“Riding the Plasma Wave” by NASA Goddard Space Flight Center, on Flickr. Used under a Creative Commons license.

Everything That Can Become a Platform Will Become a Platform

Why legacy companies need to evolve faster to stay relevant

The S&P 500 lists the 500 most valuable companies in the United States. Dick Foster, a McKinsey consultant, studied their average lifespan. It is a sobering tale that reminds just how fast-paced business innovation has become. In 1937, the average tenure of companies on the list was 75 years. By 1960, it was 61 years. In 1980, 37 years. In 2000, 26 years. Today, an average of 15 years.

Innovate and adapt, or die.

Dries Buytaert, founder of Drupal writes: “Society is undergoing tremendous change right now — the sharing and collaboration practices of the Internet are extending to transportation (Uber), hotels (Airbnb), financing (Kickstarter, Lending Club) and music services (Spotify). The rise of the collaborative economy, of which the Open Source community is a part, should be a powerful message for the business community. It is the established, proprietary vendors whose business models are at risk, and not the other way around.”

Institutions have internalized lessons that no longer apply, and continue to rely on strategies that no longer make sense. They are molded by regulation and cultural forces that themselves are becoming obsolete. Industrialization, followed by automation, has led us to value conformity and uniformity above all else, and in every situation. The industrial process taught that tight control delivered the highest quality, And for the manufacturing of smartphones, light bulbs, and refrigerators, we want that precision. Six Sigma and all that. Managers sought to eradicate variation through tight centralized control. The bigger the company, the greater the urge to centralize.

This piece excerpted from Peers Inc

Legacy institutions believe deeply in command and control as the right management tool. Command-and-control cultures are extremely risk averse. The biggest of these companies know that the smartest people work for them, and that those people are the only ones who really understand the complexities of their business. If innovation or variation manages to find its way in, the corporate culture antibodies swarm in and soon put an end to it.

There is another way. In the transitioning world economy, everything that can become a platform will become a platform. The potential for this new organizational structure, that I call Peers Inc — the use of a technology platform and central core of workers (the Inc) that enables individuals who may not even work for the platform but simply provide services to its customers (the Peers) — is simply too compelling to deny: exponential scaling, exponential learning, and very low cost innovation and localization.

Collaborations between efficient platforms and participating peers will spread to all walks of life. Roxane Googin, a leading technology analyst who advises fund managers who move billions of dollars, said in a recent issue of her newsletter, High Tech Observer:

“The concentration effect is extreme. The centralized processing engine [what Peers Inc calls a platform] is a bear to develop, but once it works, the next transaction is effectively free. It therefore devours all the less efficient and smaller scale operations because it is both cheaper and more effective. Then, the profits of all the failed companies, along with the difference in efficiency between the manual and the automated business, accrue to the center. And, it learns. If managed correctly, it becomes a recursive learning machine that just gets more effective with every measured mistake.”

This is what I think of as Peers Inc miracle #2, exponential learning. And then, as the platform starts to really perform, the tendency is for larger platforms to eat smaller ones because of network effects: We all want to use the short-term rental service with the broadest possible range of rooms advertised, or be on the social network that has most of our friends on it. The winners keep winning and tend to wind up with monopolistic power. Roxane continues:

“It soon grows beyond replacement. Just look at how even after [Microsoft] management wasted billions of dollars on Bing, it is still failing against [Google], while [Google] never even missed a quarter. Thus, hyper efficiency, automation, wealth transfer and income inequality go together. In addition, this concentrating quality has all the power of the gravitational pull of a black hole.
That is because in this model, with a relatively fixed cost for the central processing engine, he with the most transactions wins. Not only are all transactions amortized against a similar fixed base allowing for lower end prices, but the biggest engine gets smarter, faster. Thus, in their desperate race against each other to be the number one transaction engine, any emerging giants quickly obliterate mom and pop operations without blinking. In the end, we have one gigantic processing engine that learns the most since it covers the most events, providing the least inexpensive, yet effective, transactions. While extremely effective from a macroeconomic perspective, this model lays waste to the small business model that supported our great middle class.”

