Networks. Sharing and Business Models- Whats Next?

I was intrigued the other day by a post from Venture Capitalist Fred Wilson

Future Friday: OpenBazaar and OB1

and particularly the following statement:

“So OpenBazaar is a decentralized open source marketplace protocol that allows trade to happen between parties without a central marketplace operator and without a take rate.

There is a real question about how one can make money doing something like this. And there is a real question about how you avoid bad people doing bad things in a marketplace like this.”

There has been a lot of buzz and discussion in the last couple of years around platforms and marketplaces, especially around what is euphemistically called the sharing economy. Well known examples such as Airbnb and Uber create a platform that connects buyers and sellers of services and I am a avid user of both services, as an active buyer and seller.

For services that purport to be disruptive (and they are) scaling of the size of the networks that are associated with them rapidly moves them to the position of incumbents, and because of network effects that is a powerful position. If you want to book shared travel accommodation will you go to Airbnb with 1.2 million listings in more than 34,000 cities worldwide, or will you try and find the plucky startup challenging their model? This means despite the fact they are supposed to be a disruptive distributed platform power quickly accrues to the centre.

This power is somewhat restricted by platform economics. The platform does not work if the suppliers are unhappy with what they receive and similarly if the buyers are not happy with prices and service. A platform marketplace only works if the suppliers and buyers both stay and the whole business model, power, and valuation rapidly collapses if people start leaving. This sort of relationship lends itself to looking at the model from the point of Porter’s Five Forces Model

porters-five-forces-model from notesdesk

From: http://www.notesdesk.com/notes/strategy/porters-five-forces-model-porters-model/

Logically the platform would equip itself to reduce the power of buyers and suppliers in the marketplace in order to maximise its own position. For instance:

  • Attracting more supply reduces the power of suppliers.
  • Financing cars for suppliers to use (Uber) helps their suppliers with financing and cost structures but also has the Machiavellian effect of locking people into capital structures and therefore more likely to maintain supply arrangements. That reduces their choices and therefore their power.

Logical actions like this tend to concentrate innovation into the process of consolidating power and revenue to the platform rather than innovating just to delight customers. Centralised innovation tends to also limit innovation as compared to innovation on open platforms.

The sorts of actions that come with maximising the value of the platform in order to reward the founders/owners have a logical flow to them and a sense of inevitability. If you can adopt a defensive market position that give you a strategic structural competitive advantage then why wouldn’t you?

The principles around OB1 appear to be vastly different. While Fred Wilson and Union Square Ventures are likely to be holding some information back on how they plan to approach their investment for prudent financial and strategy reasons it seems they are looking to contribute to the core platform/ecosystem while opening up themselves up to out and out competition on the platform as their way of creating value for customers and investors.

A number of services could be envisaged on top of the platform that help buyers and sellers in the market place. These include search services, trust services, premium advertising services, Bitcoin hedging services, etc. However if my assessment is right OB1 will only profit if they produce the services on the platform that produce the best value for customers (buyers and sellers) and therefore they will be exposed to ongoing and relentless competition.

I see that as a fantastic thing for customers. The jury is still out as to whether such a system can compete with a more systematised and heavily capitalised platform such as eBay. On the plus side open source has proven itself again and again to be commercially competitive with companies competing on the service supply side. On the negative side simple systems that just work and employ existing standards that people are used to and trust are big winners in mass markets.

Union Square Ventures and A16Z who have also invested are smart players in this space. That does not mean they are right because they are venture capitalists who depend on the big wins to get the returns they are looking for. That means that individual bets tend to be high risk. However this is very much a space to watch

If this interests you then I suggest you read:

What is OpenBazaar?

Introducing OB1

The next post will continue on this theme and look at networks as marketplaces rather than simple paltforms

Why is the EU Acting Like a Meat Wholesaler?

lamb carcase from WA agriculture carcass

For a long time I was on the board of an unlisted public company that wholesaled meat. The Chairman had a very simple attitude to debt collection. If someone owed us $20,000 then he would spend $50,000 trying to get it back. That may not seem to make economic sense but it made sense when you think of debtors as a network. He simply wanted to send a message that we were not to be screwed with, and that we would chase you to the end of the earth. In the meat industry if you got even a whiff of a reputation that you would not collect your debts then people very quickly stop paying you. This very simple strategy worked very well. On annual turnover of $80-$100 million a year we very rarely had bad debts in total over $25,000 and there were years where we had none at all.

This strategy seems to be echoed in the approach the EU is now taking to Greece. I have done quite a bit of reading and thinking about the issue over the last week or so as understanding geopolitical and economic risk is important to my work as a futurist. I am going to use some of the details in a workshop on uncertainty that I am running later in the month. One standout feature seems to be that the EU is concerned that if they go soft on Greece then Spain. Portugal, Italy and others may feel emboldened not to pay back some of their debt and the problem will spread.

However the story is much more complex than that and the details are an object lesson in the fact that social, political and economic issues are intertwined in these sorts of issues, often at a very personal level of the decision makers. They also demonstrate that once stories are embedded in the collective consciousness they are hard to shift. The first rule of politics is that it is always easier to convince people of something they already believe. I am writing this as the Greek referendum is taking place and I think it is worth putting some of the facts on the table.

