Chapter 12
Governance and Stakeholders
The advent of these myriad choices for getting work done raises some confounding questions for companies. How do our existing governance protocols apply and, perhaps more fundamentally, who is responsible for work? HR has traditionally focused on employees, while business leaders look at joint ventures and alliances, and procurement might focus on vendors and contractors. If we believe that winning organizations will seamlessly traverse these options as opportunities arise and market conditions change, then the decision rules we have previously touched on need a governance framework; one that ensures coherence and consistency, and reflects the shifting realities facing each stakeholder and their role.
Let's define six key governance principles organizations will need to consider in a world beyond employment:
- Ownership and protection of intellectual property
- Knowledge management and capability development/preservation
- Work quality control
- Risk management, including liability and indemnification
- Time horizon
- Logistics and control systems—talent movement, payment, taxes, and so forth
As can be seen from the “current and future state” box, these governance principles have always been considerations in how we manage employees and their work, but the number of variables and the permutations grow significantly when you contemplate a world beyond employment. Let's examine them and some potential scenarios.
- What about protecting our IP? Companies go to great lengths to protect what they believe to be their proprietary knowledge and capabilities. How do we stop people from stealing our talent? What does that even mean? Could a competitor just follow our use of talent platforms like Topcoder and get the same people to replicate what they did for us, but cheaper and better since it is the second time around? What information do we have to keep hidden from nonemployees? Does it even make sense to think of it that way? How do we stop information we shared from being stolen? For example, if one of our free agents in Egypt working on a brochure design comes to understand some secrets of our business model, how do we stop her from setting up the same business? If we invest in innovation and most of the knowledge sits in free agents' heads, we may have spent a fortune getting them to solve our problem, but now that they have, how do we prevent them from selling their knowledge to competitors? The answers may well come from how open-sourced technology is developed and managed where the focus is on shared ownership versus individual rights.
- Scenario: You find that the free agent you hired to build your sophisticated website is reusing the code for other clients of his.
- Preventative action: As part of due diligence, identify any areas of sensitivity around IP (exploitation of yours versus use of someone else's) and have a discussion with the free agent on those issues. Don't rely only on a standard nondisclosure agreement; you need to be able to give the free agent concrete examples of what they must and must not do.
- What about knowledge management? When all your work is done within the bounds of the organization by employees, the biggest challenge is formalizing knowledge management and transfer. This becomes immensely more challenging in a world beyond employment
- Scenario: Over the years more and more of the engineering work on your company's specialized marine pumps have been done by free agents. With the retirement of two internal engineers, it becomes clear that their specialized knowledge was essential to organizing and directing the work of the free agents. Almost all of the work had been done outside the walls of the organization, but what was done inside was crucial. Not only is it proving impossible to hire people with deep intelligence about marine pumps; you don't even know who the free agents who worked on your pump design were. They were all hired via a talent platform that has since gone bankrupt. Critical knowledge about your line of marine pumps has been irretrievably lost.
- Preventative action: Knowledge management must be a disciplined process since one can no longer count on the natural diffusion of knowledge from senior engineers to juniors that occurs when long-term employees are housed in the same office and work together. Furthermore, knowledge management must treat free agents the same way it treats employees, some of them are the holders of business critical knowledge, the knowledge management function needs to know which workers have critical knowledge and take the necessary steps to document, catalog, and appropriately disseminate it.
- Now let's take a look at work quality control. Organizations typically focus on measuring and rewarding both inputs (like values, behavior, culture, etc.) and outputs (financial outcomes, operational performance, etc.). While it may be easy to specify the exact output you expect from a developer on Topcoder, it becomes quite challenging to ensure consistency of management decision making.
- Scenario: A freak flood wipes out your alliance's production facilities in a remote part of China. Since there was no history of floods in the area, the factory was not insured against this calamity. The head of the alliance, who incidentally is an employee of the partner company, immediately borrows $50 million from a Chinese government development agency to get the factory back online. Your company, which is facing hard times, had been planning on phasing out of the alliance and now faces half of a bill it can't afford.
