From Outsourcing to Crowdsourcing

Most companies become conservative in an economic depression. They focus on cost cutting and cancel projects that don't show immediate returns. Stove-piped organization structures, with separate fiefdoms for sales, marketing, products design and operations, make it hard to react to changing market conditions.

Lean and mean companies have already organized themselves around their core business processes and outsourced parts of these processes to create flexibility. If demand increases they expand rapidly without large capital infusions; if demand decreases they reduce volume without staff reductions. Outsourcers have the economies of scale and support multiple clients in different markets, thereby spreading the risk. But outsourcing is more or less of the same; it is not a tool for innovation. Outsourcing typically covers the operational aspects of commodity processes. Despite the claims of outsourcers that they add substantial value to these processes, the realityis that they show little agility, let alone innovation.

In a recession new cards are dealt and new players join the game. Microsoft and Oracle were born in the difficult early eighties. Google and Amazon rose from the ashes of the dot com meltdown. For open organizations the recession can be the opportunity for creative reconstruction. New products and business models are considered. One of the concepts that is winning in popularity is “crowdsourcing”. In its simplest form a problem is decomposed into self-contained components and individuals, teams and companies around the globe are invited to provide solutions using web tools.

Apple, Toyota, P&G and Vodafone, all four on BusinnessWeek's list of 25 most innovative companies, make use of open innovation and crowdsourcing. The iPhone's success is partly due to the large library of iPhone Apps: applications that anyone, after validation, can sell on Apple's iTunes store. Currently the most successful application, Stickwars, was developed in a month by a single person. Users rates these applications online and their assessment determines its fate. Stickwars has 1,100 reviews. This week the billionth app was downloaded. With on average 27 applications on each iPhone, Apple has created true stickiness for their device. Vodafone launched a website www.betavine.net that invites software developers around the globe to bid on the best solutions for widgets (mini-applications) that Vodafone requires to keep their phone platform competitive. They provide participants with the development tools and guidelines. Winners are awarded with prize money (which can be substantial) and in return they get to keep the rights to the solution. Close ties, open knowledge sharing and strong collaboration with their subcontractors allowed Toyota to bring better cars at a lower cost to the market than their American competitors. P&G leverages extensive innovation networks and apply their Connect & Develop methodology to the effect that over 50% of their innovation is now obtained from outside the company boundaries, reducing speed and cost to bring new products to the market. InnoCentive, spun out of Eli Lilly, mediated solutions to its network of 170,000+ participants for over 400 problems posted by various companies. It has developed a reward system, team-based collaboration platform and governance structure to speed problem solving along. Interestingly they found that diversity increases the probability of finding solutions.

Web 2.0 technologies allow these companies to do faster and cheaper R&D, product design and software development, but also to strengthen their relationships with key customers. Engaging the most important stakeholders in the evolution of existing products or the design of future products strengthens the bond and creates word of mouth marketing opportunities on social networks like Facebook.

Outsourcers should seriously consider to become crowdsourcers. This is the time to turn companies inside out and build stronger connections with the world outside the company walls: leverage the collective problem solving capabilities of open networks, make customers part of the extended organization and switch to open source software. Open, innovative organizations will be the winners in the post-recession world.

Crowdsourcing at the bottom of the pyramid

In 1998, when our company MphasiS was only a handful of believers crammed in two tiny offices in LA and Mumbai, we got our first real consulting gig. ICICI was at that time a semi-government Indian bank primarily operating in the corporate market. The company was managed by the charismatic K.V. Kamath, who set the Bank on a new course in the relatively uncharted waters of retail banking. This market was dominated by State bank of India, then a horror of bureaucracy. Foreign banks like Citibank and HSBC had made inroads and introduced modern products and services, but they were severely constrained by regulations. Kamath laid out a vision to bring state-of-the-art banking services to all Indians. He put Shika Sharma in charge and hired Jerry Rao and myself to help realize his consumer banking strategy. Years before, Jerry, as a young Citibank executive, had done the unthinkable: he had introduced two-wheeler loans. This was the first product for a market segment largely ignored by other banks. It changed India. Suddenly millions of people could afford a motor cycle and have their self confidence and mobility dramatically improved. Now Kamath wanted to do something similar on a larger scale: create a bank that could ultimately serve hundreds of millions of customers. And..have the foundation up and running in nine months! So Jerry and I went to work on the program plan. We proposed a “broad and thin” presence with focus on customer relationships and products that fit with the different market segments. Kamath wanted to leverage technology as much as possible: from branded phone booths and simple ATMs to flag ship branches in the metro areas.

