example, if you were to go out to your workforce and say, “We have to save X amount of dollars in labor cost, and there’s a couple different ways we could go about this: We could lay off 20% of our workforce, or everybody could take the 20% cut in pay in their schedule and we could add six unpaid vacation days. This is a shared sacrifice; we’re going to get through this together.” Now, all of a sudden think about how you feel about that organization. Think about how you feel about whether you’re motivated to try to make this work. I would argue that all of those aspects of engagement are maintained, if not enhanced, which again the research shows impacts your bottom line. But none of that gets quantified by these financial analysts. You just don’t hear it.

You mentioned the research shows that job satisfaction and motivation are connected to the bottom line, but it’s hard to put a dollar value on engagement, isn’t it?

It is, and I think that’s the challenge; how do we challenge the financial community to expand their understanding? You know, it’s interesting; there is so much research about the fact that layoffs really do not achieve your goals, and yet that seems to be what our business leaders are rewarded for. I really do believe it’s because the financial analysis modeling is not complex enough to account for the less-easily quantified results of downsizing. That includes increased legal liability because if you downsize and you don’t do it the right way, you’re hit with lawsuits from people who claim they were targeted unfairly. There’s also the cost of paying severance. So there are a variety of things, but my point is there’s a complexity of analysis here that needs to be taken into account, and that’s not happening. As a result, the rewards and incentives are not built into the system to encourage leaders to be more thoughtful, flexible, and strategic around how they reduce their labor cost.

On the flip side, there has to be some additional cost to the flexible alternative as well, right? I mean there’s the time to create, negotiate, manage these types of agreements, as well as the HR costs associated with the care and feeding of flexible arrangements and managing a flexible workforce.

Okay. But my response to that is; that’s why you don’t wait. You do not wait to implement a business-based flexibility strategy in your organization. A year ago we were having this conversation around the increase in energy prices and all of a sudden companies are going around trying to get people to work four days a week or work from home because energy prices went up. If you have a business-based flexibility strategy and energy costs go up; you execute your strategy toward dealing with that. Similarly, when a recession hits, you take the same strategy and you execute it toward that issue. The next challenge could be 40% of your company is purchased by an Asian organization, and now all of a sudden you’re reporting to people in another time zone. Well, you execute against that so that you can have better communications with that group in Asia and you can adjust your hours accordingly.

Again, that’s why it’s not just an HR program or policy. It’s processed based, which means there’s a process that helps figure out what flexibility is going to look like in a particular business given the resources, the people, and the realities of that business. But it is executed in the operations; it’s not executed in HR. So, there shouldn’t be this massive amount of execution overhead around flexibility if it’s already built in. And I have to tell you, downsizing ain’t no trick, it’s no pretty thing or low-cost thing to implement. It takes a lot out of HR, and it takes a huge amount of money. Not so with flexibility, if you have that strategy in place.

What’s the technology/CIO perspective on enterprise flexibility?

Do you think HR and IT talk about flexibility? No. Uh-huh. Rarely are they brought in the same conversation. And that’s why flexibility strategies need to live in the business because all these players need to come together for it to work.

I had a CIO recently tell me he loves their flexibility strategy because it allows him to rebrand what they are doing in IT; meaning it allows him to take what they’re already doing and rebrand it in the context of flexibility. Flexibility provides the context to explain how enterprise technology can provide value, and allows him to help people get more out of it. It isn’t even necessarily an additional investment. It’s just taking what’s already there and helping people apply it.

In one of your posts you interviewed Dr. Cappelli from Wharton – he mentioned one of the reasons companies might opt for layoffs instead flexible solutions is that people are easy to replace. You can fire people and then get them back if you need to.

That’s what we did in the last 20 years. What I thought was most interesting about what he said is that there is a precedent for flexible downsizing 20 years earlier, in the ‘80s. We moved away from it because we moved into a period where the employee-employer contract began to disintegrate, and people were viewed as being easily replaceable. Prior to that, companies tried to hold onto their core talent.

Is there still a war for talent?

We live in a world of rapid change, and my only fear is that a year ago you were struggling for talent, and now you think all of a sudden you have the pick of the litter; you don’t need to care about it anymore. I’m just curious where we’re going to be in a year. Are you going to be looking for people again? Does it really making sense to go into this hire-cut, hire-cut cycle? My feeling is that it doesn’t. I don’t know how you run an organization like that. I think there needs to be a lot more creativity and flexibility because I think those up and down cycles are going to happen a lot more frequently and a lot closer together.

Would you include talent marketplaces and “ideagoras” as part of your flexible work strategy? I’m thinking of things such as Elance and Guru.com for freelance work or InnoCentive and Nine Sigma for R&D solutions.

I did a blog post on my Work+Life Fit blog. I’m sort of musing about the post-recession workplace, and I go back to a model that I originally read about in business school back in the ‘90s by Charles Handy; it’s called the Shamrock Organization. Basically in that Shamrock Corporation you have your core people, and then you have the experts that come in and out of your organization on a flexible basis as you need them, and then you have this third group of part-time workers on the outside.