When I have spoken to people in Australia about the Greek situations they have defaulted completely to the story that the Greeks over borrowed and have been profligate and undisciplined in a fiscal sense. That story is certainly true but it is the facts of a long time  ago and the lenders were certainly complicit in lending the money. When you tell people that most of the bailout money has gone to pay out private lenders and that over the last five years the following has happened they are totally surprised:

“Since 2009 the Greek state’s deficit has been reduced, in cyclically adjusted terms, by a whopping 20 per cent, turning a large deficit into a large structural primary surplus. Wages contracted by 37 per cent, pensions by up to 48 per cent, state employment by 30 per cent, consumer spending by 33 per cent and even the current account deficit by 16 per cent.Alas, the adjustment was so drastic that economic activity was choked, total income fell by 27 per cent, unemployment skyrocketed to 27 per cent, undeclared labour scaled 34 per cent, public debt rose to 180 per cent of the nation’s rapidly dwindling GDP”

From: http://www.irishtimes.com/opinion/yanis-varoufakis-a-pressing-question-for-ireland-before-monday-s-meeting-on-greece-1.2256339 

This is even more dramatically shown in the following graph:

 Greekovery from interfluidity

via Interfluidity (see below)

This is all part of the argument around whether austerity works or whether austerity contributes more to the problem. Apart from the fact that if you are measuring risk as a ratio of debt to GDP then crashing the GDP makes the problem worse, it is obviously very hard to pay back debt if your economy is suffering in this way. This is compounded when the predictions by the lenders are continually optimistic and completely wrong:

troika-forecasts-large from interfluidity

Via interfluidity – see below

It is easy to see from these graphs and the reality of unemployment and economic depression why the general person in the street in Greece might be disillusioned at the moment.

If I was a Greek voter right now I would be inclined to vote against the proposal to agree to the new lending and austerity measures because I think there is still a path of negotiation via that route. My concern about the opposite vote is that we will see significant political disintegration in Greece that will feed into radical political movements and that the long term future of the EU will be threatened both from without and within.

Beyond the financial implications of being “soft” on Greek debt I think that there is a large piece of decision making that is occurring here because of personal political considerations and entrenched positions of bias. That is always a poor environment for clear decision making and  timely reminder when we try to analyse these issues we must always ask the question of a story that is being told :  “who benefits from the story being told now or in this way?

If you wish to be further informed on these issues I suggest you read:

Where did the Greek bailout money go?

interfluidity » Greece

Schaeuble Popularity Soars as Germans Doubt Greece’s Euro Future

The Road To Grexit

I would encourage people to point out where they think the information I have provided here is incorrect or presented in a biased way. We are all better off when we see issues from multiple points of view.

Paul Higgins

What Happens When all the Friction has Gone?

The quick answer of course is that you slide right off.

friction sole-115156_640

I am fascinated by the continuing questions of what is the collective result of us making logical individual decisions that make economic sense. Adam Smith of course would say that this is the invisible hand of the market where we all benefit from everyone acting in their own self interest.

I am constantly telling clients and conference attendees that they need to remove the friction in relation to their interaction with customers and stakeholders. Through our level of connectedness and the developments in mobile technology we are training a generation of people that they can get what they want now. Want to be reading a book? Search on Amazon and it can be on your reading device before you board the plane. Want a TV show, click on your Netflix app, want to reach someone call them on their mobile. The list goes on and on.

Friction is anything that gets in their way about the capacity to do something, and especially if they have made a decision to act rather than just browsing. This is both a customer retention strategy and a talent retention strategy. If inside your organisation people cannot get the same level of capacity to do stuff they can in their daily lives they are less likely to stay.

It is  a clear economic benefit to reduce friction and increase the likelihood that someone will buy your products or services or will stay with your organisation. There are clear first mover advantages but the question is what happens when we have all done it and response time is down to milliseconds.

My thinking on this today was prompted by an article in MIT Technology Review:

Buy buttons are coming to Pinterest and will reinvent online commerce, the company claims.

The article describes the possibility of you seeing a recipe on Pinterest that you like and the capacity for you to click on a buy button that will buy the ingredients on Instacart which has a one hour delivery service. That theoretically means if you feel like it you can scan for recipes on your train trip home, click on the buy button and have the ingredients delivered for you to make dinner. This all makes sense from an logical economic part from Pinterest who will obviously make a cut for that transaction. If you see the recipe and leave the site without making a buy decision they get nothing. There are a number of other implications to this as well:

  • It is likely to be higher margin business for both Pinterest and Instacart (and other providers that participate) because your purchase is partly an impulse buy and you are not comparing prices.
  • It is aimed at the time poor consumer as much as anybody. You may have planned to shop on the way home but a late client call or an unexpected meeting with your boss had delayed you so this service provides a way for you to deal with this problem.
  • It means that the competition to attract and retain platform users for this sort of business is likely to get even more brutal. Accessing those high margin customers who may contribute 80% of your net profit will be vital.
  • Tracking and data profiling of the customers will become even more important and probably more invasive.

More and more organisation are going to be heading down this path in order to reduce any barriers for their customers.

So back to my original question.