It was clear that, while many of the concepts from the USA could be applied, the implementation had to fit with the specifics of the Indian market. The initial focus was on addressing the growing middle class, obviously an attractive market segment. Our company, MphasiS, built a call center infrastructure, online capabilities and mobile banking in a matter of months to allow for easy access to banking services. For the major products, like current and savings accounts, deposits, cards and loans existing software packaged were obtained and tied together with a common customer relationship management system. As India has no credit bureaus, databases and algorithms had to be built from the ground up. The “Personal Financial Services” went live as planned. This was a testimony of the tremendous execution capabilities of Shika and her team, backed by the ICICI leadership.

But while there is a sizeable emerging middle class in India, the majority of the Indians are living near or below poverty levels. ICICI had to completely rethink its products and the delivery mechanism to spread its reach and to profitably address the lower echelons of the market. Kamath: “We need to invent a new business model where we can create a distribution base effectively in 600,000 villages in India, and to learn to do that at one-tenth the cost of urban India.”

In his excellent book “The Fortune at the Bottom of the Pyramid”, C.K. Prahalad, claims that "If we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up." He points out that the poor are actually paying a “poverty premium”, which can be a factor of 50 or more in financial services. When he did his research, annual interest rates in Mumbai's shanty town, Dharavi (of Slumdog Millionaire fame), were between 600-1000%, while the more affluent paid 12-18%. A model based on low ticket products, high volumes and extremely low delivery cost, would not only present a viable business opportunity but also financially improve the conditions of the poor.

Rather than building a huge organization ICICI decided to tap into local entrepreneurship to acquire clients and collect on loans. They also relied heavily on information technology to keep the delivery cost down. Following the model applied by the Bank of Madura, which ICICI acquired in 2000, they based the business on a core management unit, called the Self Help Group. This is a group of around twenty members (primarily women) who collectively acquire and manage the clients. The Bank doesn't lend to individuals but rather to the Groups who then manage the allocation and collection of the loans. This gives the Group a strong sense of ownership. Products have evolved from micro credit to micro savings (using smart card tech) and insurance. For its technology ICICI teamed up with n-Logue, who placed Internet kiosks in the villages leveraging low cost wireless connections. The kiosk is owned by local entrepreneurs and financed by ICICI. With Internet access the village can now not only start using modern financial services at market rates, they can also get real-time market information, communicate and collaborate to bundle buying and selling power. This has spawned new economic activity in rural areas.

Enlisting a large network of local entrepreneurs to design, market and support products tailored is a formula that not only works for companies in developed economies, it can actually be a way to bring dignity and financial independence to the billions at the bottom of the pyramid.

Resource Efficiency 2.0

In 1972 the Club of Rome published its controversial “Limits to growth” report. The authors concluded that “If the present growth trends in world population, industrialization, pollution, food production, and resource depletion continue unchanged, the limits to growth on this planet will be reached sometime within the next one hundred years”. At our home and school the report was widely discussed. The Club of Rome started a first wave of consciousness about the environment and the threat of gradually depleting resources. The following year, in reaction to the West's support of Israel in the Yom Kippur war, the OAPEC stopped supplying oil to these countries, which led to a huge increase in oil prices and ultimately an economic recession. In Holland many belt-tightening measures were introduced. The best of these was the “car-less Sunday”, which allowed us to rollerblade on the highway. In the US the Government launched a conservation program, called ''Don't Be Fuelish,'' urging the public not only to use less gasoline, by reducing the speed limit to 55 miles an hour (yes that's the explanation), but also to cut back on heating and air-conditioning. Shortly after being elected in 1977, President Jimmy Carter, sitting fireside in a beige wool cardigan, told the nation to “tighten our belts, turn down the heat and wear a sweater”. We were asked to reduce, reuse and recycle. Emission standards for cars were set, waste was being sorted for recycling and “green” political parties were founded to pursue an environmentally and ecolologically responsible agenda. The first wave of resource efficient products hit the market in the late seventies. Then it went quiet.