This is what happens when we apply the Peers Inc framework — the scale of growth, the potential for hyper-learning, and the inevitable efficiency of it. But where Roxane sees the demise of small business, I see the rise of micro-business. In Roxane’s scenario, everything becomes automated and computerized by the platform. In my thinking, some platforms are in fact people-centric partnerships, opening up the possibility of a new localized, customized, specialized economy as delivered by the people. Platforms have unleashed the talents of artists and craftspeople (Etsy), musicians (SoundCloud), freelance administrators, accountants, and logisticians (UpWork), illustrators (Behance), cooks (Feastly), dog sitters (Rover), caregivers and babysitters (Care.com), errand runners (TaskRabbit), editors, programmers, designers, and videographers (Fiverr.com), communities of knitters (Ravelry), and gardeners (GardenWeb). This list could go on for pages, as we all know. All of these people now have newfound agency, new corporate powers, and access to a marketplace. These are examples of platforms that do not simply aggregate a commodity such as spare bedrooms but act as marketplaces for genuinely creative people to find audiences for their work — the same job that record companies and movie studios started out doing.

There is a certain inevitability of outcome. The platforms will exist, and they will grow and increase in power for many years to come. While some activities invite a greater degree of human interactions than others, most will become so efficient that people will be removed from the transaction altogether. The increasing use of automation is showing up everywhere, and it’s a trend that intersects with peers and platforms more every day.

Most of the incredible productivity gains of the last forty years have been unevenly distributed. Each year Fortune publishes data on executive compensation. Beginning in the mid-1970s, executive salaries began to outpace salaries for everyone else by a factor of three to one. Over recent decades, the richest 1 percent of families received 70 percent of the increase in average household wealth. So how will we distribute the productivity and efficiency gains that will result from the Peers Inc collaborations? The worst-case form of the platform economy — with the productivity gains of the platforms going almost exclusively to the platform owners and with significant unemployment — is unthinkable and unstable. We know that every big change results in winners and losers. We don’t want to end up with the almost-everyone-loses-everything alternative. Governments have always had to restrict monopoly power, and it has been a major aspect of life in American business since the days of the robber barons of the railroad industry and the epochal breakup of Ma Bell in the 1980s. Right now we have the opportunity to guide this transition, redesigning these businesses not just to centralize wealth and power at the platform level but also to build new structures for democratic control of big asset bases. The implications of the Peers Inc transition on companies play out differently than for people.

When I left Zipcar in 2003, I started educating myself more about urban transportation. I realized that in cities, where 50 percent of the world lives now and most will be living in the future, the vast bulk of vehicles on the street will necessarily be shared. There is no economic rationale to have cars that are used 5 percent of the time taking up valuable and heavily subsidized real estate for parking the other 95 percent of the time. Once vehicles are shared, we only need about a tenth of the number we currently have. The move to shared-cars-only cities is almost certainly inevitable, particularly when the self-driving car arrives. Technology makes it simple, the economics of pay per use are preferable to consumers, and cities will increasingly require it because of parking space constraints.

Back in the mid-2000s, I couldn’t figure out why the car companies didn’t see this (today, they all do). Why weren’t they adapting faster? There are many reasons, one of which I learned in 2007, when I was asked to participate in a conference at Ford on the Future of the Car in 2030. I was excited to be there. Finally I’d get to tell the Ford executives what they should be doing! I remember sitting with earnest and thoughtful senior executives over lunch thinking, Robin, you are so naïve. Hearing how vast the Ford ecosystem was, it was obvious that the 181,000 people who work at Ford, not including the broad network of suppliers and dealerships, cannot turn on a dime. Big companies have limited flexibility.

Likewise, employees have inadequate flexibility. In November 2008, when the three American car manufacturers sat before Congress and begged for help to avoid bankruptcy, I was opinionated then too. I thought that instead of using government money to prop up the companies, the money should have been applied to guarantee health care to every employee for the next decade, or until they found another job. So many people in the United States stay at their unsatisfying jobs due to their family’s need for health coverage and other benefits. People can’t try their hand at any of the Main Street businesses, nor high-growth ones. They can’t explore other passions; they can’t tentatively find other employment. We need to make it possible for people to change, to make full and effective use of their assets and talents, without risking the welfare of their family (particularly in key areas such as health care) in the process.

The lack of flexibility for both company and worker is true in different measures in most of the wealthy countries. U.S. employees are tied to full-time employment with one employer in order to maintain needed benefits. In France, which has national health care, once a person is hired and passes a probationary period, it is almost impossible to fire someone, building in rigidity for employers. If we want our economies to experiment, adapt, and evolve, to keep pace with technology, innovation, and environmental pressures, we need to reduce the stickiness of the labor force to the benefit of both the Peers and the Inc. Right now we leave good people in economically unproductive industries, unable to get out and start something new. And in other ways make it very difficult for employers to adapt quickly to changing environments.