Once everyone has removed every possible friction with customers it ceases to be a key competitive advantage. In my work with clients on business models we differentiate between survive competencies and thrive competencies. The survive competencies are the ones that you need to have just to play in the game. Thrive competences are the ones that will grow your organisation and its success. Over time many thrive competencies transfer into the survive category. A sort of commoditisation process. My work is partly about helping people think what the future will look like so they can refine their strategy and allocate resources. Lack of friction will no longer differentiate you in the future.

So what should you do:

  • First of all by all means continue to work on removing friction. It will give you short term advantage the faster you do it and you will need it just to survive in the future.
  • Think through the sorts of organisations and platforms that are likely to capture the attention of your high margin customers or your key stakeholders. You will need to figure out how to maximise your presence there while minimising your dependence on them. If you give up your key contact to the customer to someone else you are handing over power. If you have arrangements with them like Instacart might have with Pinterest make sure that you are in a position to collect customer data.
  • Think through how you support and maintain contact with those customers who are the ones that will promote your business and recommend your product. You may even want to support them establishing profiles on sites like Pinterest.
  • Concentrate on the one enduring competency. Delighting the customer. Removing friction will help that but in the end it is the experience that the customer (in the widest possible sense of the word) has with your product or service that counts.

Tell me what you think

Paul Higgns

So Your Daughter Wants to be a Motor Mechanic

Myself and Christopher Rice (@ricetopher) have started writing a book on the life and work skills that a child entering their first year of high school right now will need in 15 or twenty years time. There is a lot of stuff around about the disruptive effects of technology (especially robotics and artificial intelligence) will have on work and the economy over the next twenty years but we wanted to focus on the conversations that parents are having with their teenage children about these things right now.

There are a large range of issues to consider and we will be posting examples of our thinking to this site over the next few months as we write.

As an example of this consider the situation where your sixteen year old daughter or granddaughter is considering becoming a motor mechanic. What advice would you give them.

queens auto mechanic female via nydaily news amd-audra-fordin-jpg

Picture:NYdailynews

In order to train as a motor mechanic the individual concerned must think there are reasonable chances of good employment as well as having a passion for mechanical things. Due to the length of training you would want those prospects to be long term. The prospects for a motor mechanic in 15 years time are highly dependent on a range of interacting factors:

First of all it is clear that robotics and computer technologies have had their greatest impact on routine manual and cognitive (sense making/ intelligence) jobs that can be easily automated. Think robots in car manufacturing plants, online accounting packages, or websites that now sell all sorts of travel products and services.

Secondly it is now obvious that technology is now pushing into areas that have much higher requirements for intelligence and creativity and are less routine and therefore less easily automated. Examples include driverless cars, journalism (An NPR Reporter Raced A Machine To Write A News Story. Who Won?), specialised manufacturing (Cheaper Robots, Fewer Workers), and even senior management (Here’s How Managers Can Be Replaced by Software). Recently there was even a story about machine systems rapping (Machine learning algorithms can ‘bust a rhyme’ better than humans by 21%).

Thirdly it is in the interests of business to make most work more routine because this affects the balance of power between employers and workers and therefore costs. Routine jobs require less skills and therefore on average wage levels will be lower. If wage levels are high in routine jobs they are under more risk of being replaced by technology because the economic case is better.

Fourthly there is a risk of overall disruptive change in the industry you choose to work in.

So let’s look at that from the point of view of a teenage girl thinking of becoming a motor mechanic.

Cars have clearly become more complex over the last decade and are becoming travelling computers and software platforms as much as they are a form of transport. To the extent that John Deere and GM have recently asserted that you don’t own your vehicle, you only purchased the right to use it in order to protect their software(GM says you don’t own your car, you just license it). Tesla updates its cars via software releases over the internet.

Generally one would think that increasing complexity would mean that the skills of the mechanics would have to rise and therefore it would be a good job to have. However there are several factors pushing this in the opposite direction:

  • The software systems are so complex that the job of monitoring and managing them is being increasing taken over by automated machinery that is moving towards a plug and play model that both diagnoses and fixes the car without human involvement.
  • Being a motor mechanic for specific brand of cars is essentially working in a closed system. The cars are all manufactured to a specification that is well known and understood. This means that the system you are working in is much more open to standardisation.
  • Companies such as BMW are introducing augmented reality systems that are able to recognise the car they are looking at and supply instructions and videos and augmented overlays that assist mechanics in doing their work. With massive investment and development of augmented systems around the world for a multitude of uses it is likely that these systems will rapidly improve. These sorts of technologies are very useful but they tend to lend themselves to de-skilling the workforce. If a mechanic is able to follow detailed and useful instructions overlaid on to their field of vision then there is less need for training. Less training means lower skills and easier replacement by others. Both indicators of lower wages

In the longer term the advent of driverless cars will greatly affect the job of the mechanic. There are various views on the timelines for the full scale implementation of driverless car but we view it is inevitable and likely within 15-20 years.

Currently our cars are idle about 94% of their life. The full implementation of driverless cars will mean that a large percentage of cars will be used far more as they move from transport job to transport job as de facto public transport system. Therefore the standard car is likely to do 60-100,000 km a year instead of the current 15,000 km. It also makes sense as a business model for driverless cars to be less personalised than in the past as we move from ownership to rentership[1].. Therefore very large scale model runs of cars that have greater durability and can be easily and systematically maintained make more economic sense. We will probably design cars that have lifetimes of 500,000 km but will still only last 6-8 years.