So, I think that the marketplaces you just described are going to become more part of this flexible management process. But, on the other hand, I also don’t know if you can staff a whole company that way. I think you’re still going to always have that core group; a group of people really committed to that organization’s success and mission, that’s the primary focus. The other expert knowledge you bring in is needed, but may not be 100% focused on that core mission. Having that core partly alleviates the risk of lost organizational memory and retaining key talent

As Charles Handy said, people will move in and out of different categories over time. Meaning, as an employee you may be a core person for part of your career, then perhaps more of an expert or a flexible consultant – a free agent, if you will – for other parts of your career. And so, I do think that’s part of it as well.

I’ve been talking to some more radical thinkers and they’re saying companies could become these miscellaneous organizational entities where you’re much more opportunistic and you can get whatever resources to pursue whatever type of initiative that you see potential in.  It’s driven more by what talent you have and what opportunities are available more than a central vision or mission for the company.

Yeah, I don’t know. Maybe there will be some companies like that. I can see that working in smaller organizations. I find that tough to imagine that in a bigger organization; I just don’t know how you would organize all of that without a core with a mission, a focus, and a vision. I think a smaller organization can sort of operate that way perhaps, but for a bigger company… I think it’ll be interesting to see how it would scale out.

Any final thoughts?

I think it’s important to frame this as another, more flexible model that will not only move us through this recession, but is a way of operating going forward. I also think there are a lot of references here to the next generation of workers, which I know is obviously a very important group of people for corporations. The only thing I would say is, just make sure that when you’re talking about younger employees that you understand that a lot of older employees feel the same way about things. Sometimes there’s a tendency to focus on the next generation, but just make sure you’re always trying to find connections to the broader employee population. It’s not just younger people fearing layoffs or flooding social networks to build leads, circulate resumes, and reconnect with possible employers.

Of course no one really knows how much accumulated wealth there is in the GI and Boomer generations, or how longer life expectancies and inheritance taxes will affect the transfer of wealth, or if the current downturn will eventually empty the Boomers coffers, leaving nothing at all. Still, there seems to be an untapped opportunity in there somewhere.

For companies with Boomer marketing strategies, it could mean it’s time to start thinking about what strategies are needed to ensure that Boomer assets and business stay with the enterprise. At the very least it’s a whole new angle on retention and relationship marketing – call it “inheritance marketing” if you will. I recently came across the term gerentocracy to describe the imbalance of political power between the young and the old. How about geriadvertising for Boomer-inspired advertising?

An interesting article in USA Today talks about how, while Boomers have enjoyed unprecedented levels of wealth; “Households headed by people in their 20s, 30s and 40s have barely kept up with inflation or have fallen behind since 1989. People 35 to 50 actually have lost wealth since 1989 after adjusting for inflation.” This would seem to suggest that targeting Boomers is the way to go.

In the book Workforce Crisis, by Ken Dychtwald, Tammy Erickson, and Robert Morison, the authors discuss the implications of the imbalance of wealth distribution (written in 2006 before the market crash):

“How should companies and governments plan for the shrinking number of young workers, young taxpayers, and young consumers? Most marketing is still youth-oriented (or “youth obsessed”) even though today’s mature adults (those over fifty) control two-thirds of the accumulated wealth in the United States. Boomers will be the most financially powerful generation of mature consumers ever. What happens to marketing and product development when 80 percent of the consumer growth comes from the fifty-plus age group? How will businesses maintain brand loyalty when customers reinvent themselves at forty, sixty, and eighty years old? Will boomers, who have been active spenders in their middle years become more frugal as they mature?”

But, Boomers are moving / have moved out of their key spending years. Tammy Erickson wrote a recent post in Harvard Business, “What Demographics Tell Us About the Economy,” where she talks about how tracking the number of people age 46 to 50 in a given economy can be used as proxy for growth in consumer spending, and how this “big spender” demographic is declining around the world. She says, “This narrower age range, 46-50 year olds, will decline in number in the United States for the next twenty five years, until about 2035, when members of Generation Y will begin to enter this age category.” Looking at this data, targeting Boomer inheritors and Gen X makes sense, but inheritance marketers may have to wait for a while to see the returns.

Regardless of how well- or poorly-informed an inheritance marketing strategy might be, there are definitely Boomer brands out there that are trying to reinvent themselves. Here’s an example from this past year that sparked my thinking on this and made me smile a bit as well. I don’t know if Canadian Club has been thinking about Boomer wealth redistribution, but I have to say the tag line for ad campaign certainly helps make my point. “Damn right your father drank it!” says CC was a cool brand for Boomers, but can still be cool for their Net Gen children. Certainly invokes images of my own dad living out his college years in California in the 60’s.

So what did they do? They took matters into their own hands and auctioned the funds to the highest bidders -  other municipalities who had projects ready to go paid them cash for the rights to the MTA funds (in one case just $.61 on the dollar). The city selling the MTA funds would then be able to take the cash and use it for anything it liked.

Three interesting things about the situation stand out:

• First, the swaps/marketplace itself is quite innovative/creative. An interesting case in optimizing results in a grass roots way. Grade: A-
• Second, the low prices paid for the funds suggest that, in some cases, stimulus dollars are being weilded very inefficiently  (A $.61 price suggests a 39% inefficiency) Grade: C
• Third, the MTA appears to have put the brakes on these swaps. Maybe because of the publicity they generated? Who knows. But cities must now build (invent?) a case for their use, or risk losing them altogether. This seems to create the wrong message and set of incentives. Grade: D 

Essentially, anything that gives an advantage to national companies at the expense of non-national companies is trade-distorting, and thus a protectionist measure.  But during a global recession, it’s very difficult to avoid these actions.  For a simple example, take the auto bailout.  In North America, we assume that the auto industry is “too big to fail”.  But in giving a bailout to GM, Ford and Chrysler, we’re distorting trade – at the expense of German, British and Japanese auto companies.  Naturally, this issue has already been raised.

