AICD: Fast, Frictionless & On Fire

Introduction

We are now in the midst of a wave of business disruption which has no historical precedent. Every industry, every market segment and every business is being affected. We need to be able to detect the ‘weak signals’ radiated by an economy in transition, because these weak signals show us the basic dynamics of the economy have already changed. We live in a unique moment, after this change became irreversible and before its ultimate unfolding. We are in the right place at precisely the right time to have a hand in this change.

We’re already well down the rabbit hole: Subscription rates for mobile services in Australia near one hundred and fifty percent of the population. Although this is evidently the case, no established businesses – either in Australia or anywhere else in the world – have rethought their approach to the customer, employees, or the market. This is the blind spot of 21st-century business, where we want to spend the next forty minutes shining a spotlight.

We will examine six businesses which owe their existence to hyperconnectivity – drawing their operational strengths from the nearly five billion of us who now own mobiles. Being directly connected to everyone else on the the planet enables enormous new opportunities – and creates unprecedented competitive threats. It’s a give-and-take that happens in double time, because as we grow more connected, information, capital and deal flow accelerate.

Every Australian firm must pay close attention to these weak signals produced by an economy becoming a hypereconomy. Now that we’re all connected, the national environment – business, political and social – is changing rapidly. We must all listen to the weak signals if we want our businesses to survive.

I: To Do With The Price of Fish (and Labour)

Let’s begin with an article published five years ago today in THE ECONOMIST.

The fishermen of India’s Kerala coast, who, for thousands of years, rose before dawn, set sail, found their favored spots in the Indian Ocean, dropped their nets, said a prayer, and – gods willing – hauled in a rich catch of fish. Holds full, they turned back to port. Now they faced a choice: which port for their fish? The Kerala coast is dotted with little ports. Going on intuition, memory and luck, the fishermen picked a port – only to find half a dozen other boats had selected the same port. One tiny market, oversupplied with fish, barely paid each fisherman enough to cover their costs. Meanwhile, just a five kilometers up the coastline, another port had been ignored by fishermen on that day. There was no fish for sale in that market, at any price.

It had been this way in Kerala for as long as anyone could remember. It was the way things worked. It was a hard living as a fisherman, because they not only had to stay alive while harvesting the bounty of the seas, but dealt with constant market oversupplies which crushed any opportunity to earn a profit.

In the late 1990s, India deregulated its telecoms sector, and businesses soon blanketed the subcontinent with wireless coverage. Some of that coverage extended to Kerala – even on Kerala’s extensive beaches. Radio waves travel in straight lines, so a tower along the coastline provided a signal 20 kilometers out to sea.

India’s first mobiles were not expensive in an absolute sense, but cost as much than a fisherman earned in a single month – in equivalent Australian terms, four thousand dollars. That kept mobiles out of the hands of all except the most wealthy of Kerala’s fishermen.

One of those wealthy fishermen – no one knows who or where this happened – took his mobile to sea, and when there, took a call. In that call, he learned of a port that had been forgotten by fishermen that day, so he set for that unloved port, and – as the only game in town – made a fat profit. The next day he called around, from market to market, until he found a market starved for fish, which he profitably provided. And he did this again the next day, and the day after that.

Within a few months, every Kerala fisherman – from the richest to the poorest – had their own mobile, phoning around to select a port to sell their fish.

As a result, each market now had enough fish to satisfy demand, but no more, and every fisherman earned much higher profits for each catch. A mobile, which cost a month’s income, could be paid off in just two months with the additional income these fishermen now earned.

Everything that had been difficult or impossible for thousands of years suddenly became easy and obvious because of the mobile. The structural issues keeping Kerala’s fishermen poor and Kerala’s markets irregularly supplied disappeared as the frictions surrounding market formation smoothed away once everyone was connected.

The market no longer belongs to a place, but to a person. As long as a person is connected, they can participate in the market, because they carry the market in the palm of their hand.

Variations on this story have been repeated in countless instances throughout the developing world. People everywhere began to grasp the relationship between connectivity and earning capability, and began to buy mobiles in far greater numbers than anyone had predicted. Soon, being human and being connected will be synonymous, because in order to be successful, you must be connected.

What’s true for individuals is no less true for businesses.

Our second example comes from the United States.

Every large American city has an army of limousines, independent contractors doing airport transfers or acting as executive chauffeurs. They’re not licensed as taxicabs, and so can’t pick up passengers except through a pre-booked reservation. Most limousine drivers spend half their on-shift hours idling in an expensive vehicle, waiting for their next jobs.

A group of San Francisco entrepreneurs wrote two smartphone applications, giving one to the city’s limousine drivers. The second smartphone application they freely distributed to the public. It allowed anyone to book travel with these drivers.