That means that the processes of fast food franchises/manufacturing plants will be applied to car servicing. This will include modularised systems that can be robotically swapped in and out of cars on a production line, with other servicing carried out on the same line Therefore skilled mechanics will be less in demand and will be replaced by a sort of basic manufacturing job.

Therefore our view is that the future job of motor mechanic for your daughter or granddaughter is much less promising than it seems currently. We would recommend that you steer that mechanically minded teenager more towards the field of robotics and drones which show much more promise and likely demand, but more on that later.

We would welcome your comments and debate

Paul Higgins and Christopher Rice

[1] A term used for moving from a system where we own most things to a greater percentage of the physical products we access being rented rather than owned.

The Budget Centrepiece: Sleight of Hand Politics and Unintended Consequences

The Australian government has made as a centrepiece of its budget a temporary change to the depreciation rules that allow small businesses with a turnover of under $2 million to write off any capital purchases under $20,000 immediately rather than over the longer term. This means that anyone who purchases such an item will create a larger short term tax deduction than they otherwise might have. Over the longer term there is no difference to the deduction as future depreciation will be reduced and tax will be higher than otherwise. The change lasts to June 30 2017.

As a futurist I am always looking at the long term impacts and the unintended consequences of actions including government policy.If we examine the possible responses from different businesses and how they will play out then we can better understand the policy.

The first group of small businesses will be those that were going to spend money on these sorts of capital items already. They will benefit from a greater tax deduction but will not have contributed any spending to the economy. The government is essentially lending them money interest free because the small business more tax back in the short term but have to pay that money back in the form of tax as depreciation is lower in the later years. Those lower tax deductions are essentially loan repayment as their tax payments to the government will be higher then than they otherwise would be. Sure they may choose to spend some of that money and stimulate the economy but it is still essentially debt based spending which has to be paid back.

The second group of small businesses are those that would have otherwise not spent the money in the next 2 years because they lacked the capital or the business case to do so. Some of these will make good decisions and some will make bad decisions given that a business capital purchase that only makes sense if there are advanced depreciation write offs is generally a marginal investment. Towards the end of the policy many purchases that were going to be made in 2017/2018 will be made before June 30th 2017 when the policy ends. This makes good economic sense for the most individual small businesses. These will be good business purchases brought forward and that brings forward the economic stimulus of those purchases. The question is what happens in the 1-2 years after the temporary change is removed. There has to be a consequence of less spending and therefore a reduction in economic stimulus at that time.

The third group is those small businesses that make spending choices based on minimising tax alone. The history of such business decisions and investments is that many of them are made poorly. Poor investment decisions are bad for the economy in general as it removes capital that could otherwise be spent on other things, reducing efficiency.

There are three major possible outcomes to the policy putting aside that micro-economic impacts might drive prices up close to June 2017 reducing the efficiency of spending decisions.

The first is that the package will work as a short term economic stimulus by promoting spending in the economy but that the spending brought forward will crash demand in the 1-2 years after June 30th 2017. The cynical would say that the government does not really care about that because it will be after the next election. However the problem may be that increased short term demand could either drive up interest rates or minimise the chances of any further rate reductions. This means that rates could be higher just as demand from small business falls away causing more problems in the economy.

The second is that the package does not work in terms of demand and that small business spending does not change much so all the government has done has lent short term money to small businesses that would have spent the money anyway. That is pure waste.

The third is somewhere in between the first two but that a significant number of small businesses that otherwise were not going to spend money  make bad spending decisions on the back of tax deduction fever. Either by spending current reserves or by borrowing money from the bank to do so. This may produce some short term economic stimulus but economic stimulus based on poor investment decisions always comes back to bite you.

The government has made a big publicity splash on this measure and the fact that they have allocated $1.75 billion to pay for it. The reality is that this is not the costs of the scheme as the only real cost is the interest on the money that the government would have otherwise received in tax receipts. The actual capital will be clawed back in future years as businesses get less deductions in the future.

Based on the media coverage so far the government has had a big political win on a measure that does not cost the budget too much over the longer term. From where I see the policy going they have achieved that political win at best for no positive impact on the economy and at worst have made another set of problems.

Paul Higgins

Is Bitcoin Technology Accelerating Faster than Anticipated

The NASDAQ has announced that they are testing use of the Blockchain technology that underpins the programmable currency Bitcoin.

On Reddit 3 days ago:

“If the effort is deemed successful, Nasdaq wants to use so-called blockchain technology in its stock market, one of the world’s largest, and potentially shake up systems that have facilitated the trading of financial assets for decades.

“Utilizing the blockchain is a natural digital evolution for managing physical securities,” said Nasdaq Chief Executive Robert Greifeld. He said the technology holds the potential to “benefit not only our clients, but the broader global capital markets.”

Nasdaq will start its pilot project in Nasdaq Private Market, a fledgling marketplace launched in January 2014 to handle pre-IPO trading among private companies. The platform has more than 75 private companies signed up, according to the company.

Private companies typically handle sales and transfers of shares with largely informal systems, including spreadsheets maintained by lawyers who verify transactions by hand. Nasdaq wants to replace that process with a system based on bitcoin’s blockchain technology.”

