The emerging case for open business methods

Summary:The Internet has been the genesis of countless useful business innovations over the last several decades. These include a globally unified e-mail network, the advent of search engines, the rise of rich user experiences and SaaS, and most recently cloud computing to name but a few.

The Internet has been the genesis of countless useful business innovations over the last several decades. These include a globally unified e-mail network, the advent of search engines, the rise of rich user experiences and SaaS, and most recently cloud computing to name but a few. But perhaps one of the most far-reaching innovations was the Internet's ability to enable the creation and organization of the open source movement, arguably the most important progenitor to most things 2.0 and perhaps eventually to business in general.

The business world of the next decade will look quite different from today and require different values and management styles to match.While open source itself is mostly closely associated with the creation of free software in the Internet age, the associated concepts of open collaboration and open information sharing has roots in the early scientific community, where the (mostly) transparent sharing of ideas and data was the most effective way to enable progress. Related trends such as open data and the Web 2.0 model of open content reflect the now widespread activity of open information sharing and exchange using primarily a commons-based approach, enabled greatly by pervasive world-wide networks such as the Internet.

Given the current size of the Internet, about 1.2 billion people, tapping into and unleashing the enormous productive capacity and latent knowledge at the edge of the network has become one of the most powerful and underutilized economic resources available to businesses today. Accessing this effectively ahead of the competition has been the explicit (though too often unstated) premise of countless Internet startups. It's turned out that companies with a native "Web DNA" have the best perspective to see the fundamental potential here better than their traditional business counterparts. Most businesses still look at the network mostly as a secondary channel for activities such as value inputs, customer relationships, and worker communication and collaboration and not the most valuable one. This is primarily because they've traditionally had more dominant and important channels.

But this is starting to change. Through continuous and very widespread experimentation and endeavor, open models of communication, information, and even the creation of products and services, have emerged as a proven and highly effective way to directly drive business activity in entirely new and powerful ways. It's largely thanks to things like open standards, open source, and open content (aka user generated content and peer production) which have tremendously challenged and even up-ended the old world models of proprietary formats, commercial software, and traditional media respectively.

Open Business Strategies: Open Source, Open Data, Open Content

All this might seem a familiar story but these methods, still too pent-up in a world of high technology and Internet businesses, have begun to spread beyond their origins in software and content and become an significant avenue of opportunity across all aspects of business, albeit involving both great rewards and significant challenges. Particularly in these trying economic times, open models have begun providing the crucial, raw ingredients for a fresh, new perspective in the way we look at how we operate our businesses.

Enterprise 2.0 is just one good example of the emerging intersection of many of these open trends combining open collaboration where anyone can collaborate with globally visible information sharing. It's also one of the most immediately appealing models to most businesses since it doesn't necessarily entail many of the risks and challenges that more external modes of open engagement would require. In other words, businesses today are generally comfortable with achieving objectives with the assistance of 3rd parties in an outsourcing or partnership model, but they are generally not as comfortable with using open sourcing or crowdsourcing to achieve the same objectives.

The reasons organizations are wary of more open and 2.0 models for sourcing work and information are many and varied but it generally boils down to four reasons:

  1. Lack of familiarity. Despite the extensive body of knowledge that has accumulated, particularly in the software and media industries, there is a broad lack of understanding of how open models work for those whose line of business lies outside the technology industry. These include how to start and successfully manage open business methods as well as the various governance, legal, and brand issues that open models involve, to name just a few. While many businesses are in fact evolving and expanding their Internet channel, most executives are not yet tracking how these open methods can potentially generate much greater value for less cost across their organization, something that most businesses would find very attractive right now.
  2. Poor evidence in their industry. Most organizations are medium-to-slow adopters or fast followers, not innovators. Open business methods, despite the evidence in other industries, are still unproven in a number of fields of endeavor. As is the case with open APIs, despite their enormous potential, there requires either an enormous individual success story or general industry consensus before there is broad recognition and uptake. Unfortunately, in the online world, where the world is flat, being a medium-to-slow adopter can prevent you from getting in the game at all. Fast followers do have a good chance however, by learning from the mistakes of early adopters and leveraging their momentum before their network effect is firmly established. Along with the stories below, there is an increasing body of evidence that open business methods work in product development, customer service, marketing, operations, human resources, and fields of all kind from politics, manufacturing, education, law, and many others.
  3. Perceived challenges to ownership, control, and monetization. Earlier this week BusinessWeek published a widely covered article about the ongoing business issues around open source companies. From open source software companies such as to social media firms such as YouTube there is a general perception that the intrinsic nature of the openness of a business model can collapse its economic value while upending them into a morass of legal entanglements and intellectual property issues. Never mind that businesses are historically not inclined to share ownership of their products with the market. It is true that open business strategies are quite different than traditional business models and require a different mindset and set of skills to avoid their most commonplace issues.
  4. Uncertainty on how to leverage successfully. Translating entirely new network-driven business models into a business is certainly a tall order for most of us. Without a pioneering success story to guide us, we are left to having to make all the mistakes and do all the hard work. Open business methods have the potential to have millions of our customers help us create the richest and most dynamic products and services, drive down the costs of production, and increase innovation and diversity, but they currently require investment and experimentation. Regulated industries that have their means of operation locked down are going to have some of the largest challenges. And let's not forget that innovation isn't automatically a good thing; one could argue that the financial industry was innovating with complicated new investment products in the 21st century and that it spectacularly backfired.

