CHAPTER 9

Firms, Ecosystems, and Collaboratives

The Internet and mobility are changing how resources can be organized to do work. The limited liability joint stock corporation remains useful for assembling capital at scale, which helps build railroads, steel mills, and other industrial facilities. With manufacturing less important in the U.S. economy in the past 50 years and new tools facilitating coordination and collaboration at scale without need for twentieth-century firms, we are witnessing some fascinating new sizes, shapes, and types of organizations. As MIT professor Erik Brynolfsson noted in the Sloan Management Review, we need to rethink the very nature of firms, beginning with Ronald Coase's famous theory: “The traditionally sharp distinction between markets and firms is giving way to a multiplicity of different kinds of organizational forms that don't necessarily have those sharp boundaries.”¹

Emerging Nonfirm Models

Rather than try to construct a typology or theory of nonfirm entities, I give a series of examples in which people can get things done outside traditional governmental and company settings. Each of these relies on some combination of connectedness, mobility, data access and interrogation, and other attributes of the contemporary landscape.

Kickstarter.com

How do art and creativity find funding? The answers have varied tremendously throughout human history: rich patrons, family, credit card debt, and many forms of government funding. David Bowie issued an asset-backed security with the future revenue streams of the albums he recorded before 1990 as collateral.² Given the decline in the audience for buying recorded music, Moody's downgraded the $55 million in debt to one step above junk bonds. Prudential, the buyer of the notes, looks to be the loser here while Bowie was either smart or lucky (but hasn't created much art of note since 1997, when the transaction occurred).

In 2009, a new model emerged. Kickstarter allows artists and other creators to post projects to which donors (not lenders) can commit. If I want to make an independent film, or catalog the works of a graffiti artist, or write a book, I can post the project, and any special rewards to funders, on the site. Donors and artists alike are protected by a threshold requirement: If the required sum is not raised, the project never launches. Kickstarter takes 5% of the funds, and Amazon payments cost another 5%. Once completed, the works are permanently archived on the site. The site attracted some notice in 2010 when a user-controlled alternative to Facebook, called Diaspora, raised $200,000.

Donors might receive a signed copy of the finished work, or pdf updates while the work is in process, or tickets to the film's premiere, or other reciprocation. While it's too early to judge the longevity or scope of the model, TIME magazine named it one of the 50 best inventions of 2010.

Software Developer Networks

Microsoft enjoyed a huge competitive advantage in software developer networks in the 1990s. As of 2002, one worldwide estimate showed about 10 million developers in the Microsoft camp.³ None of these men and women was an employee but was often trained, certified, and equipped with tool sets by Microsoft. The developers, in turn, could sense market demand for applications large and small and build solutions in the Windows environments for customers conditioned to seek out the Windows branding in the service provider.

More recently, the App Store model has attracted developers who seek a more direct path to monetization. Apple has hundreds of thousands of applications for the iPhone and iPad; Google's Android platform has nearly as many, depending on counting methodology. Tools are still important, but rather than certification programs, the App Store model relies on the market for validation of an application. Obviously dry cleaners and other small businesses need accounting programs, or whatever, and Google can't compete with Microsoft for this slice of the business. Even so, enterprise software vendors such as Adobe, Autodesk, Oracle, and SAP must navigate new territory as the app store model, along with software as a service (see Chapter 26), make such competitors as Salesforce.com and its Force.com developer program a new kind of market entrant. Much like Apple, Force.com allows developers to go direct to market rather than have to team up with conventional vendors.

The app store developers aren't really a network in any meaningful sense of the word: They don't meet, don't know each other, don't exist in a directory of members, affiliates, or prospects. There are developer conferences, of course, but not in the same form that Microsoft pioneered. The networks, particular the app store developers, certainly aren't even remotely an extension of Apple's, Google's, or HTC's corporate organization: The market model is much more central than any organizational chart can be.