The Blockchain technology allows transactions to occur between two parties who do not know each other without a trusted intermediary between them.

As an example in presentations and workshops I use betting on a football game with someone you do not know. That really doesn’t happen now because how do you know they will pay up. So if you want to bet on a football game you either bet with friends or use a commercial betting agency. Those relationships provide the required trust.

However you could use the Blockchain technology to program your bet into the system and the programming includes scanning the internet for the game result and paying out on the result. The money to do this would have already been locked in the Bitcoin (or other system) currency that you own. So you can make the bet without a trusted intermediary.

Immediately this disrupts existing betting agencies but this also applies to a whole range of business models including as we can see from the NASDAQ announcement the stock market.

The initial experiment by NASDAQ makes sense because it is dealing with a sub- market that is currently clunky.

There are lots of issues still to be sorted out. In the betting example above one of the problems is the consumer standardisation of the process. The wild fluctuations in the price of Bitcoin and other currencies also means a lack of confidence in the bet amount. However we are already seeing hedging services filling this vacuum.

The NASDAQ announcement as surprised me a little. The Blockchain technology has been on my radar for a while but it is accelerating faster than I expected. Get ready for a wild ride.

Addendum: 

The again maybe I should not be that surprised. It is a general rough rule of thumb in technology adoption that a technology has to be around for twenty years before it becomes mainstream. As the history of cryptocurrency page on Wikipedia notes:

“In 1998, Wei Dai published a description of “b-money”, an anonymous, distributed electronic cash system.[17] Shortly thereafter, Nick Szabo created “Bit Gold”.[18] Like bitcoin and other cryptocurrencies that would follow it, Bit Gold was an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published”

Welcome to the future.

Paul Higgins

For other interesting pieces on Bitcoin and the Blockchain see

Why Bitcoin Could Be Much More Than a Currency – Technology Review

After The Social Web, Here Comes The Trust Web – TechCrunch

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order – Book on Amazon

The Smart Business Model Play in Solar Energy Solutions

In conjunction with the announcement by Tesla on April 30th that they are supplying home battery storage systems (Tesla launches a stationary battery aimed at companies with variable electricity rates and homes with solar panels.) Solar City in the USA has announced that

Using Tesla’s suite of batteries for homes and businesses, SolarCity’s fully-installed battery and solar system costs are one-third of what they were a year ago

Just think about that for a moment. A model which has dropped in price by 67% in 12 months. That is disruption on a major scale.

The solar panel business and the battery storage business is likely to be a continually brutal Darwinian space and require huge capital to supply the necessary scale because of the structure of the technology and the cost reductions that are occurring.

This raises the question of what is the smart play in this space and I think it is in staying away from the panel and battery technology space and playing in business model innovation at the layer above that.

There has been considerable comment on what is happening in the cost curve reductions in solar panels and battery storage including:

Why Moore’s Law Doesn’t Apply to Clean Technologies

and a counterpoint from one of my favourite analysts/writers Ramez Naam:

Is Moore’s Law Really a Fair Comparison for Solar?

who embedded the following graphic from Nature Climate Change

Nature-Climate-Change-Batteries-Cheaper-than-2020-Projections-800x488

looking at the falling prices in battery storage.

I think both articles make excellent points but the main issue is the cause of price change over time which has been 60% annually for transistors and 14% annually for solar (over 37 years) according to Naam. Analysis of the two articles indicates that the change in transistors has been far more driven by technological innovation while the pace in solar has been more by the classic cost learning curve and move to scale.

Which brings us to the smart play. My view on the key drivers when thinking about business strategy:

  1. Just as many solar manufacturers have bitten the dust over the last decade the same will apply to battery manufacturers and start up battery companies in the next decade, as well as being a continuing issue in the panel industry.
  2. One of the main problems with Lithium Ion batteries is the charge and discharge cycle lifetime. From a cost per kWh storage point of view the shorter the life cycle then the higher the cost as the initial capital costs have to be depreciated over less energy usage. Therefore alternative battery storage options have to be a key competitor in the space. There is lots of investment going on in technology development. So to win you either have to have the capital backing that companies like Tesla boast or pick the right technology and take the development risk.
  3. Particularly at a household level the costs are related as much to installation and deployment model as to cost of the technology (just as transistors are only a fraction of smartphone or tablet costs).
  4. At the household level adoption issues beyond costs will also be critical.

So while there will be clearly winners in the panel and battery space the risks and capital required are enormous. There are better opportunities in deploying innovative business models in the space including:

  • Models for landlords that get around the issues of the landlords bearing the capital costs and tenants gaining the cost reduction on their power bills. This includes leasing and income sharing models driven by algorithms.
  • Efficient and low cost installation models that drive down the costs of installation and maintenance.
  • Financing models that allow installation for people that otherwise could not afford installation.
  • Community models that integrate use of the grid into distributed generation, storage and consumption models that reduce costs to consumers while improving the income for local generators and renewable energy systems

There are parallels for this in other sectors. The sports clothing company Under Armour is pursuing a strategy for fitness apps to complement its sports clothing sales. That strategy is hardware technology agnostic in that it integrates with a range of technologies that users are adopting. This means they do not tie themselves to any particular hardware solution and avoid riding on top of a technology that fails.