What if all (or almost all) work was done by independent contractors in Peers Inc platforms? Both business and labor would gain from the new fluidity and responsiveness. Employers could respond more rapidly to market forces; workers could diversify their income streams and transition from dying industries or boring jobs in an adaptive way that was much more in their control. The “job for life” that was the hallmark of corporate America in the 1950s has been gone for close to two generations. In a genuinely efficient platform economy, in which assets and labor flow to the most productive uses, the job-for-life benefits package provided by private companies evaporates.

Some countries seem to have figured out a way to deliver balance, giving both companies and people flexibility. For the ninth year, Forbes magazine ranked 146 nations on eleven different factors to produce a list of the “Best Countries for Business.” For the fourth time (2008, 2009, 2010, 2014) Denmark came up in first place. According to John Weis, an economist at Moody’s Analytics with an expertise on the Danish economy, Denmark’s pro-business climate stems in large part due to its long-standing policy of “Flexicurity,” a multi- pronged approach supported by the European Commission. Flexicurity combines flexible and reliable contractual arrangements with lifelong learning strategies and adequate social benefits, supporting the needs of both employers and employees. “The model encourages economic efficiency where employees end up in the job they are best suited for,” says Weis. “It allows employers to quickly change and reallocate resources in the workplace.” All the while, Denmark is among the most productive economies in the world. True, it has one of the highest tax rates to pay for these benefits and commitment to retraining, but it is also ranked as the “Happiest Country” in the United Nation’s 2013 World Happiness Report.

Can these policies (also implemented in other Nordic and northern European countries) be adapted to accommodate a fully flexible workforce? Let’s go back to one of Roxane’s sentences: “Hyper efficiency, automation, wealth transfer, and income inequality go together.” While this has been the path of least resistance, we just saw that tax and employment policies can in fact deliver both higher growth rates and adequate income equality. But can these policies work in an environment of increased unemployment? I recently talked to a CEO of a telecommunications company that had been sitting on a technology improvement that would not only dramatically reduce the company’s costs and improve customer service but do so by reducing the company’s workforce by 40,000 people. Self-driving vehicles, which are coming much faster than people realize, will take away the need for drivers around the world. This will be painful everywhere, but devastating in megacities such as Mumbai and Lagos, where millions of people earn their living from driving. The least skilled and the least educated will likely not find new full-time employment. Even with the optimistic and inevitable forecasts that new technologies will open up new economic frontiers, we all know the difficult truth: In real time in defined geographies, job losses do not equal job gains one for one. We can see this future and have time right now to produce a different outcome.

A more efficient economy is also an economy that creates fewer jobs and does away with job security. Given a generation, the platform + peers structure could result in as big a change in the basic construction of our economies as the invention of mass production in factories did. We need to create new social mechanisms to spread out the gains of the new platform economics — perhaps even a Basic Income allotted to every person, in addition to the Flexicurity principles. Without this, the social consequences could be dire, bad enough to upset the entire applecart in time. National basic income schemes are getting serious consideration even in fiscally conservative nations like Switzerland, which has a national referendum scheduled in 2015 on the topic following a successful citizens’ initiative in 2012. Much better for us to get off on the right foot: a maximally fluid and efficient economy that makes full use of our social, material, and technical possibilities, with the necessary safety nets. Basic income is the long-term answer to the increasing precariousness of ordinary people in a global economy that can shift their jobs to the other side of the world in a heartbeat.

How would we pay for these benefits? We know that when employers outsource labor, even within the same country, they do so to avoid paying for health insurance, worker’s comp, disability insurance, and retirement benefits (see FedEx’s lost suit in their claim that its California delivery drivers were independent contractors). All these services have to be paid for by somebody; the costs are simply being moved to the shoulders of the government. Thomas Piketty, the economist who burst into public consciousness with his bestselling book Capital in the 21st Century, calls for a global wealth tax that is impossible to evade by changing jurisdictions. This seems like a radical proposal indeed, but given the spread of multinational corporations and off-shore profits, can multinational taxation be far away?

Other models might include a value-added tax (VAT), a luxury tax, or, better yet, a carbon tax. The more you consume, the more you pay. It would be hard for either companies or individuals to hide from a global carbon tax, particularly if the tax was collected at the point where the carbon was mined or drilled rather than at the point of use. Using the revenues from a global carbon tax to protect and reinvest in the environment, as well as provide for national basic incomes, could compensate for damage to the environment we all share. This would set up the right system of incentives for rapidly decarbonizing the global economy while giving ordinary people the economic freedom and support that they need to be genuinely productive in this new world of ours. What could be better?