Decades later, in 2006 Al Gore's Oscar/ Nobel Prize winning An Incovenient Truth made an impact on virtually everyone who wanted to listen. The documentary warned us, in a much better researched and packaged presentation than “Limits to Growth”, that the end is neigh: “Humanity is sitting on a ticking time bomb. If the vast majority of the world's scientists are right, we have just ten years to avert a major catastrophe that could send our entire planet into a tail-spin of epic destruction involving extreme weather, floods, droughts, epidemics and killer heat waves beyond anything we have ever experienced. “ Tom Friedman published “Hot, Flat and Crowded”, a call to arms to deal with the challenges and opportunities of global warming, growing population and expanding middle class. Darn...even George W. Bush pleaded with Americans to conserve gasoline by driving less and issued a directive for all federal agencies to cut their own energy use and to encourage employees to use public transportation. And this week Obama said that the US must move quickly to develop clean and innovative sources of energy after years of delay. "We've seen enough. We can remain the world's leading importer of foreign oil, or we can become the world's leading exporter of renewable energy."

Nowadays the concept of “sustainability” has full credibility, almost to a point of becoming fashionable (like Jimmy Carter's cardigan ). We have come to learn about sustainable development, housing, agriculture and even the sustainable South Bronx. The facts are that “the average American generates about 15,000 pounds of carbon dioxide every year from personal transportation, home energy use and from the energy used to produce all of the products and services we consume”. The energy consumption of the average American is almost twice that of a German and three times that of a Pole. Playing on people's conscience may help change behavior. We can trade in our SUVs (disclosure: I am driving a Lexus Rx400h), turn off some lights and empty the jacuzzi (the biggest consumer of electricity). The real change though will come from solutions that not only address these huge issues, but make business sense as well. And there is light on the horizon. Huge companies like General Electric and IBM have developed solutions for the “smart grid”. Highly entrepreneurial green enterprises are getting substantial investor attention. Examples are companies like Better Place, which has launched a new businessmodel for electronic cars, or Tendril, which develops smart grid software.

Infomation Technology is at the heart of the solutions that aim to optimize our scarce resources. IBM claims that “if the U.S. grid alone were just 5% more efficient, it would be like permanently eliminating the fuel and greenhouse gas emissions from 53 million cars. Billions of dollars are wasted on energy that never reaches a single lightbulb.” Tendril has a solution that uses smart plugs containing sensors. A transceiver sends information about energy consumption and patterns. The data gets analyzed and instructions are sent back to the the plug to switch the appliance on or off. This can easily save 10-15% in power consumption at the home or office. Every kilowatt saved in the home saves three at the generating station. Even Google has stepped into the game with their PowerMeter doing what they do best: collecting information, applying analytics and providing users tools to make decisions to reduce energy consumption. Rolls Royce now tracks the performance of 3,500 jet engines around the world in real time, as data is beamed satellite to the company's control room. By analyzing the data it has steadily improved fuel efficiency and over the past 30 years has extended the operating life of engines tenfold. These systems are fairly straightforward control loops: gather the data, analyze it and adjust the settings.

CK Prahalad suggests that government, civil society and companies collaborate to tackle this new phase of resource optimization. The government should contribute with focused investments and regulation, civil society with ideas and grass root approaches and companies with the entrepreneurial and operational capabilities to create commercially viable products. There are big opportunities to improve the supply chains of WalMart (importing over $20Bn in goods from China alone each year) and other large retailers from a green perspective, applying concepts like reverse logistics and extended supplier responsibility. Civil society should look at Walmart as a potential ally rather than a big bad capitalist.

But Sharon Begley writes in this week's Newsweek: “while you're doing all that to reduce the world's energy use and cut emissions of greenhouse gases, keep this in mind: even if we scale up existing technologies to mind-bending levels, such as finishing one nuclear plant every other day for the next 40 years, we'll still fall short of how much low-carbon energy will be needed to keep atmospheric levels of carbon dioxide below what scientists now recognize as the point of no return.” We need profound breakthroughs. Money should flow to where we have the highest chance of finding these and bringing them rapidly to industrial scale. This should be the number one priority after the financial system is cleansed.