Now, a note on free trade.  Generally, most economists agree that free trade is good, and protectionism is bad.  Since the Second World War, regional trade agreements and the World Trade Organization have been, overall, reasonably successful in promoting global trade and lowering barriers to trade.  But let’s remember – we still don’t have absolute free trade.  Canada still has tariffs – you can read our official list if you’re that interested.  So although we have relatively “free-er” or “more open” trade than previous periods in history, it’s still not completely free or open, in any absolute sense.

Now as I mentioned, most economists will agree that we need to move towards free trade, not away from it.  Protectionism, and sometimes even bailouts, are often regarded as the “slippery slope” towards deeper recession (or even depression).

What makes this even worse, however, is the retaliatory nature of protectionism.  Just look at the “Buy American” clause in the US stimulus package, which prompted Canadian politicians to start talking about possible retaliatory measures.  Michael Ignatieff warned the US that Canada is a “force to be reckoned with”, while European leaders made open threats that this could spark a trade war.

But is this kind of rhetoric helpful?  Do our politicians really have to talk tough and make threats? 

Words like “war”, “threat” and “retaliate” all have very negative connotations.  The word ‘war’, in particular, is one generally associated with violence and malice.  Is this the kind of discourse we should have between North America and Western Europe, regions that are supposed to be close allies?  Using the term “war” angles this as state-versus-state conflict.  Is this how we want to frame this issue, at a time when global economic cooperation is more important than ever?

Politicians are savvy- they know the power of words (journalists too).  When they need to gather public support for a cause, they’ll often frame it as an us-versus-them issue – note the “War on Drugs” and the “War on Terror” (on a sidenote, I’ve always thought that a barrier to progress on global warming was the term itself – “global warming” doesn’t sound very threatening – who doesn’t like warmth?  Why hasn’t anyone thought of a more threatening term for this?)

When the newspapers front headlines of “Trade War”, it’s likely to create public support for retaliation.  When public support goes up, it’s more likely that politicians will act on it.

So let’s go back to the auto bailout.  Was it protectionist? Yes.  Is protectionism detrimental to global trade?  Of course.  But did challenging times necessitate a bailout?  You could easily make this argument (as many economists have).  In a recession, states will do things like this, and yes, they will be trade-distorting.  But to frame bailouts and stimulus packages as acts of war is only going to make matters worse.

So let’s stop making threats of retaliation, and stop calling this “war” – this isn’t war.  Let’s not blindly assume that free trade is our ideological goal, and that any barriers to it are evil.  Instead, I’d rather see our politicians act with pragmatism, and come to new agreements on how the world can come through this crisis together.

People are already upset over the worsening economic condition.  So let’s choose our words more carefully, before the discourse of “war” causes national populations to villanize one another.

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However, the discussions around growth seem misguided in a new world where virtually all resources are scarce. Due to the banking crisis, the flow of capital has slowed to a trickle. Even after banks are reorganized, it seems that leverage will be used more sparingly, raising the cost of capital for all. Human capital, despite the recent layoffs, is also expected to become scarce as the boomers retire, albeit a few years later than they were planning. All forms of natural resources, including water, timber, oil and minerals will be in short supply, especially as emerging market consumers look for ways to bring up their standards of living.

The reality of scarcity implies that economies will need to fundamentally rethink how they judge progress. It seems that efficiency will be the new mantra. How much more can you get out of what you have? This goes for financial capital, human capital as well as natural resources. While the amount of resources used stays constant (or shrinks) people will need to think of more efficient ways of exploiting them to lift their living standards. The interesting question for us is how the principles of Wikinomics can be applied to help organizations deal with scarcity.

Companies will need to shed legacy business models in order to more effectively use their human and financial capital. The practice of laying off workers in bad times and fighting for talent in good times may be suitable to monolithic and hierarchical organizations, but not the modern 21st century enterprise. Organizations need to become more fluid, agile and transparent to enable more foresight and flexibility in their operations. A focus on collaborative innovation, especially when there is slack in the organization during downturns, leads to gains when the economy picks up.

All in all, the current crisis presents an enormous opportunity to move away from exalting aggregate consumption to embracing responsible management of resources. This requires a major mind-shift, however, the burning platform is certainly there. It seems that along with Obama’s Era of Responsibility the Age of Efficiency is here. The limits of unbridled consumption are now obvious – growth will need to come from doing more with less.

He outlined five objectives for the Forum.  I’ve summarized them below but I encourage everyone to read the full speech, which is a quick read.

First, we will support governments, and particularly the G20, in their efforts to address the systemic risks in the financial systems to stabilize and relaunch the economy. We have worked together with the respective governments to make sure that all relevant issues are integrated into our discussions and that we can create here – midway between the G20 Summits in Washington last November and in London next April – a true global multistakeholder partnership supporting bold but necessary actions and policy changes.

The second objective for our Meeting is to make sure that we look at our world in a holistic, systemic way. The financial and economic crisis is not the only issue that needs a global multistakeholder response.

The third objective of this Annual Meeting is to start a year-long process to help design the systems and institutions that the world needs to really cooperate and to confront global challenges in a much more proactive way.

