Can I trust you?

This is the second of two blogs on our new White Paper: Achieving Transform At Scale. The first blog focused on the infrastructure challenge. This blog focuses on the parallel need for institutional innovation.

Sometimes, when a society confronts a new challenge, the institutions it previously relied on to provide solutions cannot cope. New, different institutions are needed. We think this is the case with personal data. Traditionally, our society has looked to two main types of institution to unleash social and economic opportunities: private sector firms focused on maximising their profits and state-owned enterprises. But as this blog explains, these types of institution cannot rise to the particular challenges posed by personal data. A different type of institution is needed, and thankfully we have one to hand: the Community Interest Company (CIC).

Many people are still not familiar with CICs, which often come across as a rather strange hybrid beast. CICs are:

• asset locked. This means any assets a CIC develops cannot be sold to another entity that is not also asset locked and equally committed to pursuing its community purpose. Mydex is not seeking a trade sale or ‘exit’: it is committed to continuing the operation and extension of its platform as permanent infrastructure to benefit its community (citizens).
• dividend capped. Only 35% of distributable profits can be returned to shareholders. The remaining 65% must be reinvested in furthering the community benefits for which the CIC was established.

Why has Mydex chosen this unfamiliar CIC status?

Mission logic

One simple explanation is that when Mydex was established back in 2007, its founders didn’t just want to sell a product in order to make money. They wanted to produce a service that brings benefits to people and communities and recognised they needed to make money in order to fund this service provision. Making money isn’t the purpose of the business. Benefiting the community by achieving its mission is the purpose, and making money is a means to achieving that goal.

A second reason is that we recognised that personal data throws up huge issues and challenges relating to trust. We reasoned as follows: If there is a lack of trust surrounding the collection and use of personal data, its full personal, social and economic potential will be hampered by mutual suspicion, power struggles and conflict and therefore never realised. A new type of institution that builds trustworthiness into what it does, and how, is needed for this challenge.

How CIC status helps us rise to this challenge is not immediately obvious but the logic is powerful. It’s worth exploring.

Economic logic

The unique and particular challenges (and opportunities) of personal data lie in the fact that unlike physical products and most services, data is a resource that can be used by many different people and organisations for many different purposes without ever getting ‘used up’. Because of this, it breaks the boundaries imposed by current notions of ‘private property’. Institutions organised around the notion of ownership of private property and profit maximisation are struggling to come to terms with a new world where value is created by data sharing.

This takes us to the first unique challenge for Mydex: the question “What makes an enterprise economically viable and successful?”

It’s commonly assumed that the acid test of an enterprise’s economic success is how much money it makes. But that relates to its financial success, not its economic success.

If you stop to think about it, organisations’ economic results always lie outside their traditional legal and accounting boundaries — in the value their products or services generate in being used by other parties (while how much money they make is an internal measure). So, for example, the economic (and social) value of electricity isn’t measured by the money electricity suppliers happen to make. It lies in all the many uses our society uses electricity for.

This is true of all enterprises. The job of a car or phone maker is to provide people with cars or phones — that provide them with mobility and help them communicate: things they want to do in their lives. The job of a hospital is to treat the sick; the job of an orchestra to delight audiences with its music; the job of a local shop to make accessing the necessaries of life easy.

For most enterprises, this external economic impact is implicit. It’s not something they worry about too much, because they are focused on the internal measures that matter to them. But in the case of Mydex it needs to be made explicit, because the whole purpose of the organisation is the external value it helps to create: making data available to people (especially citizens) outside its traditional organisational boundaries, so that they can use this data for their own purposes. Adopting CIC status makes this external purpose explicit and focuses attention (of people both inside and outside the organisation) on this external purpose.

Financial logic

If it’s true that financial success is not the same as economic success, then how much money an organisation happens to make has got nothing to do with its external economic impact. If it’s a charity or public service, it could deliver huge economic benefits but not ‘make’ any money at all. If it’s a mafia syndicate, it could make huge amounts of money while its external economic impacts are 100% negative.