Not all of these developer networks play inside the lines, as it were. Despite robust security technologies, Sony PlayStations and Apple iPhones have been unlocked by third-party teams. The iPhone Dev Team, described by the Wall Street Journal as “a loose-knit but exclusive group of highly-skilled technologists who are considered to be the leaders among iPhone hackers,”⁴ has contributed a steady stream of software kits for Apple customers to “jailbreak” their devices. The procedure is not illegal but can void certain warranty provisions. The benefit to the user is greater control over the device, access to software not necessarily approved by Apple, and sometimes features not supported by the official operating system.

The iPhone Dev Team is so loosely organized that it functioned quite effectively, solving truly difficult technical challenges in elegant ways, even though its members did not physically meet until they were invited to a German hackers' conference in 2008.

Kiva.org

Founded in 2005, Kiva.org is a nonprofit microlending effort. The organization, headquartered in San Francisco, recruits both lenders and entrepreneurial organizations around the world. The Internet connects the individuals and groups that lend money to roughly 125 lending partners (intermediaries) in developing countries and in the United States, and the lending partners disburse and collect the loans. Kiva does not charge any interest, but the independent field partner for each loan can charge interest.

After six years, Kiva has loaned more than $200 million, with a repayment rate of 98.65%. More than 500,000 donations have come in and nearly 300,000 loans have been initiated, at an average size of slightly under $400. While the recipients often are featured on the Kiva Web site, lenders can no longer choose who will receive their loan, as was formerly the case. Still, the transparency of seeing the effect of money for a farmer's seeds, or a fishing boat repair, or a village water pump is strong encouragement to donors, so most money that people give to Kiva is reloaned multiple times.⁵

Kiva and other microfinance organizations challenge the conventional wisdom of economic development, as embodied in large capital projects funded by the World Bank and similar groups. Instead of massive dams, for example, Kiva works at the individual or small-group level, with high success rates that relate in part to the emotional and economic investment of the people rather than a country's elites, the traditional point of contact for the large aid organizations. At the same time, the scale of the macro aid organizations is truly substantial, and Kiva has never billed itself as a replacement for traditional economic development.

Even given its successes, Kiva faces substantial challenges:

• The quality of the local lending partners
• Currency risk
• Balancing supply and demand for microcredit at a global scale
• Transparency into lending partners' practices

Still, the point for our purposes relates to $200 million in loans to the world's poorest, with low overhead and emotional linkages between donors and recipients. Fifteen years ago such a model would have been impossible even to conceive.

Internet Engineering Task Force

More than a decade ago, the Boston Globe's economics editor (yes, daily newspapers once had economics editors) David Warsh contrasted Microsoft's pursuit of features to the Internet Engineering Task Force (IETF), the unique organization behind the network of networks. In the article, the IETF was personified by Harvard University's Scott Bradner, a true übergeek who embraces a minimalist, functionalist perspective. “Which system of development,” Warsh asked, “[Bill] Gates's or Bradner's, has been more advantageous to consumers? … Which technology has benefited you more?”⁶ Bradner contends that, like the Oxford English Dictionary, the IETF serves admirably as a case study in open-source methodology, though the people making the model work didn't call it that at the time.

Companies in any realm of intellectual property, especially, should consider Warsh's conclusion:

As stated on its website, the IETF's structure and mission are straightforward and refreshingly apolitical:

A famous aspect of its mission statement commits the group to “rough consensus and running code.” That is, the IETF makes “standards based on the combined engineering judgment of our participants and our real-world experience in implementing and deploying our specifications.”⁷ The IETF has meetings, to be sure, and a disciplined process for considering and implementing proposed changes, but, remarkably, such a powerful and dynamic global communications network is not “owned” by any corporation, government, or individual.

eBird.org

Species migration provides crucial scientific data in many realms, not least of which is climate change. Bird-watchers can play a valuable role here, pursuing their hobby but sharing observational data with larger databases that can generate large-scale pattern recognition. Cornell's Lab of Ornithology and the National Audubon Society teamed up in 2002 to build an online tool for information collection and dissemination related to the abundance and distribution of avian species across time and space. In January 2010 alone, 1.5 million bird observations were submitted in North America. A birder can keep his or her personal log on the site and use tools for visualization and other forms of analysis. Multiple languages are supported. Unusually and usefully, regional bird experts review all submissions to maintain a high level of data quality. eBird in turn supports still larger efforts, such as the Global Biodiversity Information Facility.⁸