The fourth objective of this Annual Meeting is to better shape the ethical value base for business, highlighting a clear differentiation between industrial and service companies that provide true value to society and those that make money through paper transactions and speculation. Profit is a major driver of business, but it is clear that it cannot be profit at all costs and that self-indulgence cannot replace reasonable competitive remuneration.

The fifth and final objective of this Annual Meeting is to reconstruct the global economy. Yes, we are in the midst of an enormous challenge but we are also at the threshold of many promising breakthrough technologies, as the strong presence of our Technology Pioneers demonstrates. Today, a great opportunity exists to generate a new wave of economic growth based on technologies, products and services directly meeting societal needs in eco-efficiency, in healthcare, in transportation, in people empowerment and many more.

But the actual deal between the two is less about cash then it is about technology exchange and access to their respective dealerships. Fiat, for example, is keen to bring its line of compact cars to the US, and is willing to trade access to its successful small-car platforms and fuel-efficient technologies to do so. Seems like a high price to pay for real estate, non?

Which brings us to the magic of US car dealerships:

• GM has more than 6,400 dealers in the US.
• Ford has over 4,300 in the US.
• Chrysler (with Jeep and Dodge) have over 3,300.
• And finally, Toyota/Lexus has (just) 1,400 US dealers.
• This works out to nearly 700,000 direct employees across the US dealer network.
• And with annual sales of 14-15 million new car sales per year, this works out to about 750 units sold per dealer.

For the most part, these dealerships operate as single-brand sales outlets (proprietary models one might say). Subsequently, the framework for sales across the US leaves the industry with a heavy, and somewhat immoveable burden of dealers that contributes to their inability to restructure.

But does it have to be this way?

There may or may not be precedent for something else.

Example 1 is Ontario’s Brewers Retail – the Beer Store. “Established in 1927, The Beer Store is the primary distribution and sales channel for beer in Ontario. It sells beer to the public under the authority of the Liquor Control Act and is owned by Labatt Brewing Company Ltd., Molson Canada and Sleeman Breweries Ltd.” I.e. It acts as a platform for distribution of various brands. Brewers that wish to sell through The Beer Store can pay a per store listing fee or a single fee for the entire system depending on the number of stores they wish to sell in.

Example 2 is the Credit Card – which for argument’s sake we’ll limit to Visa and Mastercard. Prior to their respective IPOs, both functioned as cooperatives, owned equally by their networks of 21,000 and 25,000 financial institutions respectively, wherein each institution would purchase a license for use of the network.

Both of these examples saw individual organizations choose the efficiencies and lower transaction costs of a distributed and shared network over a proprietary model. And while my colleague Denis makes a good point that in the auto industry the sticker price of a purchase is the equivalent of 1000 or so cases a beer, and thus makes keeping the customer as close as possible more important, I can’t help but think that a shared platform for sales would be more efficient and might just hep build a competitive and user-centred industry.

I’ll admit I’m not an expert on the industry so I’d love to know what everyone else thinks. I’ll also admit that I submitted a similar idea for the financial services industry about 8 years ago when I worked at large Canadian bank and got told thanks but no thanks! So maybe it’s already being done? Maybe it’s not possible?

Let me know.

Reading the news this morning, I came across this story.  As you’ve probably heard, the U.S. deadline to switch over to all-digital broadcast television is just over a month away, February 17^th.  The problem, however, is that an estimated 7.7 million Americans haven’t switched over from analog, and risk having their televisions go black.

The purpose of this switchover isn’t to provide better quality television for couch potatoes.  Switching over to all-digital broadcasting incurs lower energy costs than analog broadcasting.  It also frees up analog airwaves for public safety use (which became a policy goal following 9/11), as well as increased usage by telecommunications companies. 

I’ll come back to this.

Also filling up headlines today was yesterday’s speech from President Obama, wherein he called for swift congressional action to pass his still-emerging economic stimulus package, which could cost, over two years, up to a trillion dollars.  That’s $1 000 000 000 000 – lots of zeros, eh?

You’ll notice I wrote “still emerging” in the above paragraph.  That’s because as of today, there’s an incredible amount of debate as to how this money will be spent.  Obviously, the usual suspects have lined up behind the usual causes – Republicans want tax cuts, Michigan wants support for the manufacturing industry, and most private sectors, from the airconditioning industry to the catfish farmers, have sent in their lobbyists.

My concern with this is that Americans will be facing an enormous public expenditure that’s basically just patchwork.  Infrastructure projects are merited in many cases, but the idea of solving this crisis simply by creating demand-side stimulus is flawed – they’d merely be putting bandaids over the fundamental problems that got us here in the first place.

As for my opinion, you have to keep in mind that I’m a NetGener.  So I see a lot of merit in a more digitized economy (and government).  If I was an American, I’d also, as a young person, fall within the demographic that’s going to have to carry the federal debt in the decades to come, so I’d want  to see money spent in ways that will improve the economy in the long-term.

Now, this brings me back to the top of this article – digitized television, the benefits of which I’ve listed above.  I can support public funding on this because it’s a good long-term investment.  What else do I think is a good long-term investment?  A national broadband policy to extend access across the whole country.  Digitized medical records.  More computers and internet access in schools.  Most importantly, America needs more funding targeted at actually teaching people how to use these new technologies (which is the main roadblock in the digitized television initiative I touched on above). 