- Preventative action: Attempting to set down every contingency in a contract can strangle an alliance, especially in a fast-moving industry. How do you ensure consistent output/behavior from a distance? Furthermore, assume in the case above that your company is a family firm that has a strong tradition of giving a great deal of decision authority to managers in overseas locations. That tradition worked when managers were long-term employees with strong internal networks that ensured they would make the same decisions the owners would have made in their place (i.e., the output was ensured because of the consistency of the input). The tradition fails when the manager is the “disconnected” leader of an alliance. The company needs to hire an experienced alliance manager who can ensure appropriate governance; communication and decision rights are established when the alliance is formed—alliance management is not a job for amateurs.
- Let's examine risk. As noted, we have strong protocols for managing the risk associated with getting work done by employees. But what happens when more of the work is being done by free agents and the distinction between employees is fuzzy in the eyes of consumers and regulators? Where might we fall afoul of employment law? To what extent are we subject to the employment laws of other countries when work is dispersed there? What if we don't even know who is doing the work? What happens if a free agent incurs a liability that they are not able to absorb? Does the company now become liable? Let's examine how a company should respond to this very real—and highly plausible—situation.
- Scenario: You hire a free-agent filmmaker via a talent platform for a corporate video on safe driving, and one of the free-agent actors working for the filmmaker accidentally runs over four people during the filming. The injured people try to sue the filmmaker, but he is only 18 years old, so that lawsuit is going nowhere. The lawyers turn on you, and social media plays this up as a corporation exploiting a teenager.
- Preventive action: Don't plan to hide behind some legality that the kid is responsible, and the corporation is not. Don't assume the free agent (or the talent platform you used to find him) have sufficient or appropriate insurance. As part of due diligence in working with the platform, make sure all their free agents have sufficient insurance in place, or ensure that your insurance covers both your employees and your free agents.
- What about time horizon? The traditional mind-set that work was done by employees and all employees are here for a long time allowed unions to flourish and grow to protect the interests of employees. With the time horizon increasingly being driven by the nature of work rather than the employment relationship, how might this affect traditional employee-based constructs like unions?
- Scenario: You are head of a lathe operators union, and you are seeing membership collapse as robotic lathes, which can be controlled remotely, replace the older technology, which required at least one operator per lathe on site. More than half the work done by employees has been shifted to free agents—many of whom used to be members of your union. You hear through the grapevine that these free agents are being treated badly, being denied future work if they take time off sick and of course there is no maternity leave or provision for a pension. Your union is dying and the free agent lathe operators are suffering from a loss of bargaining power.
- Preventative action: Think about organizing the free agents differently, inventing new forms of union membership that are not predicated on tenure or employment. Look for lessons from groups like the Screenwriter's Guild. Invent new services, such as a pension fund, that is not predicated on it being provided by an employer.
- What about logistics and control systems? For employees, the company typically handles all the direct and ancillary logistics of the deal (taxes, movement of talent to where the work is, or vice versa). Other providers, however, are strictly on their own. Contractors pay their own taxes, procure health care and pension benefits on their own, and must manage the cost of getting to the work. In the future state, the contrasts between the management of such logistics will likely not be quite as stark. Consider the previously referenced Freelance Management Systems (see Chapter 4). As Staffing Industry Analysts frames it, “Unlike online staffing platforms, which facilitate direct one-to-one or ‘one-off’ engagements between an individual buyer and an individual worker, FMS facilitates an enterprise-wide engagement and deployment model. This arrangement still allows for direct engagements between companies and workers, but the key difference is that the rules and processes of the FMS platform will be uniformly enforced across an organization. In other words, with online staffing platforms, each engagement is a one-off experience; with an FMS, although the engagement is still ‘direct,’ it is managed under the enterprise's rules and system of control.”1
- Scenario: A class-action suit in a South American country rules that any free agent who has received at least one payment from your firm for five consecutive years is an employee with the right to certain benefits. Some of your managers (you are not even sure which ones) had used a talent platform to get perhaps tens of thousands of microtasks (you don't have any clear idea on the number) done by workers in that country. While you don't have any idea how many of these microtasking free agents might be deemed employees, you know the total cost could be stomach churning.