That is the smart play here

Paul Higgins

 Full disclosure: I have recently worked for the sugar milling industry here in Australia on energy transition scenarios. I may in the future have a financial interest in community models.

Councils and Foresight – Critical Differences

Since I published my Councils and Foresight post last week I have had some comments and questions via social media about the key differences between Councils and Commercial Organisations in particular and what they mean in terms of different approaches to foresight. Along with those questions three comments that were made last week during our foresight session at the VLGA Mayoral Leadership Conference have stuck in my head:

  1. I demonstrated our quick and dirty scenario approach prefaced with the statement that it was useful when you had a spare ten minutes. One Mayor talked to me afterwards and said she would love a spare ten minutes for anything. That is a major concern, No time for strategic thinking.
  2. Two mayors talked to me about reading 300 page briefing reports for council meetings, which ties in with the problem in point 1.
  3. One Mayor talked about the glacial pace of change in councils, which I am sure is true in most people’s experience.

These comments tie in with the different approaches that need to be taken with foresight issues in councils and they relate to the structural issues of how councils operate:

  • Firstly compared to commercial entities councils do not have the luxury of appointing a skills based board (council) based on getting a diverse range of expertise and perspectives. Having said that many commercial boards do not do that well either but at least they have the capacity to do so.
  • Secondly many councillors commonly come to council without a deep understanding of the detailed operations of council or in the management of large organisations while in many cases commercial boards are selected on that basis.
  • Thirdly councils are far more tied into, and exposed to the needs and views of their community while large commercial entities in particular are generally distant from their smaller shareholders. There are pluses and minuses to either situation but there is nothing like being confronted down the street, in the pub, or at the local footy club to bring home the reality of what you are trying to do.
  • Fourthly commercial entities are able to make faster decisions and have a much clearer measurement of success in terms of profit and loss, balance sheets, and share prices, albeit allowing for the weaknesses of some of those approaches.

So in terms of foresight and thinking of the future I think that councillors need to:

1/ Work much harder at bringing a diverse range of perspectives into the foresight and strategy processes of council, and ensure they are not the same old faces. This compensates for the lack of capacity to have a planned diverse council.

2/ Let go of the need to get across of all the detail and concentrate far more on critical thinking and questioning skills. Having been involved in representational agripolitics and party politics I realise that this is a lot easier said than done. Voters expect you to be across all the detail but if you spend all your time reading 300 page briefing papers you will have no time for thinking strategically. Councillors need to allow council officers to do the detailed work but have the capacity to clinically question what is put before them or develop alternative strategy, not try and do the operating job.

3/ Concentrate on areas where there is going to be faster than glacial movement. In areas of the economy that have been disrupted recently the key  has been a strong and direct link between the producer of products and services and the customer. Think books, music, airline travel, etc. In council affairs this relationship is sometimes more diffuse. The key area of direct contact and pressure is either funding by government or rates. In this efficiency and effectiveness of council service provision are critical. My view is that critical areas to be looking at here are:

  • The development of artificial intelligence systems and robotics. MTR in Hong Kong is already using an AI Boss to supervise and schedule its repairs and maintenance system.. X.ai is supplying an AI as a personal assistant which I have had personal experience with, and it already works well. There are going to be huge opportunities for reducing costs and improving the effectiveness of council service sin the next 5-10 years.
  • Crowd funding as a mechanism to test the real desire of people to get various things done in their community, perhaps by providing matching funding for projects. This has to be carefully managed as it raises the value of the voice of people who have money versus those that do not.
  • The rise of social enterprise were world class business operations also have a social purpose. The Bendigo Community Bank is an example of this where 50% of the profits are returned directly to the community in which the bank operates but there is likely to be big developments in this area.

4/ Concentrate on longer term issues and start the discussions well ahead of time. If pace of change is going to be slow then we need to engage the community in longer term discussions on what change looks like. Examples include:

  • Driverless cars are likely to be adopted in a significant way in the future. The time frame of that wholesale adoption is likely to be 10-20 years away (see post : Implementation of Driverless Cars – A case for public subsidy of private transport systems) but will have significant impacts on requirements for parking, public transport systems, road planning, work/living relationships (changing value of certain suburbs versus others). Council needs to be thinking about these issues well ahead of the adoption curve.
  • The future of local democracy. What does that look like in a networked world, tied in with crowd funding systems, electronic voting systems, virtual reality , etc.
  • The possible havoc that improvements in artificial intelligence and robotics might wreak on employment and what it means to the local economy and job market.

The pace of change is likely to accelerate. Councillors need to step back and see where their limited time can be used to create most value in that future.