Improving technology, digitizing the country and teaching people how to use these tools should be a crucial centrepiece in long-term economic planning.  This would facilitate the movement of more Americans towards mass collaboration, and other Wikinomics principles, the merits of which can be found in any of the blogs you’ll see on this site.

So if America is going to spend a trillion dollars on a stimulus package, let’s hope that Obama remembers these promises that he made back in November, and embraces a few Gov 2.0 and Wikinomics principles.

For the last few weeks I’ve spent a fair bit of time thinking about the Keynesian “Paradox of Thrift“, which has become particularly relevant in today’s turbulent economy. As everyone knows by now, one of the driving forces of the problems revealed in 2008 was that consumers took on too much debt. The natural anecdote for this is for consumers to stop borrowing, and start saving – but that’s where the paradox lies. If everyone does that, aggregate demand will fall, the economy crashes, and the savings rate falls further still (also noting that when one saves by putting money in bank, it has to become debt for someone else in order to earn interest). Thus, we have a problem.

So it’s a case where doing what looks like the right thing for the long-term success of the economy has some perilous implications – at least in the short-term. In turn, it got me thinking about whether there is a similar, and potentially much larger, “Paradox of Wikinomics” as well. What I mean by this is that while application of the wikinomics principles might appear to  be the right thing for many companies and industries acting in their own self-interest, everyone adopting them at once could have similarly dire consequences – again, at least in the short-term.

In order to explain, let’s start again (also used in the wisdom of crowds vs. uniquely qualified minds post) with the first story in the book – GoldCorp. The gist was that the company ran a contest to find the best methods for identifying gold on their property, to great success. In theory, the methods they identified are probably the best for many such potential mines around the world. A logical extension would be that there are probably thousands upon thousands of people employed trying to discover ore deposits, that might very well now be redundant, if all similar companies adopted such approaches – transparency, information sharing, etc. – simultaneously. The old model, while less “efficient”, created more jobs.

So fine – one small subset of workers in the world potentially losing their jobs would barely cause a ripple in the global economy. But as you extend the principle of what made the GoldCorp story a success to other industries, such job loses can pile up. Other ideagoras (like Innocentive) would be an easy example, as companies start only paying for successful results (and a winner-takes-all economy takes hold) in R&D, while numerous people can no longer earn a living. But on a much larger scale, transparency and information sharing within the enterprise could make an extraordinary number of jobs redundant – jobs companies might be less resistant to cutting in the current economic climate than before. One easy example is “white collar grunt work” replaced by more effective, collaborative technologies – but there are many others.

And it of course doesn’t stop there. We’re already witnessing the demise of many newspapers, with the hyper-efficient Craigslist model being held responsible by many people. While I’m confident that the creation and dissemination of news will figure itself out again in the long run (and check out this excellent Clay Shirky interview for more thoughts on this), we’re seeing tremendous pressure on all creators of content tied to an advertising supported model. As the popularity of social media continues to increase, I expect that this trend will continue – and a lot of current jobs will be threatened.

I could go on, but I think you get my point by now. In the long run, what drives the wealth and success of an economy is productivity and efficiency. In my opinion, many of the principles of wikinomics continue to hold the promise of an extraordinary amount of efficiency and productivity to be unleashed, which should/ could have amazing long-term benefits. But in the short to medium term, I see the potential for a very difficult paradox – what makes the economy more efficient and productive as a whole causing a major dislocation of workers, who as we all know are also the consumers, and as they have less to spend the economy potentially shrivels up in a way similar to the paradox of thrift.

Given that the tagline of wikinomics is that mass collaboration changes everything, this dislocation could be on such a scale to make it a much tougher paradox to deal with. In such a case, the challenge is to ensure that the wave of innovation that can be unleashed through applying the wikinomics principles creates enough economic growth, and jobs, to compensate – and make sure the displaced workers can be re-trained to do them.

But such immediate questions aside, growing youth unemployment, or underemployment, may have far deeper societal repercussions.

The recent events in Greece where mobs of angry youths rioted in the streets is perhaps a telling example. Triggered by the shooting of a 15-year-old boy, an estimated 8,000 Greek youths joined what soon became an all-out attack against their role in the Greek state. As Nikos Mouzelis, emeritus professor of sociology at London School of Economics, noted: “The death of this young boy was a catalyst that brought out all the problems of society and of youth that have been piling up all these years and left to one side with no solutions. Every day, the youth of this country experiences further marginalisation.”

Or as others noted: “The death of the young boy may just be an excuse for the overqualified, so-called ‘700-euro-generation’, to rage at society. They have a hopeless future, since their degrees do not correspond to the needs of the market…. What a pity it is to see the energy of youngsters lost just because society doesn’t take care of their culture and education, doesn’t encourage them to explore their dreams and at the same time introduce and prepare them for real life.”

So could this mix of economic, political and social marginalisation yield the same violent results in other parts of the world?

The most oft-referred to storyline focuses on the possibility of unrest in China if that country’s economic growth rate dips below 7-9%. China has already seen nearly 7 million jobs disappear thanks to the global economic slowdown. And while the current unemployment rate for new graduates is just over 12% – a further 6.1 million university graduates will enter the job market next year according to the Chinese Academy of Social Sciences. Some imagine that should growth flatline at sub-7%, the country will fail to create enough new economic opportunities to keep its pool of job-seekers happy, and subsequently could lead to mass civil unrest that would far eclipse the push for democracy in 1989.

