As I wrote back in my May blog Internet 3.0 Collaboration in Commerce, Communities and Networks, we are transitioning to a new era of collaboration. The industry buzz word is “sharing economy” but this is a little too altruistic a moniker for my liking. If an elephant was taken down by 1 million ants there would indeed be sharing… of the carcass!
Indeed the implications of collaboration and reduced Transaction Cost Economics (TCE) are much broader than “sharing”. As Uber demonstrates, existing industries will be taken apart and re-assembled through external orchestrators. How can companies deal with the “unstructured complexity” of new market based orchestration, open APIs with unstructured requests for their data across thousands of new partners? This is our focus at Commerce Signals.
I’m currently reading the works of 2 Nobel prize winners in economics: Oliver Williamson (2009) and his mentor Ronald Coase (1991). Both were focused on the factors governing the “nature of a firm”. (particularly Transaction Cost Economics). Here are a few of the books I’m reading (for those interested):
- The Nature of the Firm: Origins, Evolution, and Development
- The Transaction Cost Economics Project: The Theory and Practice of the Governance of Contractual Relations
- Misbehaving: The Making of Behavioral Economics
- Wikipedia – Theory of Firm and Transaction Cost
There is no way to summarize the work of 2 Nobel prize winners in a blog, but I would like to focus on one element: Transaction Cost Economics (TCE).
Transaction Cost Economics (TCE) dictates the structure of a company
Ronald Coase, used a TCE framework for predicting when certain economic tasks would be performed by firms, and when they would be performed on the market. From this Williamson Paper
Ronald Coase posed the problem more sharply in his classic 1937 paper, “The Nature of the Firm.” He, like others, observed that the production of final goods and services involved a succession of early stage processing and assembly activities. But whereas others took the boundary of the firm as a parameter and examined the efficacy with which markets mediated exchange in intermediate and final goods markets, Coase held that the boundary of the firm was a decision variable for which an economic assessment was needed. What is it that determines when a firm decides to integrate and when instead it relies on the market?
Today, our network, and services, are evolving in a way that supports new mechanics for transacting: Authentication, reputation, coordination, contracts, risk, discovery, trust, …etc. Uber is the best example of this. We all agree that Uber’s success is reallocating the “assets” of production in a more efficient form.
As stated in my blog, the boundaries of [established] organizations will be changing as a result of changes in TCE and common facilities to construct agreements and partner outside of their organization. Modularity is the key technical term describing how business must structure boundaries (specifiability, measureability, predictability). What services do you want to make available? The answer to this question is NOT a technical problem, but a business one. Amazon is one of the clear leaders in modularity. The rules in which modules operate are “platforms” (technically) and “markets” (from a business perspective). After if everyone built their “API” in a different technology with no common directory it would be useless. For those interested, CommerceSignals is this neutral directory, never looking at the data.. but switching it as directed.
Collaboration what does it mean?
I guess it depends on your point of view (the elephant or the ant). Look at the Google Buy Now Button (see my Blog). Google gets everything I’m saying in this blog (guess they listen well). Google Buy Now is a Partnership Platform (see blog on Google’s Strategy) for advertisers and physical retailers. Local retailer uploads store inventory, google helps them get customers to buy.. and ships the goods to the customer’s door twice a day with an Uber like delivery services (shopping express). With all of these services Google will be in a position to guarantee sales.. For example if I’m a local specialty retailer Google could propose: I will drive $100k in sales for $1500… This is a MUCH bigger deal than Uber.
Who do you work with? Are you the lead? Are you the follower? Who decides? Who sets the rules? My favorite collaboration story at Commerce Signals is from the Chief Marketing Officer of a National Movie Theater chain. Brent said “Tom I’m the anchor tenant at 500 locations, I’m surrounded by 10-15 restaurants and 20-40 retailers in each of them, when I win they win. It is my community that competes with my competitor’s community, yet I have no facilities for collaboration. My data just falls into the trash can, how can you help us”?
For example every Fortune 100 company wants a “big data team”. These companies have internal plans based upon internal data driven by internal teams. While I agree that determining what products and consumers are profitable is a key area for everyone, the REAL VALUE to be unlocked is at the intersection of your data with something else. Afterall what company can compete with Google, Amazon and Facebook in consumer insight!?
One of the MOST SIGNIFICANT developments in last 5 years is that there is now a broad recognition that collaboration is necessary. For example Bank’s spent over $400M (EACH) trying to make CLOs work, MNOs spent $600M trying to make payments work, .. I could go on. Commerce is about markets. Markets are about connections. We are moving from an era where every Fortune 50 built their own closed market (where no one showed up) to a model where at 2 or more work together (Closed to semi open to …??open). The early battle in this shift to collaboration is Google, Amazon and FB (GAF) vs Everyone Else. What ONE COMPANY could possibly compete against GAF?
Collaboration is more than just advertising and demand how do you work with specialists? What parts of your organization are not best in class? When should you have your own internal team, vs an external one? When should you build and when should you buy? Technically we see this dynamic in great companies like Salesforce and Amazon Web Services. Uber and Google Buy Button have given us business led examples. The challenge for existing enterprises to adapt is tremendous. From a management perspective how do you manage a collection of suppliers vs a hierarchy of employees? If you have challenges managing internal compliance, how do you do it across many external organizations? How do you specify the “unit of work” to be performed and how do you measure it? What is a 1099 employee? In which country/State?
This is where trust, reputation, markets and the strategies of (distributed) modularity come to play.
My Fortune 100 recommendations (from previous blog)
1) List out your most valuable consumer insights
2) List your top growth opportunities
3) List the top sources of new revenue from existing customers
4) Where are your greatest threats?
5) What are you not acting on?
6) Who can act on them more effectively?
7) How can you partner one time?
8) How can you enable 100 companies to run with the opportunity?
9) What needs to be measured?
If you don’t take action.. the swarm will …