However, intriguing success stories have begun to emerge recently and organizations large and small are beginning to have success with open business methods. Open platforms are probably one of the oldest and most proven of open business strategies (leading to the success of operating systems, personal computers components, and even the iPod accessory market, to name just a few), most open business strategies are still heavily technology and information centric. Some of the more interested recent stories include the following:

Emerging examples of open business strategies

  • Google Android. One of the biggest open business initiatives in existence is Google's Android platform, which has brought the first open source mobile phone platform to market. Google has made most of the code available already and will soon make the entire source for the whole platform available to the world. Dave Bort's post about the open sourcing of the platform in October is telling, saying "Have a great idea for a new feature? Add it! As an open source project, the best part is that anyone can contribute to Android and influence its direction. And if the platform becomes as ubiquitous as I hope it will, you may end up influencing the future of mobile devices as a whole." Google is making what most businesses would consider as a tremendous gamble in letting anyone contribute to their mobile phone platform (which is currently in production shipping on devices such as T-Mobile's G1.) However, Google is an Internet firm first and foremost and understands that giving up a certain amount of control also gives them tremendous benefits including getting participation and ideas from around the world. This open business strategy supports an encirclement and constriction strategy around other smart phones such as the more closed iPhone by allowing dozens and perhaps hundreds of different handsets based on Android to proliferate and flourish.
  • Open location. The world's best map data is still the provenance of commercial map making companies, but this has begun to be eroded by open location initiatives such as the excellent OpenStreetMap which is a "free editable map of the whole world" using a wiki-based approach and uses high production value including sophisticated interactive Web interface to let anyone add to and improve the data set, which is entirely licensed with Creative Commons. Initiatives like this will eventually affect the commercial viability of more traditional business models around location. Most location products -- such as GPS receivers and online map services such as Google Maps -- use data sourced from companies like NAVTEQ and Tele Atlas. These organizations are ripe for disruption unless they too adoption open business strategies that offer more participation, transparency, and richness. Fortunately, they have already begun to realize this and NAVTEQ's user-powered Map Reporter is an example of the kind of response traditional businesses will have to enable open participation in the development of their products over the network. And open location is a good microcosm of the issues that will start to surface as open methods become more common. Will users ultimately be willing to pay mapping companies to access the data they themselves contributed? Will mapping companies be able to maintain the high rates of monetization they have when more and more of their map data is generated by their customers in free products? These are vitally important questions and can be directly translated to industries of all kinds.
  • Open innovation. Open innovation strategies such as Dell's Ideastorm and Innocentive are well-known successful examples of open business methods that allow companies to leverage the knowledge and intelligence on the network in a controlled fashion. When open innovation is applied to product development, I've referred to it as Product Development 2.0
  • Peer production. Beyond specific verticals, the concept of peer production is to use the open network to harness collective intelligence and actively build useful outcomes. Also known as crowdsourcing, peer production has resulted in impressive outcomes such as the well known story around the creation of Linux to lesser known but more commercial compelling stories such as Goldcorp, which made a extensive sets of geological survey data of its properties available to the public over the Internet. They offered rewards to anyone who could analyze the data and then suggest places where gold could be found. The company currently claims that the effort produced 110 targets, 80% of which proved productive, yielding 8 million ounces of gold worth more than $3 billion. Netflix has also offered the popular Netflix Prize to encourage innovators anywhere to submit algorithms for film recommendations. The Netflix Prize leaderboard already shows many participants and some winners, though no Grand Prize winner yet. There are many other examples similar to these. The key point here is that companies are beginning to understand how to use open business methods on the network to directly generate business outcomes. One early lesson learned are that incentives are proving to be key to getting high levels of network engagement. There are many ways to use peer production to generate business outcomes and understanding the tenets of open business methods are essential to leverage them successfully.

More efficiency, richer results, but very different businesses

That open business methods are going to become more commonplace as the methods and successes improve there is increasingly little doubt. The real challenge is in the need for change and transformation; successful businesses are less inclined to go out of the comfort zone and risk their reputation and investment on what seem unproven ideas in their industry. But today's times are extraordinary and there is a very real need for not only change but accountability.

And one of the very best aspects of open business methods is openness; having transparency and visibility into all parts of a truly open business model and the ability to make sure there are few surprises and true accountability. When everyone can see what everyone else is doing and there are not just double-checks and triple-checks but everyone that wants to can observe, understand, and validate what's taking place. Radical decentralization and radical transparency go hand in hand with open business methods.

Sourcing Models: Inhouse, Outsourcing, and Crowdsourcing/Open Sourcing

Whether your open business strategy is some internal Enterprise 2.0, crowdsourcing your next product design, or using customer communities to provide customer self-service, the business world of the next decade will look quite different from today and require different values and management styles to match. The future of open business is very likely the future of business in the 21st century itself as the network turns out to be the single most valuable asset to which every business has access.

Are you using or planning to use open business methods, why or why not? Please put your comments in TalkBack below.

Topics: Networking, Browser, CXO, Open Source

About

Dion Hinchcliffe is an expert in information technology, business strategy, and next-generation enterprises. He is currently Chief Strategy Officer at the digital business transformation firm Adjuvi. A veteran of enterprise IT, Dion has been working for two decades with leading-edge methods to bridge the widening gap between business and... Full Bio

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