With no more than a two apps and a transaction engine, this firm – Uber – has disrupted taxi companies across North America. Drivers who use Uber to add jobs during their downtime double their income overnight. Some drivers cannily run the passenger app as well, so they can see the other limousines around them, avoiding areas oversupplied by available cars. Passengers, no longer at the mercy of undependable taxi companies, have flocked to the service, even though Uber charges a 40% premium over an equivalent taxi fare.

Uber did all this without building a fleet of vehicles. Capitalization requirements were minimal. Uber takes an existing resource – limousine drivers – and deploys that resource with the efficiencies available because everyone is directly connected. Connecting a mob of individual drivers creates a virtual fleet. Connecting passengers aggregates market demand. Marrying the two creates a new business model that has no expensive infrastructure, no overhead, and very low scaling costs. Bringing Uber to another city is as simple as distributing the appa to drivers and passengers.

In just the same way that connected fishermen create a perfect, frictionless marketplace for their catch, Uber connected drivers to passengers to create a perfect, frictionless marketplace for transportation. It’s easy to imagine other market segments, such as logistics, that are now susceptible to the same sudden disruptions. Hyperconnected, everyone can quickly pool both labour and resources to create new markets.

 

II: The Five Irreducibles

In the developing world, connectivity is opportunity.

Our next story concerns the very poorest Kenyans – surviving on eighty cents a day – too poor to take advantage of any job opportunities because they don’t have the money to buy the daily paper, can’t afford travel to job centers, or access online job lists. As poor as they are, they still have access to mobiles – either they or someone they know are one of the seven hundred million Africans who owns one.

A text message based service, “Kazi560” (from the Kiswahili word for job, plus the short code number for the service), allows Kenyans to quickly find out about any jobs available within their local area, connecting labourers to demand for that labour.

Job seekers subscribe to the service and send a text message to the short code identifying the type of job they are looking for from a standardized list of positions. In response, they receive an immediate text alert for each job opening in that category.

The additional income earned through access to the job pool aggregated within Kazi560 far outstrips the cost of mobile ownership. Just as in Kerala, the mobile makes everyone richer. Just as with Uber, a connected workforce can be deployed much more efficiently. Individuals can be hired for either long or short term positions, because most of the friction associated with recruitment has vanished. That friction has always kept businesses starved for labour when it is most needed, and keeps individuals from being able to fully capitalize on their skills. These market inefficiencies, like those in Kerala, are being replaced by a connected market that can quickly respond to changes in supply or demand.

A pool of connected labour represents a flexible resource which must be paired with some form of demand aggregation to create a market. Workers need work. This is no less true in the developed world than in Africa, but with better infrastructure – wireless broadband and smartphones – a closer and more coordinated connectivity becomes possible.

AirTasker, an Australian startup, recently launched a smartphone app that allows anyone to post a request for labour – of almost any kind – together with a location, time frame, and proposed payment. This labour request goes out to every smartphone-equipped AirTasker within the given locale, who each respond with their own bids to complete the task. A labour market emerges from frictionless connection of labourers to the aggregated demand for their labour.

The logical next step in this progression into hyperconnected business will see the formation of ‘virtual franchises’, as a large number of labourers with shared skills form a community to pool their labour while also aggregating demand for that labour. Professionals from law to medicine to pool cleaning and gardening will find themselves drawn into these franchises, loosely affiliated, but with a reach that can span the whole nation, without any of the centralization, organization, staffing or compliance issues which are the hallmark of large businesses.

The more connected a business becomes, the greater its freedom to decompose into its constituent functions, because all of the frictions which kept those functions bound to a specific organizational form – a trading entity – have vanished.

Without its exoskeleton of frictions and market barriers, what holds a business together?

Capital formation has historically formed the major barrier to entry, but in an economic environment dominated by services and artisanal products, capital requirements are low. Where they are not, ‘crowdfunding’ processes – such as those introduced by Kickstarter – allow thousands of individuals to pool capital in a new venture, turning the idea of the public stock offering inside out, so that the offering is made when the venture launches, not after it achieves success. Only a very few businesses – mostly in resource extraction and high-end manufacturing – have capitalization requirements that place them beyond this new generation of connected capital formation.

Labour, connected, finds capital, connected, and this combination form the businesses of the 21st century, businesses which look less like organizations than apps, strung together with software and connected devices. Uber formed a taxi company from thin air, and AirTasker has done the same for temporary employment.

Can a business formed in the 20th century compete with these decomposed business entities, which have none of the overheads needed to overcome the frictions which existed before hyperconnectivity?

The business models of the 20th century will fail in an environment so different from the one in which they were nurtured.

You can not transplant a temperate flower to a tropical environment; it will not survive the soil, the insects, the molds, and all the competitors for sunshine. Born in a time of great and seemingly permanent frictions, existing business models offer a poor guide to a future which works so profoundly differently than the past.