- Preventative action: All payments to workers, whether to employees, free agents or free agents via a talent platform, should be managed on a single system, handled by a single department (HR, procurement, or finance) in the company. The company needs to treat its relationships with free agents with the same discipline it treats its relationships with employees. In cases where there are legal uncertainties the company may wish to seek out insurance.
The sidebar “Governance in Action: Making Collaboration Work” illustrates these principles in action.
As can be seen, the governance considerations become increasingly complex as we look at a future for work that lies beyond employment. Governance involves stakeholders; and, as we see in the car-sharing industry, it can get quite messy, but the role of each can be assessed and defined (see sidebar). How will the role of each stakeholder evolve? Will they all continue to be relevant?
| Stakeholder | Typical Current Role | Likely Future Role |
| Owner/shareholders | Provide financial capital, and value the return on such capital based on the traditional model of the firm (i.e., a self-contained entity with the vast majority of revenues, costs, liabilities, and capital captured on traditional financial statements) | Provide multiple forms of capital (financial, social, intellectual, etc.) while measuring the return through alternative measures (e.g., the strength of the leadership team's social networks, the flexibility of the organization to utilize multiple platforms for getting work done, etc.) |
| Leaders/Managers | Define the work, ensure sufficient supply/skills of employees to do the work, manage alliances and partners, ensure engagement of employees and execution of work at the desired cost to produce the targeted revenue at an acceptable level of risk | Continuously (re)define the work and build the capability to assess the very essence of the operating model and seamlessly deploy work where it can be most optimally performed at a particular point in time |
| HR | Hire, develop, engage, reward, and retain employees | Will HR evolve its remit to manage how work gets done versus enabling the management of employees? |
| Procurement | Manage contractors and vendors | Will procurement extend its current tools and framework to encompass the management of employees? |
| Workers | Perform the defined work in exchange for current and future rewards, including the skills needed to be relevant as an employee | Multiple forms of relationships with companies over the course of a career, with increased accountability and ownership for “future-oriented” reward elements (e.g., pension, retiree medical benefits, skill acquisition) |
| Unions | Protect the interests of workers through bargained work rules and rewards that are provided by the company | Leverage scale to provide services (e.g., advocacy, bulk buying of benefits, etc.) to providers (employee, free agents, etc.) of a particular craft (see the future of unions sidebar) |
| Customers | Purchase bundled services with limited opportunities to disaggregate them | Access to an infinite number of options for any particular service (see the car-sharing sidebar) |
| Governments | Focus on provision of benefits and protecting the interests of employees | Provision of safety nets for all citizens regardless of work relationship |
| Brokers/Talent Platforms | Focus on organizing free agents to provide services to companies | Integral partners to enable corporations to continually access the resources to get work done: free agents, third parties, employees at noncompetitive companies (e.g., collaborative production), current and future employees |
You might well wonder how we could be so apparently definitive about the possible future states for so many stakeholders, yet rather less so about the two that we know so well: human resources and procurement. The reason is the potential interdependency between the two in a future beyond employment. We see clear roles, and some early signs of adaptation, by owners, leaders, workers, unions, customers, and governments to the future state. Yet, with some exceptions, we do not see much change on the part of HR and procurement. Given their deep legacies in helping organizations ensure compliance and mitigate risk in specific domains, how will HR and procurement change? As companies build the capability to seamlessly traverse these various options for getting work done, who will be responsible for analyzing, understanding, and managing the movement of work from one platform to another? HR? Procurement? Or some other function?