By the way, don't forget to turn the lights off for an hour on Earth Day

Have we hit rock bottom?

We are all standing in amazement how fast and furious the decline has set in. No corner of the globe is spared. In China factories stand empty and twenty million workers got on the train back to the rural villages they fled years back. Once looked upon as economic miracles, the illustrious duo Iceland and Ireland have nose dived and are facing double-digit contracting economies. PIGS (Portugal, Italy, Greece and Spain) cannot fly and these countries came crashing down. Many large banks, including the financial behemoths Citgroup and RBS, bastions of capitalism, have been taken over by national governments in a desperate effort to keep liquidity in the economy. Large companies are collapsing under their own weight. Household names like Circuit City disappeared and the GMs of this world will shortly cease to exist (but not before burning billions of federal aid). This must be a wake up call. As Tom Friedman writes in the NY Times: “ What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall — when Mother Nature and the market both said: No more. “

It is the time for creative reconstruction. Most companies become conservative in the face of a downturn. They focus on relentless cost cutting and stop “discretionary spending” on innovative projects. While that may be necessary to remain afloat, at the same time new products and business models should be pursued. Like the famous Dutch soccer coach and philosopher Johan Cruijf (Holland's own Yogi Berra) proclaimed: “Every disadvantage also has an advantage”. Instead of putting moribund companies on life preservers, stimulus should be directed to “sustainable” innovation, aimed at long term growth without depleting the globe's rapidly diminishing resources. In a downturn, more than ever, should we get entrepreneurial instead of risk averse. We need agile local businesses in large global networks instead of huge, heavy weight multi-national companies.

I attended a round table with CK Prahalad last week to discuss sustainable solutions for a planet in distress. As a staunch believer in the positive forces of capitalism he pointed out the opportunities of green solutions, such as “extended producer responsibility” or “reverse logistics”. These concepts look at extending the life cycle of products and giving the producer responsibility from cradle to grave. So, old PCs or cars will be returned to the manufacturer who can re-use and recycle. Tom Friedman has been writing regularly about the need for the US to be become a global leader in green energy. Buildings, cars and appliances will be equiped with networks of sensors that continuously monitor resource usage to optimize and replace parts in time. New business models will be built around true resource optimization.

You can not regulate yourself out of a recession. Nor will unfocused stimulus have the required effect. Money has start flowing to the companies that have the entrepreneurial and innovative capability to create long term wealth, while doing good. Economic nationalism and protectionism, fanned by populist slogans such as “Buy American” or “British jobs for British Workers”, are counterproductive and will prolong the recession. The limitation of H1-B visas as part of the bail-out is an economic blunder. Half of Silicon Valleys companies are founded by entrepeneurs born outside the US. Globalization has helped emerging economies to charge ahead and create a large middle class, which in turn fuels the global economy.

We clearly need a jump start, but the engine will keep sputtering and it will surely die again if we give in to conservative, myopic impulses. Money thrown at dying industries is unrecyclable waste. The future is in solutions that not only turn the global economy around but also the earth's decline.

The Truth...Nothing but the Truth

Early January Satyam, “truth” in Sankrit, admitted that $1.4Bn had been siphoned away from the company. No one knows what Mr Raju, the soft spoken CEO, thought when he held the coveted Golden Peacock Award for Corporate Governance in his hands. It is easier to imagine the reaction of the former prime ministers of Canada and Sweden, who were leading the Jury. Obviously the Satyam Fraud raised many questions. How is it possible that there is such a gaping hole between the business process documentation and reality? Why didn't the Board and PwC, who are supposed to audit the books, smell a rat? Is this cooking of the books a regular phenomenon in India? What is the impact on offshoring?

That looks can deceive we all know. Fraud and mismanagement are not confined to India and whistleblowers have a better track record in uncovering corporate wrongdoings than highly paid accountants. Satyam is also listed on the New York Stock Exchange and exposed to US regulation (no comment). My experience as vice chairman of the Board of MphasiS is that corporate governance in India is not better or worse than in Western markets. Every quarter one can expect probing questions from both auditors and analysts. Companies like Infosys are known for squeaky clean books and robust management practices.