Though the operating environment has transformed, the shape of all businesses are driven by market barriers. Although many market barriers will tumble, some will remain.

Analysis of the hyperconnected economy – ‘hypereconomics’ – has led to the identification of ‘five irreducibles’ – barriers which are not removed by hyperconnectivity. These five irreducibles define the leverage points that every business must build into its strategic model.

Time

Time is money. People can’t wait forever for the job to be done, so the job will go to those who can meet the temporal requirements. In a hypereconomy, so many elements are strung together so carefully, time becomes a more important factor than ever before. Late delivery means the collapse of a just-in-time production chain. Timeliness will be seen as the greatest of all business virtues.

Territory

Our communications can travel at the speed of light, but we can not. We can not outsource the making of a burger to Laos, or the making of a bed in a Gold Coast hotel to a Bangladeshi. We can’t even ask someone in Townsville to do the job. Place is important, and now that everyone can be everywhere – virtually – place is more important. The local, amplified by hyperconnectivity, becomes the hyperlocal. The better a business knows where it is, the better it can serve the locals.

Talent

People can be taught almost anything, but only a few of them will have real gifts. Talent can be nurtured, but it can not be raised up from nothing. An organization without talent has no defense against an organization with even just one talented individual. Organizations need to identify, recruit and maintain the talented. They’re worth their weight in gold, and they’re like Kryptonite to your competitors.

Trust

Although we can now do business with everyone, everywhere, we will remain reluctant to agree a contract with someone we do not know and can not reference. Trusted relationships are the bedrock of commerce. In an environment where trust is in short supply, the trusted will find themselves the benefactors. Tools and techniques for building trusted relationships must be a core competency of 21st century business.

Tongue

English reigns as the global language of business, but we now have a billion Mandarin speakers and half a billion using Spanish, Hindi and Arabic. Each of these languages encompasses a culture and cultural values as specific as anything embodied in Australia’s dialect of English. Cultures persist in the face of hyperconnectivity – in fact, they can spread faster than ever before. Business that can translate well within a native idiom will find themselves adopted and assimilated.

Last week a colleague suggested I add a sixth irreducible – tension. Some people just won’t get along. All the connectivity in the world won’t solve those kinds of problems, and might even make them worse. Along with talent comes tension.

Together these five-and-a-half irreducible friction points form the skeleton of the 21st century economy. The flesh on these bones is driven by your ability to be innovative.

 

III: Lean, Mean Innovating Machines

Here comes a paradox: businesses must do their best to remain stable over long periods of time, but this stability has a price – organizations lose their resilience. They become brittle and resistant to change.

Only flexible and resilient businesses can withstand the transition to a broadly connected world. All of our business processes evolved in a slower, far less connected economy. New, connected business processes must be implemented within the next few years, before the new connected economics becomes so dominant that older business models can no longer operate profitably.

My final two examples show how established (even conservative) businesses can disrupt themselves into new business models safely, transitioning in step with the economy as a whole. Firms willing to embrace the risk that comes with creative destruction show us that risk is not the worst thing to happen to an organization – quite the opposite: risk is the handmaiden of innovation.

Back in 2007, two employees of Vodafone launched M-PESA, a mobile payments system based in Kenya.

The project began as a ‘skunkworks’, with just a little bit of funding and support from the head office. M-PESA caught fire, because it presented the first real access to banking for the vast majority of Kenyans.

With M-PESA, funds can be deposited with any of 30,000 agents, then – via a code send in a text message – retrieved from any other M-PESA agent.

Cash transfers in Kenya have always been difficult; someone working in the city would spend the entirety of their day off traveling to their village to deliver cash to their family.

With M-PESA these transfers are immediate, and have become so pervasive that at least 40% of Kenyan GDP now flows through M-PESA – and this after only five years! Two-thirds of all adult Kenyans have M-PESA accounts, and Kenya’s retail banks – which had never provided services to the nation’s poor – now offer M-PESA gateways.

M-PESA has transformed commerce in Kenya, creating a platform for businesses that could not exist in the slow and disconnected business environment, such as pensions, micro-insurance, ‘layaway’ savings accounts, purchase of renewable energy generators, and so forth. M-PESA enabled the emergence of a financial sector for those ‘at the bottom of the pyramid’, the billions who earn no more than a few dollars a day. Those dollars can now be saved, invested, or spent with the same or even greater sophistication than we enjoy in the developed world.

Kerala, Kazi560 and M-PESA all happened long before their equivalents showed up in the developed world. The rich world is moving more slowly into the hypereconomy because it is not driven by the same need.

Being rich as made us a bit dull and a bit lazy. Innovation is bursting out of the developing world and into our economies because necessity is the mother of invention. They have a need to become wealthier; we only have the desire. That need, transformed into innovation, is transforming the global economy: India and Africa will soon be eating our lunch.