Paul Higgins

Councils and Foresight

Yesterday it was both my pleasure and privilege to present a Master Class on Foresight for Councils to the Annual Mayoral Leadership Conference in Victoria run by the Victorian Local Governance Association and Leadership Victoria. I say privilege because it was fantastic to see such a committed and enthusiastic group of people determined to maximise their learning and capacity to make a contribution to their communities in what must be one of the hardest  but most important jobs in politics. This aligns with one of our principles of being engaged in work that helps others make a contribution to their community so it was a privilege in the strongest sense of the word. Here is a summary of what I presented with some additions based on some of their great questions. The structure of the presentation was to talk about some general principles and then to give the participants a taste of some tools they could use in their council activities. The title of presentation was Avoiding the Unknown Unknowns but from the outset I told them that this was an impossible aspiration. That we can get better at looking at what might surprise us but we will still have to react to surprises and there will always be crises to deal with. Foresight is essentially the process of helping people put together a few more pieces of the puzzle they face while recognising there will always be pieces missing The group as a whole were there to learn to think better about what might be happening in the future, to create new approaches to approaching planning and problem solving, and to look at how to open up their organisations and their communities to what the future might hold. The principles that we discussed around these objectives were: 1/ That we all have innate ability to think about the future. We cannot operate in the real world without that capacity. In such a simple process as crossing the road we have to project ourselves into the future by anticipating how fast cars are travelling and when they will arrive at our crossing point. However our brains evolved at a time when the sorts of threats and challenges we faced as human beings were nothing like the complex issues we face in today’s ever changing world. Our brains evolved in an environment where physical threats and challenges were the main issues and so the improving vision systems and pattern recognition systems that were successful in those environments won out. Our brains have not changed much since those times and so we need concepts and processes to augment the natural way in which our brains work. 2/ That getting people and organisations to think about different possible futures automatically increases the chances of spotting meaningful change. If our minds are already tuned to multiple possibilities we are more likely to see signals of change in the events, encounters, and reports that we see every day. 3/ That the use of as many diverse perspectives as possible in engaging in thinking about the future improves our chances of our organisations finding meaningful signs of change. We all have cognitive biases such as confirmation bias where we actively seek out people and information that confirms our “fantastic” decision making or recency bias where we privilege more recent information (see List of cognitive biases , Top 10 Thinking Traps Exposed — How to Foolproof Your Mind, Part I, or  Racial Bias, Even When We Have Good Intentions for many more examples). These biases mean that we see the world in a certain way and when talking about future possibilities we favour some forward views of the world, discount some forward views, and downright ignore others. No matter how smart we are these biases affect us and it is very hard to get away from them as an individual. Therefore we need to involve people with diverse backgrounds, ages, training, cultures, etc when looking at what the future might hold because we all look at things a different way depending on those backgrounds. 4/ That context is really important. The decision theorist Gary Klein once said:

“Intuition is the use of patterns you have already learned, whereas insight is the discovery of new patterns”

Some of the really good decision makers I have seen in the past were great because they were great users of their intuition. They had built up a large library of problems they had seen and solutions that worked and they were able to pluck those out and apply them. That is the use of patterns you have already learned. It works fantastically well where the problems repeat themselves and we can re-apply solutions that worked. However we live in a world that is getting more complex and uncertain every year and therefore we encounter more and more novel problems as we move forward.The real skill here is differentiating between problems we are familiar with and applying old solutions to them, and recognising what are new problems and creating new solutions for them. One of the underlying skills in foresight is discovering and understanding the underlying patterns that are driving change. One of the practical applications of foresight is using that to create better decision making by understanding context. One of the best ways to look for ways the world might be changing and more new ideas on strategy is to look at other sectors, other cultures, other industries and other organisations. However the real skill is understanding the context in which those changes are happening and being able to apply that understanding to your context, not just blind copying.

5/ That time frames are really important when trying to get your organisation to rethink what the future might look like. One of the lessons that I have learnt in the practical application of foresight is to extend the time frame well beyond the current strategic plan time frame. This may seem fairly basic as we are talking about the future but it is really important. If we move the discussions beyond current plan time frames then it helps get past current embedded positions. The hardest thing to ask people to do is to go through a long strategic planning process and then six months later ask them to rethink what they have done. After people have spent months grappling with the issues, and fighting for their ideas and views to be represented in the plan and have resources allocated to those ideas they will always fight to preserve those entrenched positions. If you can take people 7-10 years in the future we move move partly beyond those problems and have more open discussions. We can then take any strategy ideas generated by that process back into the present to apply them. As a caveat here I am not a fan of these process being thought of as being 20 or 50 years in the future except in very specific cases because the time frames and too long and not relevant to people.

Later in the session I demonstrated our Trend Sheet Conversation process that utilises different perspectives in an organisation to discuss and prioritise trends and the impact they may have on the organisation. During that process I cautioned the group on being over reliant on trends. All trends are historical in nature as they are based on evidence of what has already happened. All trends change or break at some stage so creating pictures of the future that is reliant solely on project existing trends is a very risky process. To highlight that point I displayed the following picture of total vehicle miles traveled predictions from the US Department of Transport :

transport forecast fiascoVMT-C-P-chart-big1-541x550.png.CROP.original-original

Source: http://www.ssti.us/2013/12/new-travel-demand-projections-are-due-from-u-s-dot-will-they-be-accurate-this-time/ 