But even closer to home, one has to wonder whether the events in Greece are a sign of things to come. Youth unemployment across Europe is far from a one-nation issue – France, Italy and Spain all share similar statistics (+20% unemployment for 15-24 year olds) – and other countries, notably those three, have much more prevalent social issues related to the integration of new immigrants and social opportunities for both new and old. Moreover, youth in these four countries (Greece, France, Italy and Spain) also happen to have much higher levels of education attainment then their older peers (+20:25%)  If ever there were tinderboxes ready to burst…

So how, in a time of economic upheaval where upwards of 7 million jobs have been lost in China, 3 million jobs in North America and perhaps a million in Europe, can governments stem the tide of immediate discontent related to a lack of economic opportunities? The most common response has been deficit spending, in particular on infrastructure, in the hopes of creating enough jobs to weather the storm. But the current economic crisis isn’t the root of the problem. In Europe for example, 20% + youth unemployment has its roots in deep structural, societal and policy-related issues. A few extra dollars on bridge building won’t change that.

So given somewhat limited job-creation capability, how might a new push for participation and engagement by youths in policy-making and strategy help mitigate their marginalisation? We’ve yet to see whether Obama’s warm hug re: hope and engagement will continue into his presidency but should it, it might just offer young people around the world a template upon which to hold their governments to account.

They recently hosted nGenera Chairman Don Tapscott and Cambridge economist Ha-Joon Chang (both of whom I’ve had the pleasure of working with) for a conversation about the Future of the Public Sector. You can view all the videos from this event, and many others, here. Unfortunately I haven’t figured out how to embed these particular presentations so you’ll actually have to go to Sitra’s site to view.

Nonetheless, here’s the lowdown: Don argues that the Net Generation and the Web 2.0 are ushering in a series of fundamental changes to the way governments operate; how they provide services and create policy; how they structure the workplace; and how they increasingly look to citizens to play a role in all of those areas.

Dr. Chang on the other hand takes a more cautious approach noting that the most visible and seemingly revolutionary ideas aren’t always the real change agents. He introduces an interesting question of whether the Internet was in fact the most revolutionary technology of the 20th century, or whether it was in fact the dishwasher for its role in changing tradiotional gender-specific roles and facilitating female entry into the workforce.

Chicken vs. egg vs. omelette. You choose.

Most of my talk was about the role of mass collaboration could play in driving the success of small and medium size enterprises. While the focus in Washington has been on organizing bailouts for large enterprises to provide short-term damage control, I argued that it’s more sensible over the long-term to provide stiumlus for SMEs given the critical role they play in innovation and job creation.

What really seemed to intrigue the audience, however, was the few minutes I spent discussing the potential for using prediction markets to make smarter forecasts and decisions. I used intrade’s prediction market for the presidential election as an example. But what the audience wanted to know, more than anything else, was whether a prediction market could help them forecast the end of this economic nightmare. 

Well, there is no such prediction market (at least not on intrade.com) but there are plenty of indicators to suggest that the intrade community sees little hope in the months ahead. At todays rates:

• Probability that the US economy will be in recession in 2009 — 90%. 
• Probability that the DOW will close on or above 11,000 by December 31, 2008 — 0%. 
• Probability that the unemployment will be greater than 5% in December, 2008 — 100%
• Probability that the US economy will go into depression in 2009 — 15% 

All of these predictions seem rather obvious now (though one would have done quite well had they bet back in August 08 that the economy would be in recession in 2009) and I don’t see anyone willing to go out on a limb to predict when all of this might end. Given the current state of flux, such reticence is understandable. Maybe someone in our reader community would care to make a prediction? Perhaps you’d like to provide some solace to my friends in Kansas City .

While we’re at it, is there a role for mass collaboration in getting us out of this economic mess. What do you think about the merits of bailing out failing automotive giants versus a longer-term emphasis on stimulating the small and medium size business sector? Or given that large and small enterprises are so intertwined through supply chains, etc., should we be trying to protect both?

• Collaboration will help us do more with less. The idea is that collaboration can lead to greater efficiencies and reduce the amount of internal resources required for projects. Collaboration leads to better information which helps make better decisions in terms of how to allocate resources. Collaboration also takes advantage of prosumers and social networks where individuals can help co-innovate with companies at a lower cost than using exclusively internal resources. There’s an assumption underlying this scenario that there’s some surplus capacity in the economy because a) companies are cutting back on projects, but not necessarily eliminating all of the corresponding staff, and b) those employees that are cut will be available for contract work and targeted initiatives. In fact, this may even be a good time to stock up on promising young talent. The pro-collaboration folks suggest that collaboration can lead to new growth opportunities that will help companies differentiate themselves in difficult times. Extra cycle times may also be directed at innovation and R&D; “there’s a lot things you can do during rainy days” and building a pipeline of products and services may be one of them.

• There’s no time for collaboration; doing more with less means we’ve got to hunker down. With an economic downturn companies will not be willing to appoint resources to collaborative projects. Since the return on investment of collaborative initiatives is not always apparent, employees will also not be willing to allocate their time on activities that are not measured in performance reviews or not seen as directly contributing to the bottom line. From an employee perspective, it may make sense to hoard knowledge in tough times and be less collaborative in order to make yourself indispensable (i.e. prevent being eliminated). The “hunkering down” managers believe that collaboration is risky and can lead to wasted resources on dead-end projects. Moreover, they frown upon self-organizing behavior; suggesting that it will result in unfocused initiatives. It’s time to run a tight ship and that means scrutinizing all discretionary pursuits, focusing on internal resources, cutting salary expenses where possible, and getting remaining salaried employees to shoulder the extra weight.