But to survive, an organisation needs to cover its costs, and how it does so matters.

If it’s a charity, it needs income from donations. If it’s a public service, it needs to be paid for by taxes. If it sells products or services, it needs customers willing to pay for them. If it needs external investment, it needs investors willing to invest.

Each of these approaches to funding has its advantages and disadvantages. At Mydex, we chose not to be a charity for two reasons. First, because with a focus like ours on personal data we feared that we would end up spending so much time and effort seeking benefactors and donations that this quest could end up diverting our attention away from actually delivering our mission. Second, this constant need to attract benefactors might place us under pressure to bend our mission to these benefactors’ whims.

Likewise, we don’t think an organisation with a mission like ours, relating to personal data, should rely directly on taxpayer funding for two reasons. First, there are immense risk and trust issues involved in the state having comprehensive citizen databases under its control. Second, taxpayer funded services often find themselves at the mercy of shifting political winds. That is why we chose to be a company that can cover its costs from what it sells: so that it isn’t dependent on external funders and remains free to make its own decisions. For us, this strategic independence is extremely important.

But does this mean we simply have to bend to the will of a different set of external parties, namely customers (e.g. the organisations who pay Mydex fees to connect to its platform) and investors?

It could, in theory. But we have designed our business model carefully to avoid this risk. We have designed our revenue streams so that we are financially incentivised to be a neutral enabler, not a ‘data monetiser’: we only sell connections to our platform to enable safe, easy, low cost data sharing; we don’t sell or rent any data itself. And the dividend cap for shareholders means the community always benefits from the lions’ share of any profits we happen to make.

Getting this balance right is crucial because of the extraordinary potential of the Mydex business model: the more it grows the more profitable it gets. Exponentially. As a platform business, Mydex’s core operating costs do not rise rapidly with volume use. But the more organisations that connect to this platform, the more revenues the platform generates. In other words, as Mydex grows its revenue streams grow much faster than its costs — which means that Mydex has the potential to become extremely profitable. By creating a legally-enforceable dividend cap that requires it to reinvest two thirds of any profits it makes in its community mission, CIC status ensures that Mydex’s external, economically beneficial community purpose always remains paramount.

(This has an important knock-on internal cultural impact. It means that in everything we do and how we do, we focus all our efforts on doing those things that will continually improve the external value we generate — our community contribution — on ‘making’ rather than ‘taking’. It creates a discipline and a yardstick for decision-making.)

Strategic logic

But this external value focus creates a potential problem. Why should investors bother investing in a company that only returns a third of the profits it makes to them when they could in theory get all the profits?

The simple answer to this question is that a third of a very large sum is much bigger than all of a tiny sum.

There is a paradox to this answer which goes to the heart of Mydex’s CIC status. It relates to the two separate elements: the ‘very large sum’ and the ‘tiny sum’.

Let’s start with the very large sum. With its data sharing infrastructure Mydex is creating the equivalent of a mass production assembly line for the entire data economy. Henry Ford’s assembly lines reduced the costs of making motor cars by over 90%. They made a transformational product affordable to ordinary people, unleashed a tidal wave of product innovation and transformed the way societies and economies worked. Mydex is doing the same with personal data: slashing the costs of accessing and using it, making its benefits available to ordinary people, unleashing innovation and transforming the way our society and economy uses our data in the process. The potential scale of this business is enormous and global. It could generate very large sums of money.

What about the tiny sum? A year or two ago, the UK Treasury published a paper on the Economic Value of Data. It contained a crucial insight. It noted that “innovative uses of data can generate powerful positive externalities (i.e. benefits) that may not always accrue to the data creator or controller. This can result in data being under-exploited or under-shared.”

In other words, the Treasury was accepting that private companies focused only on profit maximisation have no reason to pursue the transformational external economic benefits we have been talking about: they have no reason to build the data sharing infrastructure that Mydex is building.