It appears that the projections ignored changes in what was really happening on the ground and continued to project previous growth trends into the future despite evidence to the contrary. This is a major issue if national road planning and spending is based on the projections. The post I have linked to above describes the process in more detail. One of the Mayors then asked  a really good question which was how do you deal with this issue if trend projections are being presented to you by council officers or outside experts. This is part of a broader question of how elected councillors question and probe information that is presented to them by experts. My answer was in four parts: Firstly the experts need to be probed on the underlying components of the forecasts. What is driving the assumptions. A key approach here is to break down the numbers into their components. In the case above questions like what are younger drivers doing? what are the effects of increasing urbanisation on miles traveled? If those answers are not forthcoming then the understanding and expertise of the expert has to be called into question. People who really know their stuff will revel in good questions being asked. Secondly ask a series of “what if” questions. This can be phrased by stating something like “lets assume that is the most likely scenario but what happens if the trends change? This can be particularly useful if again the trends are broken down into their component parts. For example “what if young drivers change behaviour?’ or “what if urban densification in our area accelerates?”, or “what if petrol prices fall?” or “what if the demographic mix in our area changes?’This can be particularly useful in identifying risks that are present if the trend breaks or changes Thirdly create a single scenario that details all the things that must remain the same for the trend to remain unbroken. This is very similar to the first process above but can be done in much more creative and story-telling ways that may work better for communication. Fourthly studies show that experts can actually be the worst people for spotting changes in patterns and trends because they are so tied into the existing ways of thinking. Therefore bring alternative outside perspectives into the process of thinking about the trends. This is always useful. I wish the group luck in their leadership roles in their communities in the next year,. I continue to be inspired that there are great people willing to put up their hands and put in the hard work that our communities need Paul Higgins You can see the presentation at Embracing Uncertainty – Mayoral Conference Masterclass Jan 2015 A second blog post : Councils and Foresight – Critical Differences is now available If you want to see more of our work please go to  Emergent Futures

The Board’s Role In Complex and Uncertain Environments – Part Two

Before Christmas I started a series on boards and uncertainty based on a Master Class Workshop for Not for Profit Organisations I presented as part of the Leadership Victoria Director Dynamics Master Class Series : How do successful boards manage the “unknown unknowns”?

You can read that post at:

The Board’s Role In Complex and Uncertain Environments – Part One

This is part two of the series and is focused on boards operating in increasingly complex environments.

If we accept that boards are operating in increasingly complex environments and that complexity creates greater uncertainty then they need to re-asses their roles. Based on the Cossin/Metayer Model described in the last post they have to spend more time in co-creation of strategy and in support of strategy. Cossin and Metayer describe co-creator and supporter roles as:

“By pursuing a co-creative role, boards can help open the minds of executives and steer the strategy debate beyond any cultural blind spots. Such blind spots typically arise from executive myopia due to corporate, historic or strategic biases”

Supporter: “In this role, the board acts largely as a support to management, lending the executive team its credibility and authority (or, in some cases, withholding its support to pressure management)”

Many Not for Profit boards are structured around the supporter roles with the board members contacts in political,economic, and community networks a valuable resource for the organisation.

My focus here is on the role of foresight in co-creation of strategy and the definition above provides a handy starting point as to what can be done to maximise the board’s value in this role. I normally say that structure follows strategy but in terms of boards I think that structure is very important and the reverse is true.

Therefore if a board’s role is to assist management in avoiding blind spots and strategic biases then a diversity of perspectives is critical. This means that when looking at board composition we need to go past the standard skill matching process where industry, financial, and legal expertise are often at the top of the wish list. In not for profit boards we can add fundraising capacity or access to networks as a key skill. Using such a list can result in a largely uniform set of board members with a long history of experience in the industry sector involved. Commonly this is predominantly a group of middle aged to older white males, except in the not for profit sector where more women are involved. This expertise is certainly useful but if it is the overwhelming characteristic of the board then the board will tend to mirror management’s biases rather than expose and question them. In order to get maximum capacity for diverse perspectives and the capacity to contribute to strategy in a complex environment we must get more diversity. This means diversity in gender, culture, technical experience, age, and training.

This is a strong case for more women on boards. Not because it is the right thing to do but because it is better for the organisation.

Secondly if the structure of the board from a perspectives point of view is well constructed then we need to allow the time and space for those perspectives to be brought to bear. Two things need to happen here.

1/ The board must have an ongoing role in strategy discussions rather than strategy being something that is discussed during the strategic planning process. It is more and more common to see strategy being adjusted in a dynamic fashion rather than just in strategic planning cycles. Processes need to be in place to have this as an active process with the board rather than management presenting new alternatives. The foresight part of strategy is focused on opening up the organisation to more possibilities and new ways of thinking. The strategic planning process is more of an analytical and choice making one, closing down the possibilities in order to allocate resources appropriately. The two require different skills and different processes.

2/ Board meetings need to be structured in a way that reflects the environment in which the organisation is operating and the considered role of the board. Too often I have seen board meeting agendas where strategy discussions are the last item on the agenda after financial and compliance issues have been discussed. This means that the supervisor role is being favoured over the other roles.This can either result in the strategy discussion being curtailed as people have commitments to meet, or people participating in strategy discussions when they are mentally and physically tired. This is particularly true of Not for Profit boards that often meet in the evenings. Boards need to assess their ratio of their various roles between supervision, support, and co-creation and then make sure that appropriate time is allocated for each role on that basis. Strategy discussions should always be at the start of the agenda while people are mentally freshest as it is the most challenging part of a directors role.

In the next post I will consider some foresight methodologies and approaches that can be used to complement the board structure and levels of expertise.