Two opinions; two very different strategies. What do you think?

There’s no doubt that the short-term job market prospects for anyone looking for a career change have been disrupted by the last six months of economic upheaval. We’ve gone from touting the war for talent to focusing on the impacts of delayed retirement and decimated pension funds on the workplace.

As a recent McKinsey report notes, “Eighty-five percent of the boomers we surveyed said that it was at least somewhat likely that they would continue to work beyond the traditional retirement age. Nearly 40 percent said that it was extremely likely, and of those, two-thirds emphasized financial reasons.”

Their decisions to either stay in, or re-enter, the workforce may push less-experienced grads and Net Geners further down the HR queue and mark a temporary end to the concept of the much-sought-after Net Gener. Economic growth from 2000 forward had kept job markets buoyant and left new grads feeling as if they were in the drivers seat. A deep recession however may smash that perceived leverage. As one commentator noted, “So it’s the Yers, mostly in their 20s, doted on and over-protected by parents, and aggressively courted by employers, who, will be most psychologically affected by this softening of opportunities. Like boomers, they thought they were special.”

But like Boomers, they’ll eventually get their turn. In the long-term, demographic trends will remain unchanged and lead to an ongoing competition for talent and skills across North America, East Asia and Europe. (Moreover, of those surveyed by McKinsey who had retired early, over half had done so for health reasons making a return to the workforce in the short-term unlikely.)

If anything now might be the time to be looking for a new job – forward thinking, strategic employers will see a glut of good young talent on the market as an opportunity to stock up for the long-term… not a bad place for a Net Gener to find a home.

I look forward to reading your thoughts on this new approach to the global marketplace.

He describes how the software as a service (SaaS) model and on-demand computing is not a gold mine for software vendors.

Anyone who thinks the software-as-a-service business is a gold mine for vendors is wrong. The economics are fundamentally different from those of the traditional software business – and not in a good way. As Lacy writes, the Web is “just as good at displacing revenue as it is in generating sources of it. Just ask the music industry or, ahem, print media. Think Robin Hood, taking riches from the elite and distributing them to everyone else, including the customers who get to keep more of their money and the upstarts that can more easily build competing alternatives.” Web apps remain a hard sell when it comes to big, conservative enterprises, and the capital and marketing costs are daunting, particularly if you’re running your own data centers. This revolution in business software will play out slowly and, for most suppliers, painfully.

Carr is right; the economics are fundamentally different from those of the traditional software business. However, they are different in a good way. Just like how utility companies changed the electric power game by drastically reducing costs, cloud computing and SaaS vendors will change the software and server game. Carr even made this same argument in his book, The Big Switch. “What the fiber-optic Internet does for computing is exactly what the alternating-current network did for electricity.”

The problem SaaS firms are having is that they are relying too much on the technology and the medium of distribution, and not on the service. Salesforce.com has been successful and the “poster boy” of SaaS because it provided a better CRM system than what was already available.

Steve Papermaster, the CEO of nGenera said at a recent SaaS panel discussion that SaaS vendors must provide new functionalities in order to succeed: “[SaaS] changes your billing cycle, but doesn’t change the game for the customer…If you’re not providing disruptive change in the positive sense for customers so they can run and lead their business very differently from before, then you’re not providing breakout value.” As soon as more vendors realize this, on-demand computing WILL become a gold mine for SaaS vendors. If the end product to the enterprise is ultimately more valuable, SaaS vendors don’t necessarily have to charge significantly less than the offerings of current vendors.

Most SaaS vendors are targeting small and medium sized businesses (SMBs) where the margins are much smaller. For SMB’s, SaaS makes more sense as they are unable to pay the high fees of traditional vendors. This current practice results in what Lacy described as Robin Hood taking money from the rich and distributing it to the poor. However, Papermaster continues, “the issue is not so much one of ‘is SaaS going to be acceptable to the enterprise,’ it’s rather how will it be possible for an enterprise not to run globally on demand?” Both large, traditional companies and SMBs alike will be forced to make the switch, as the level of service will be so much greater than what the traditional vendors are offering. For larger companies, vendors can include value-added service and consulting work on top of the basic platform to justify charging a higher subscription fee.

Current economic arguments aside, the companies soon to be staffed by the Net Generation won’t just appreciate always on SaaS applications, they’ll expect them. This hyper-connected, tech-savvy generation will not tolerate upgrade cycles, instead expecting the daily improvements and tweaks only SaaS vendors can provide.

Although both Carr and Lacy recognize that cloud computing and SaaS is the future, the future is a lot closer than they think.

Note: BusinessWeek has published special report on cloud computing.

As always, check out www.dilbert.com for the original and all the other mash ups – now on to my comment on voting.

I have a group of people that I know who regular read my Dilbert cartoons, and they are extremely blunt in their assessments – whether they’re great, terrible, or somewhere in between. Interestingly enough, whenever they say that I’ve done a “good or better” job lately, I tend to find I have a relatively large number of ratings on the Dilbert site – but the ratings tend to be quite low. One possibility is that everyone I know has equally bad senses of humor, but I’m going to ignore that for now to look at what could be a fundamental flaw in the voting system.