A Perspective on the Future of Unions
The role of unions in society is a deeply political issue, and we are going to sidestep the power politics and hopefully the emotions that surround them. We like to think of unions as key stakeholder organizations that provide a set of services to workers. With unions, the noun “organization” clearly follows from the verb “organize.” Unions organize otherwise disconnected workers. Thus, a union might be called a guild or an association.
Probably the single most important service of the U.S. Freelancers Union is to provide health insurance. This is a service that otherwise unorganized freelancers need. However, it is some distance from the traditional role of unions in negotiating pay, work rules, and work conditions.
Management's biggest complaint about unions has long been their view of what a job is. To a union, a job is a sharply defined construct that is to be done by a specified person and no one else. One manager told us the story of a machinist whose lathe stopped because the electrical connection, sitting in the floor beneath the machine, had come loose. He stooped down to correct it, only to be swiftly stopped by a union colleague. “Hey, that's electrical work,” he said. “You can't do that.” Once an electrician had been found, the issue arose as to whether he was allowed to disassemble the appropriate part of the wooden floor, as that was carpentry work. The whole area came to a halt as everyone stopped to see how management and the union steward would resolve this fascinating problem. The story sounds apocryphal, but it's a real one; and no doubt some readers experienced with unions are thinking, “I can top that story!”
What happens to unions as our sense of what a job is dissolves under the potent solvent that is the Internet? They need to focus not on jobs within a tightly defined skill set, but on the needs of the workers within a more broadly defined craft, and in the future the workers most in need of this support will be free agents. Free agents will need help knowing what to charge, to avoid being exploited by bad talent platforms or bad employers, to manage their finances, retirement, and wellness, and insure against risks. Unions won't be the only organizations attempting to address this need. Profit-making businesses will sell their services to free agents.
Will unions be able to negotiate higher wages in a world of deconstruction and dispersion? It will be harder, but already groups like the Writers Union attempt to do so by setting out guidelines on what to charge. Interestingly, the unit of measurement they use gets right down to the microtask level: they suggest charging by the word. These are guidelines, not rules, and encouraged, not enforced. That does not mean they are not helpful. But this discussion about the challenges facing private sector unions pales in comparison to the broader issues facing society when you consider the implications for public sector unions. Consider these statistics from the Bureau of Labor Statistics on the percentage of workers belonging to unions:2
- in the United States 11.1 percent
- in the private sector 6.6 percent
- in the public sector 35.7 percent
- in local government 41.9 percent
One doesn't have to look beyond the average daily newspaper in the United States to realize that cities like Chicago and states like Illinois are on the cusp of bankruptcy in part due to the unfunded liabilities associated with pension and health care obligations for unionized public sector employees. So as private sector companies evolve toward flexible work arrangements, unions can expect the decline in their membership to further accelerate unless they fundamentally alter their basic philosophies. The 6X contrast between union representation of public sector employees versus private sector workers will become increasingly visible to voters as the disparity in the “cost of work” increases between these two sectors. How should unions respond as the 84 million millenials in the United States who are now eligible to vote start to question the rationale for the public sector “deal”?
Free agents need protection from precariousness. Unions often lean toward forcing everyone back to the old world where people have full-time permanent jobs working for a single employer established in a single country. As long as they take that tact they are fighting the tides of change.
Some Closing Thoughts on Governance and Stakeholders
Current talent governance frameworks such as legislation, regulation, and professional excellence standards will likely need to change to encompass the tide of new work relationships. Most employment legislation and regulation relies heavily on the assumption of employment as the main engagement method and the primary means of delivering value in the economy (compensation, health care, retirement, etc.), and even goes to great lengths to rigidly categorize such things as full-time employment, contracting, temporary-labor suppliers, and so forth. Increasingly, regulations that rely on the notion of an identifiable organizational boundary and employment transactions may need to morph to include protections and regulations for those who are not employed by any single organization, or even those who contribute ideas without getting paid. It is obvious to the casual observer that the vast majority of labor protections are afforded to the employed, with less consideration for alternative ways of contributing to the overall economy.