Distributed Capital

One day a few years ago, I was having trouble with my VPN connection to the corporate e-mail server and the weather was unseasonably warm, so I took the dog for a walk around the block while the network hairball cleared. I did a rough count of people on the street in our small town outside Boston and was stunned to conclude that, not counting the retirees, more people had “alternative” work arrangements than conventional ones. Changing the names, here are the people who lived on our street:

• Keith has a PhD in operations research and is employed by a Wall Street bank doing quantitative analysis from his home office. He was hard-wired into the mothership via a dedicated T1 line. His wife, Karin, ran a nonprofit.
• Tina was and is a personal fitness trainer.
• Natalie ran a software company from her home. Two people worked for her there.
• Brian was a professor of engineering and grew fruit that he sold at his farm stand.
• Jim and Stephanie worked for moviemakers building sets in their barn/workshop and scouting locations for movie shoots.
• Rich left the dot-com world and sold musical instruments to schools.
• Greg was another sales executive, working for a technology hardware vendor.

Observations

First, I make no claim for this being an “average” neighborhood—the Boston metro area is pretty expensive to live in, and our town had grown more affluent than many. Even so, as a “weak signal,” this employment pattern is indicative of larger trends. It may be happening here earlier than elsewhere, and probably to a greater degree, but we're not unique.

Second, just on our street there's a wide spread among the service businesses and occupations represented. While there are a lot of classic “knowledge workers,” with six PhDs on the street, there are other occupational types represented as well: personal training and carpentry, for two. The sales reps are another interesting category, and we have a classic entrepreneur who doesn't hold an advanced degree.

Third, there's a split between those who need the Internet to do what they do and those who could get along without it.

Finally, I realized that the difference between working at home and telecommuting to work somewhere else is blurring. Professors are home most of the day and have summers off, and while they couldn't teach without a classroom in 2005, online learning is growing extremely fast, so location matters for education less than it formerly did. In addition, the fitness trainer's “shop” is wherever she is at a given time.

Getting aggregate numbers for these kinds of workers is difficult—nobody has a good count of American distributed workers, nor is much international data reliable; even the label is problematic. Anecdotally, the trend seems to have accelerated since 1995, and it's happening in many types of businesses. Because service work is often brain work, and because the Internet allows those people to work remotely or in a home-based business, one outcome is that the means of production are getting more decentralized. As more factories move offshore, as companies reevaluate their real estate holdings in an attempt to manage costs, and as retirees from conventional jobs find new types of employment after age 60 or so, this tendency will likely accelerate. This decentralization of the inputs to economic output will compound the already fuzzy problem of measuring services productivity, as we see in Chapter 14.

The impact of this decentralization will be far-reaching. For example, the best way to reduce traffic congestion is not to build bigger roads but to reduce the need to drive, whether to work or elsewhere. Similarly, the explosion of interest in home-schooling can be attributed in part to the availability of online resources and community for families who opt to home-school their children. According to a study done by the U.S. Census Bureau in 2007, there are roughly 1.5 million students doing home-schooling, and the annual growth rate of this student population appears to be in the neighborhood of 15%. Finally, the availability of online information is changing the role and function of libraries—and librarians. The bottom line is that most of the people working away from offices are not one-person shops.

Implications

There are several varieties of fallout from this overall line of thinking.