There are no financial incentives for doing a Dilbert Mash up, just like there aren’t financial incentives to participate in many other collaborative platforms (like Wikipedia, etc.). In turn, those of us crazy enough to participate regularly in such things are likely, whether we admit it or not, to be interested in building a “reputation”. In the Dilbert mash up case, such reputations come through the voting mechanism – do people find you funnier than others or not?

Now unless it’s changed recently, the only way to vote on the comics is to be a registered user on the site. I would think the only people interested in registering are the people that want to do the mash ups. In turn, if they are interested in relative reputations, they’re incentive is to vote low scores for everyone else – particularly anything that looks half decent. It would be like a class full of students, knowing they were being graded on a bell curve, voting on each other’s scores.

I’m in no way saying that most people do this – in fact, it looks like the vast majority are like me and never vote at all, which leads to a low overall vote count that is easy to sway. In turn, when you see vote tallies in the single digits, do these scores really mean anything? And if so, what? Could a low score actually indicate that a comic was funnier than one with a high score (or no score at all)?

While I’m focused on the Dilbert example here, it’s more of a broader question in terms of mass collaboration / wisdom of the crowds platforms – are the incentives of the crowd aligned with the outcome the platform is trying to achieve? In a future post I’ll tackle some examples of situations this has (or might) arise that have far greater implications than how my Dilbert cartoon was rated…

I don’t want to rehash all of the arguments in their entirety, but rather focus on carving out a middle ground between the two POVs.

One one hand, technology is enabling a such a rapid increase in the volume of “units” being produced in certain categories (think: digital music tracks for sale) that what was previously the long tail is now being pushed into the “head” / blockbuster category based on one commonly used definition – the top 10% or 1%. I don’t think such units really belong in the “head” category.

On the other hand, I also don’t think they fit into the long tail anymore (which Chris defined in relation to availability in bricks and mortar outlets, a definition that needs to evolve in markets where b&m is rapidly decreasing in importance). This leaves them somewhere in the middle. Since the body is in between the head and the tail, I decided to go with that (after an embarrassing foray with the term ‘middle tail’) – could the body end up being more important than either the head or the long tail?

However, I realize what I just wrote might be clear as mud, so let me provide a numerical example that builds on the research.

According to the article, the entire music inventory of a typical Wal-Mart store is equal to about 10,000 tracks, which for the sake of simplicity we’ll say represents all the music options available to consumers in a pre-digital age. Let’s say you define the “blockbusters” as the top 10%, and the long tail as the rest – that would be 1,000 blockbusters, and 9,000 in the long tail, and you could map out the sales accordingly. Alternatively, you could argue that that this entire group of 10,000 represents the “blockbusters”, and the long tail is what was sold via concerts and indie distribution outlets. It really doesn’t matter too much, as you will see in a second.

Jump forward to the digital age. The paper in question used Rhapsody for their digital music analysis, which offers more than one million tracks – let’s just say an even million. Even if you redefine “blockbuster” to only account for the top 1%, this now equals 10,000 tracks – or the entire music selection previously available at Wal-Mart. If you use top 10%, it’s approximately 100,000 tracks, and thus captures 10x what was previously available to “ordinary” consumers.

This leads to a rather obvious observation: as the sheer volume of content available to consumers has increased so quickly, what might have previously been considered the “long tail” can now – statistically speaking – be counted as part of the “head”, if you use the percentage method. The HBR article notes the top 10% of Rhapsody singles account for 78% of plays (and the top 1% account for 32%), which sounds highly concentrated, until you remember – as Chris notes in his response – this accounts for 100,000 songs (or 10,000 for 1%). Does anyone really think there are that many “blockbusters”? Does the long tail really not begin until the 100,001st most popular song?

So rearranging those numbers a bit, consider the following argument. Let’s say that right now the top 1% represents the head – that’s 32% of sales. The bottom 90% capture 22% of sales, which I’ll call the long tail. In turn, that 9% jammed in the middle is capturing 46% of sales – which I’ll call the body. While I’d need further research to verify it, the cost of developing and marketing that 9% is likely significantly lower than the costs associated with the top 1%. Might this body of work end up being the most important (read: profitable) of all? Perhaps even representing the content that is so good it sells itself?

There’s obviously still an underlying definitional problem here – as content is constantly added and nothing vanishes, what is the top 10% today becomes the top 1% sometime in the future, and the dividing lines might have to be moved again. However, the underlying concept might be an attractive one – maybe it’s not the head or the long tail that ends up mattering so much as what’s in between the two.

The OECD numbers, however, show that this linear relationship does not exist. For instance, an average South Korean works almost 1000 hours per year longer than the average Norwegian, while enjoying half the GDP per person. Both countries rank in the top in terms of their use of advanced technologies – Korea might even have a slight edge in terms of internet and mobile adoption. Granted, there are many other factors at play including natural resource wealth, distortions such as wars, workforce participation rates and cultural norms. However, the differences are significant even between seemingly similar countries such as Germany and Italy.

The rough consensus among economists is that in the long term, productivity is key; that is how efficiently a country puts together its labor and capital. The OECD numbers seem to support that view, however, it is surprising that the differences can be that great. One thing is for sure – it seems that the Norwegians and the Dutch have it figured out.