For the United States, the introduction of the Affordable Care Act of 2010 represents one of the more significant steps forward as it relates to the decoupling of rewards from employment. By enabling talent who are not employees to access the health-care benefits traditionally associated with employment, a significant barrier to the growth of alternative platforms has been eliminated. It's worth asking the question of what rewards should be governed and legislated versus left to the market. Categorizing these rewards into direct versus indirect rewards may be useful in this regard. Direct rewards associated with work would include salaries, bonuses, long-term incentives, recognition, reputation, and development opportunities. Indirect rewards include health care, retirement, and other family benefits. Should regulation cover both categories of rewards? Are there minimum protections that should be afforded to any one category (e.g., minimum wage)? How will such protections recognize the trade-offs that individuals might be willing to make across the various categories (e.g., trading of short-term compensation for reputation scores on a talent platform that might ultimately result in higher compensation in the future)? Since the dawn of the first industrial age, unions have played an important role in protecting the interests of labor, but do they have a future in the information age?
When it comes to ensuring the quality of work, most organization's professional excellence standards presume that the work of the organization will be done by either an employee or contractor. There is little discussion of how the work of other entities will be assessed, managed and governed, as these are typically managed through service-level agreements and contracts. What white space and inconsistencies might exist between these different governance frameworks? Are there opportunities to structure these as part of a single continuum of standards that govern the risks, capabilities, and costs associated with every different type of relationship? When the “how” matters, not just the “what,” then that makes the relationship with a contractor more difficult to manage. Yet, many an employer will tell you that she sometimes feels she has more control over a contractor than an employee. A quick scan of any “professional excellence” manual will reveal an intense focus on how work is done, and say very little about the output of work. Often this is left to the performance management process (for employees and contractors), or service-level agreements for all other third parties. Interestingly, many organizations struggle with the philosophy of paying for individual output instead of time, as evidenced by recent research from Towers Watson that indicates a weakening linkage between pay and individual performance.
A final consideration related to governance involves the investment markets (i.e., the enablement of ownership). Given the significant percentage of a company's market value that is accounted for by intangibles, and the value of its human/knowledge capital, there will likely need to be a radical rethink of how we evaluate and measure “employment”-related relationships, and the cost of work. The current categorization of costs does not allow for consistent analysis and visibility into the total cost of work. The P&L structure provides inconsistent detail of the cost of employment (pay, benefits, etc.) and virtually no detail on the other categories of work (usage of talent platforms, offshorers, etc.). As the diversity of means with which work gets done increases, financial analysts will have progressively less insight into the true cost of work.
What about the forward-looking valuation of the company? If future leadership is as likely to come from outside the organization as inside, and depends more upon the web of social connections outside the organization than the formal hierarchy or candidate slates within, then should the value of organizations depend in part on the social presence of organization leadership and key influencers? How will investors and boards assess “key man risk” (i.e., the risk that a significant percentage of an organization's success is due to the contributions of one individual? Think Steve Jobs and Apple in the early days)? Does the number of Twitter followers for the CEO or leadership team matter more than the number of employees, or the slate of in-company successors? As exchanges have removed the friction associated with the movement and utilization of financial capital, so too can they reduce the friction associated with the movement of human capital. Talent exchanges can allow different entities to collaborate in pursuit of mutually beneficial outcomes. Just as financial exchanges require a “market maker,” so too do the human capital exchanges. Consider the example of collaborative production, as presented in Chapter 8. For talent to move seamlessly from one entity to another with minimal disruption to work and the shortest possible time to productivity requires an intermediary who can source the right talent, slot them into the right job at the right career level, ensure that pay and benefits are appropriate, and handle all the external requirements of work permits, taxes, and the like. In such networked architectures, the role of “brokers” to reduce the friction associated with such interorganizational movement will be critical to governance. Will analysts have insight into such relationships, and, perhaps even more challenging, how will such complexities be factored into company valuations?