This means that without a new type of institution that prioritises the external benefits identified by Treasury they won’t ever happen. If we stick with existing institutions with their existing priorities, the very large sum becomes a tiny sum. Forever. Investors who insist on having access to all the profits will get close to none instead. The opportunity will be stillborn.

This goes deep into Mydex’s role. The UK Treasury was highlighting a strategic collective action problem. It would greatly benefit all parties if investment was made into the infrastructure that makes the safe, efficient, privacy protecting sharing of personal data possible, so that all its uses and potential can be realised. But it’s not in the immediate interests (or role) of any current data controllers (e.g. organisations collecting and using personal data) to take on the cost, risk or responsibility of making this investment.

Somebody else needs to take on this role. But this somebody has to be different. They cannot be focused on grabbing all the benefits for themselves. They have to be focused on creating external community value. And these priorities need to be baked into how they work. That’s what CIC status does: bake these purposes into the organisation’s legal structure. As a CIC Mydex is legally required to share financial rewards equitably. And, as a CIC, we are legally required to keep to the above promises in perpetuity (unlike venture capitalist funded outfits that are incentivised to make all the promises in the world and to break these promises once they have achieved a profitable ‘exit’).

To put it simply, to break the Treasury’s collective action problem and to fully unleash personal data’s ‘positive powerful externalities’ we need a new type of institution that every stakeholder can trust. Only a new, neutral, independent, non-threatening, non-competing, trustworthy body can break the collective action logjam and Mydex’s CIC status formally confirms and signals to everyone concerned that this is its positive, permanent, enabling role.

The final piece of jigsaw

There is one more piece of this jigsaw that finally locks all the others into place. There are two main types of Community Interest Company: companies limited by guarantee and companies limited by shares.

Companies limited by guarantee are not-for-profit enterprises, while companies limited by shares can make a profit and distribute (some) dividends to shareholders. Mydex has chosen to be a company limited by shares. Why?

To some purists, CICs limited by shares are not ‘real’ community interest companies. The purists’ assumption is that if any shareholder stands to make any money out of investing in the company, then by definition they are extracting value from it and therefore exploiting the community that the company is supposed to be serving.

We don’t see it that way. Mydex is building nationwide infrastructure that will last for decades and building such infrastructure takes time (decades) and money. Which means it needs investment.

Most financial investors today adopt the role of cherry pickers. They search around for ripe fruit ready for the picking and invest in the cherry picking operation: big, quick, low-risk returns. Mydex is doing the opposite. We are planting and tending a cherry orchard from seedling to maturity — without which there will be no cherries to pick (the ‘positive externalities’ the Treasury was talking about). But this requires a different type of investor: one who ‘gets’ the mission and is prepared to be patient (because reaching the point where those increasing returns kick in will take many years).

Paying dividends (limited to one third of any profits made) to such investors is not exploitation of the community. It is paying for a service that makes a community benefit possible, just as paying staff to develop the software is not staff exploiting the community but making the community benefit possible. Once again, CIC status helps us to turn potential conflict into alignment to achieve a positive way forward.

Locust or bee?

Mydex’s mission — to empower every individual with their own data — is potentially global, long term and paradigm-changing: if successful it would put the modern data economy on a new and different footing.

In nature, we find many strategies for survival. There are predators and prey, parasites and hosts, foragers, scavengers, hunters. Locusts flourish by devouring the value other organisms have produced. Bees flourish by helping plants flourish — to flower and fruit.

Today’s personal data economy is dominated by locusts, intent on extracting as much profit as they can from individuals’ data. In choosing to be a Community Interest Company, Mydex brings together economic, financial and strategic logic to make it possible for the company to flourish as a bee, and therefore for the orchards to flourish and fruit too. We flourish by helping others to flourish. That, we believe, is why in the long term we will be successful. And that is why we are a Community Interest Company.