One venerable Western institution, as conservative as they come, has embraced the challenge of the hypereconomy.

The Royal Canadian Mint, which makes ‘Loonie’ Canadian dollar coins – as well as kroner for the Norwegians and baht for the Thai – recently launched their ‘MintChip’ initiative. The MintChip is a small memory card that acts as a secure wallet for electronic currency. Unlike an EFTPOS or credit card, the transaction happens locally – through the MintChip – instead of being mediated by a bank or clearinghouse.

The MintChip is cash in every respect: portable, anonymous, and difficult to counterfeit, but has shed all unnecessary physicality.

To facilitate its use, the Royal Canadian Mint has opened its doors to technologists and developers, defining a suite of services intended to be built into other products and services.

Just as many websites use PayPal and credit card payment gateways, the Royal Canadian Mint is doing everything in its power to ensure that tools to provide MintChip capabilities become also become pervasive. Those tools will support an ecosystem of MintChip technologies and applications. Without that ecosystem, MintChip can not hope to survive. But if that ecosystem garners enough interest to become viable, MintChip could become a de facto standard for commerce – not just in Canada, but throughout the world.

There is no reason why transactions need to be performed in a local currency; the only time a local currency matters is when a creditor demands payment in a specified currency. With sufficient support, the MintChip could become a global currency – something PayPal never quite achieved – and the Loonie could become the financial input powering the hypereconomy. It’s not that this is by any means assured; rather that the Royal Canadian Mint has produced the first possible candidate to fill that role – a truly 21st century currency.

Both M-PESA and MintChip began as ‘skunkworks’ projects within large, formal, bureaucratic organizations. Each organization allowed a few talented individuals the space and resources needed to create a real innovation. This is where it all begins. It is difficult to change a massive business completely in a single go; instead, businesses must experiment, spinning out tiny projects as frequently as they can, charging each with a specific problem, or simply given the charge to disrupt the business environment.

As these innovations and disruptions pour forth, the first instinct of the organization will be to smother them in the cradle. Organizations do not like to be disrupted, especially from within.

For this reason, skunkworks need strong C-level and director-level support. Without that kind of protection any innovations and disruptions will be prevented from bearing fruit. Kenya’s banks didn’t invent M-PESA, the Kenyan government didn’t dream up Kazi560, and San Francisco’s taxi companies didn’t invent Uber – though many now try to copy it. Organizations will not disrupt themselves. But they must be disrupted, or face destruction.

Creating innovative and disruptive products and services has always been more of an art than a science, but new business methodologies, imported from the technology incubators of Silicon Valley, bring rigor to practice.

Eric Ries, in his bestselling book The Lean Startup tells innovators to build testing and measurement into their innovations. At each step along the way, an innovator should be able to test and measure the effectiveness of their work – customer satisfaction, units sold, software downloads, etc – and should be constantly changing their own processes to match the emerging needs of the market. For Ries, innovation is a form of feedback between talented innovators and the market, working in concert, producing disruption.

Spin out as many skunkworks as you can manage. Tell each to build something innovative, but make them test and measure the results of that innovation, putting what they’ve learned from their testing into a continuous cycle of improving builds, continuing testing, and constant measurement.

Disaggregate your businesses into service offerings accessible internally or externally, to both vendors and customers. Turn your entire sales channel into software, so that every connected person – all five billion – can be your customers.

Don’t be afraid as you shed business units, discard policies and procedures, and streamline your operations. Many businesses will become little more than clever software sitting atop a wide range of constantly-evolving production chains. This isn’t a failure of economics, but its quintessence.

The economic environment of the present has no precedent. We have never been connected as we are today, and we do not yet know all of the ways this hyperconnectivity will change the way we are and the way we work. The market, once situated in a specific place and time, has become a feature of connectivity.

Five billion sole traders, bursting with ideas, makes this is the most fertile environment for business formation in human history. It is also the most competitive. No business has a guarantee of future success, and if any business expects to be around in a decade’s time, they must grasp the nettle of hyperconnectivity today. It changes everything, but needn’t be the end of everything. A billion businesses will bloom. Do you need to redesign your business so you will be among them?

3 thoughts on “AICD: Fast, Frictionless & On Fire

  1. Pingback: Real time, right time – it’s all about me – so what about Twitter? | Aide-Memoire

  2. Mark- one of your best posts ever- you nailed it. This is the very theme of Amplify Festival 2013….Shift Happened: Transformation Required. ( Business Models, Org design, structure of work, capability & skills) I also love how you have managed brevity given how interconnected all the elements are. Would you like to come and do a 10 minute talk on this at the launch of Amplify 2013 on 31 October?

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