To paraphrase Peter Drucker, the primary purpose of a business is to create customers, people who are able and willing to part with their money to buy goods and services from you.
To paraphrase Ronald Coase, the primary purpose of a firm is to reduce business transaction costs, principally the costs of information, search, contracting and enforcement.
Words like “sharing” and “social” are often treated as fluffy and ephemeral and Utopian and otherworldly, dismissed as being too pinko-lefty-tree-hugger to make business sense.
Which begs the question. What makes business sense?
In this context, I think it’s reasonable to assert that anything that helps businesses to create customers and/or to reduce transaction costs is worth doing, “makes business sense”.
So any debate about the value of “sharing” and of “social” in the enterprise needs to consider these things.
Social networks reduce transaction costs in a number of ways. Search costs are reduced as a result of network-driven recommendations, votes, ratings, increasing signal and quieting the noise. Some of these are “passive” outcomes, where the value is a function of the overall size of the network, provided as an anonymous aggregation. Much of collaborative filtering falls into this category. As against this, we also have “active” outcomes, where the value is a function of the size of your network, provided as an “onymous” recommendation to you by a person or people with real knowledge of you and your needs. Contracting costs are reduced as a result of the ability to have transferable, “nested” trust: you imbue trust on to the people trusted by those you trust. Enforcement costs also reduce as a result of this trust daisy-chain, since adherence to common principles and rules is made easier in an environment of trust, simplifying the process of recourse in the event of breach.
Sharing also reduces transaction costs in a number of ways. As Linus’s Law put it, given enough eyeballs all bugs are shallow. Transparently shared information is less likely to contain errors, as a result of the crowdsourced “proofreading” that takes place. Tasks that would otherwise be hard to parallelise are made parallel through sharing techniques, as seen in the way people study satellite imagery in order to find big things that have been lost for years. Even the tragic death of Steve Fossett had an unintended outcome: the discovery of the locations of many crashed planes as a result of thousands of people poring over thousands of images. There’s also the question of liberating latent “cognitive surplus”. Knowledge work is intrinsically lumpy in character: it comes in peaks and troughs rather than in a smoothed out manner. But people are not prepared to look unemployed as a result of that lumpiness, for fear of losing their jobs. So they busy themselves with the only tool provided to them: meetings. By sharing information resources and providing the right tools to create, find, check and correct information where required, firms can convert such cognitive surplus into tangible value, as error rates drop.
In similar vein, social networks help us understand customer intentions, needs and wants more accurately, by bringing the customer into the conversation and providing that customer with a voice. Tools to monitor, analyse and report on the conversations taking place are improving as we speak.
These conversations don’t take place in walled gardens but out in the open, the shared spaces of life, both in culture as well as in technology and architecture. Markets are conversations, as Doc Searls said. It is through the sharing of social objects that communities form and grow.
The social objects have another critical use: they form rolling stones that gather the moss of metadata we all need. As we move from hierarchies of product and customer to networks of capabilities and relationships, the topology of the business and the firm changes. Vertical integration is replaced by an architecture best defined as high cohesion with loose coupling or, if you prefer, small pieces loosely joined, to quote David Weinberger.
This horizontalisation of industry and business is taking place while one other major shift takes place, the democratisation of access to real computing power. Neither telcos nor IT companies have any control of the device at the edge of the service. Without end-to-end control, and in a small-pieces-daisy-chained world, it is no longer possible to have a finite number of low-volatility repeatable processes.
Instead we have patterns.
And as we move from process management and execution to pattern recognition and response, the metadata we collect becomes more important; the ability to spot patterns in the data and in the metadata becomes more important; the ability to extrapolate from the data to the pattern becomes more important. Which in turn means we have to get better at how we describe things, again something that requires us to consider the concept of cognitive surplus, how to apply it, how to convert it into value for our customers, for our business, for our shareholders.
Businesses exist to create customers. They are organised into firms in order to reduce transaction costs. The use of social and sharing tools within the enterprise needs to be looked at in these contexts and not dismissed out of hand as is often the case.