MEASUREMENT First, a warning flag should go up when talking about abstractions called “productivity” or “the workplace.” Services are often delivered in highly decentralized arrangements in some ways closer to the craft or guild model that applied before industrialization (and then mass production) changed the scale of economic production. Measuring the inputs to service output, particularly when they are decentralized, is difficult and perhaps impossible. Quantifying services output, meanwhile, remains controversial.⁹

INFRASTRUCTURE The emergence of powerful information networks is shifting the load traditionally borne by public or other forms of infrastructure. The power grid, roads, schools, Internet service providers (ISPs)—all will be utilized differently as the capital base further decentralizes. In addition, given contract manufacturing, offshore programming, cloud computing, and more and more examples of software as a service, the infrastructure requirements for starting a venture have plummeted: Leadership, talent, and a few laptops and smartphones are often sufficient.

RETHINKING SIZE The importance of scale can at times be diminished. For example, Jeff Vinik didn't need the resources of Fidelity Investments to run his hedge fund after he quit managing the giant Magellan mutual fund. In the 1950s, one reason a hotel investor would affiliate with Holiday Inn was for access to the brand and, later, the reservations network. Now small inns and other lodging providers can work word-of-mouth and other referral channels and be profitable standing alone. The question is how and where dispersal can work and what the center, if there is one, looks like.

TALENT As Linux and other developer networks grow in stature and viability, managing the people who remain in traditional organizations will likely become more difficult. What management writer Dan Pink reasonably calls “the purpose motive”¹⁰ is a powerful spur to hard work: As grand challenges have shown, people will work for free on hard, worthy problems. Outside of those settings, bureaucracies are not known for proving either worthy challenges or worthy purposes.

One defining fact of many successful start-ups—Netflix, Zappos, and Skype come to mind—is their leaders' ability to put profitability in the context of doing something “insanely great,” in the famous phrasing of Steve Jobs. Given alternatives to purpose-challenged cubicle-dwelling, more and more attractive job candidates will opt out of traditional large organizations. Harvard Business School and other institutions are seeing strong growth of a cadre of students who resist traditional employment and, more important, traditional motivation.¹¹ Both nonprofits and startups are challenging investment banking and consulting as destinations for ambitious, capable leaders of the next generation.

Looking Ahead

In the end, the purpose of a firm, to be an alternative to market transactions, is being rescaled, rethought, and redefined. Firms will always be an option, to be sure, but as the examples have shown, no longer are they a default for delivering value. One major hint points to the magnitude of the shift that is well under way: Contrasted to “firm,” the English vocabulary lacks good words to describe Wikipedia, Linux, Skype, and other networked entities that can do much of what commercial firms might once have been formed to undertake.

Notes

1. “Beyond Enterprise 2.0, An Interview with Erik Brynjolfsson and Andrew McAfee,” Sloan Management Review (Spring 2007): 55.

2. Karen Richardson, “Bankers Hope for a Reprise of ‘Bowie Bonds,’” Wall Street Journal, August 23, 2005, http://online.wsj.com/public/article/SB112476043457720240-Tvpthd07S8mCqCxLFNKIPnWWY9g_20060823.html.

3. http://answers.google.com/answers/threadview/id/43891.html.

4. Yukari Iwatani Kane, “The iPhone 3GS Hacking Debate,” WSJ Blogs, July 6, 2009. http://blogs.wsj.com/digits/2009/07/06/the-iphone-3gs-hacking-debate/.

5. www.kiva.org/about.

6. David Warsh column, Boston Globe, November 28, 1999.

7. www.ietf.org/about/mission.html.

8. http://ebird.org/content/ebird/about. Thanks to Lee Erickson for pointing me to this effort.

9. For a prominent example, see Zev Griliches, “Introduction to ‘Output Measurement in the Services Sectors,’” in Griliches, ed., Output Measurement in the Services Sectors (Chicago: University of Chicago Press, 1990), pp. 1–22.

10. Daniel H. Pink, Drive: The Surprising Truth about What Motivates Us (New York: Riverhead Trade), 2011.

11. See, for example, John A. Byrne, “Harvard MBAs: Putting Goals of Corporate Domination Aside,” Fortune.com, May 25, 2011, http://management.fortune.cnn.com/2011/05/25/harvard-mbas-putting-goals-of-corporate-domination-aside/.