Though irregularities from time to time surface in companies that are majority owned by promotors (founders and their family), the Satyam case seems to be more of an exception than a rule. The company was managed in typical “George W. Bush style”. Raju and his tightly knit circle of family members and loyalists ran the company in a centralized manner. Frances Karamouzis of Gartner comments in the NY Times that “Satyam was slow to transform, in part perhaps because of Mr. Raju’s management style. He was very old school management, very parochial and didn’t embrace change or implement anything differently.” Customers had complaints. “We are tired of being required to call up the top guy in India to get things resolved,” one Satyam client told Gartner in 2005. The Times of India reports that “ The customer list of Satyam during Raju times was a top secret that even senior company executives had no access to.” Maybe Raju suffered from deluded views brought on by power. According to The Economic Times he owned 320 pair of shoes and thousand tailored suits in addition to houses in 63 countries (!). Whatever the cause of his behavior, it is clear that management style and company culture make a difference. As this is hard to measure it is an often downplayed part of the vendor selection process.

What happens to the clients who have their IT managed by Satyam? While Satyam's new board is highly respectable, continuity remains in jeopardy. The company will not stay in its current form and will most probably be acquired by another Indian company. As cash is running out there is no investment in client relationships and the best talent is busy packing their bags. Moving vendors may be as hard as moving banks (according to a survey in the US you are more likely to divorce your partner than move your bank account, but that may have changed recently). Still it is advised to approach Infosys, TCS, HP or IBM and start a transition plan. These companies have the processes and people in place to migrate the work currently performed by Satyam. “Outsourcing” and “offshoring” carry inherent risk and “continuity of business” plans apply to operations as well as vendors.

The truth was revealed at Satyam and we have become the wiser. Despite this drama and a business pause, India will remain the most important destination for offshore IT and BPO work. Nowhere on the globe can you find the combination of scale, skill, service innovation and cost advantage. Companies will continue to source work from this vibrant country, as the advantages far outweigh the risks.

Eyeless in Gaza

As the Israeli's didn't allow any press into the Gaza strip, we didn't have our formal “eyes and ears”. Instead both the Israelis and Hamas blasted the Internet with blogs, videos and Twitter to shape public opinion. The war was being fought on two fronts: on the ground and in cyber space. The Israel Defense Force maintains a YouTube channel and the Israel consulate in New York held a press conference exclusively on Twitter. For a while this 140-character-at-a-time medium seemed more important than the message: the chatter on Twitter got quite a bit of coverage. But now the dust has settled it seems that Israel was outsmarted on the Internet, not by Hamas, but by ordinary folks uploading real time reports. Despite its understanding of the Internet channel, superb technology and clever PR machine, the Israelis couldn't weigh in on the avalanche of blogs, videos and messages.

It used to be that we got our news neatly packaged from a limited number of sources such as CNN, Reuters and AP, now it comes from thousands of people, reporting on the ground as events unfold. These reports may be raw, grainy and emotional, but they can hit their target because they are more passionate and immediate.

Here are some examples of how Internet is being used to shape opinion. We Will Not Go Down (Song for Gaza) has been viewed on YouTube by over half a million people and has become the rallying cry at pro-Palestinian demonstrations. QassamCount, tracks the number of Qassam rockets fired into Israel by Hamas. It has both a Facebook and Twitter account that provides real-time updates. Yesterday, this was posted on Twitter: “5:22pm: 2 rockets hit Israel on Sunday after Hamas announced an immediate ceasefire #gaza”. (Note the #gaza, which is a so called “hashtag”, a tag or label that allows broadcasting of the message to the group “Gaza” so that everyone with an interest in the conflict can get this message.) Pictures of destruction by the Israeli army can be found on Flickr. On http://www.israel-vs-palestine.com/ anyone can vote on their position. While this reduces the conflict to it simplest black-and-white form and strips out any nuance, it prompted around 1M people to cast their vote. It is questionable what, if any, impact a site like this may have, but it is clear that we're seeing the first steps toward engagement with conflicts by using the Internet. Conflict 2.0 in its infancy.

I am currently working with European Center of Conflict Prevention and their partner NGO's, such as Oxfam/ Novib, Warchild and Cordaid, on a technology platform that aims to bring together information from the stakeholders: the different party's spokespersons, aid organizations, the press and observers on the ground. The objective is to give the fullest possible picture, provide analysis and prompt action, which may either help preempt conflicts or resolve existing ones. The platform should make it easy for people around the world to connect, exchange notes and to collaborate. We will leverage the same tools that play such important role in today's conflicts.

Last month, Machiel Salomons, an officer with UNHCR, wrote on my blog: “video footage is beamed nowadays through mobile phones to UN Agency heads in New York and Geneva. It helps decision makers, is instrumental in raising funds, mobilizes opinions and contributes towards an early resolution of major problems and challenges. Evidence is found in the fact that the world really has become a saver place.” While information technology is neutral, it can play a major role in resolving armed conflicts.

Obama-style Leadership

I can not help getting emotional watching Obama walk onto the platform to the cheers of more than a million people, who brave the icy Washington weather to participate in the inauguration of the 44th president of the United States of America. The world is celebrating both the first black president to take office and the end of eight years of incompetent leadership. Bush hands over an entangled Middle East conflict and the biggest economic mess since the Great Depression. Old style politics, leadership and business are incapable of solving the profound issues facing us.

The Bush Administration typifies last century's business culture: command and control, centralized decision making by an exclusive group of loyal insiders, driven by ideology and arrogance. Just watch Rick Wagoner operate and you see the Bush of business. It is obvious where GM is going (oblivion).

Obama is the best example of the new generation of leadership, the antidote to Bush-style government and business. For starters he has globality in his genes. His style is open, collaborative and inclusive. During the elections he effectively mobilized and engaged millions (by leveraging Web 2.0 technology). He believes that the economy can be brought back on track through innovation. Over the last weeks he worked closely with the House to create a $825 billion economic recovery plan, that includes money for education, infrastructure, energy investments and basic research, besides emergency spending for unemployment benefits, health care and food aid. His inauguration speech was sober and grounded in realism and pragmatism. Instead of talking in terms of “for us or against us”, he sees that there are no clear cut enemies, rather a “far-reaching network of violence and hatred”. He mentioned the need of close collaboration with other countries to solve the evil trinity of recession, terror an global warming.

While many business people worry about impending protectionism, his “Blue Print for Change” can not be clearer: “There are some who believe that we must try to turn back the clock on this new world; that the only chance to maintain our living standards is to build a fortress around America; to stop trading with other countries, shut down immigration, and rely on old industries. I disagree. Not only is it impossible to turn back the tide of globalization, but efforts to do so can make us worse off. Rather than fear the future, we must embrace it. I have no doubt that America can compete — and succeed — in the 21st century. And I know as well that more than anything else, success will depend not on our government, but on the dynamism, determination, and innovation of the American people.”

Obama is reactivating the American Dream. Let the USA again be an open place where talent from the whole world can come together, study, innovate and build companies. One of the reasons for the USA’s connection with the rest of the globe is its world class universities. Foreign students and immigrants account for almost 50 percent of all science researchers in the country. In 2006 they received 40 percent of all PhDs. By 2010, 75 percent of all science PhDs in this country will be awarded to foreign students. Those who earned their degrees in the US either stay in the US and tend to disproportionally contribute to the economic activity or they return to their home countries to establish and run companies that keep links with the US. Moreover, an open, well funded and competitive research environment has been the engine for much of the US growth, as major technology companies have sprung up around the major schools. Moreover, an open, well funded and competitive research environment has been the engine for much of the US growth, as leading technology companies have sprung up around the major schools, such as Stanford in Silicon Valley, the hot bed of technology with Google, Oracle, HP and Cisco, or MIT in the Boston Area, which has technology leaders like EMC. Dell is close to the University of Austin.

Obama's leadership style fits well with the post-recession business world. Successful companies in the next decade will have leadership that has more in common with Steve Jobs and Eric Schmidt (who was on Obama's Transition Advisory Board), than the leaders of the three of Detroit. Here's a summary of the style differences (thanks to Henk Bos who contributed to this list):