Digital Kapital
Something New?

I want to talk about the integration of technology and business processes, an evolutionary bump and grind that has slowly transformed the way we work -- and taken us only part of the way toward a new way of life. It’s a particularly ironic time to address this, because as the United States has once again gone to war, the Web sites that geeks frequent became suddenly irrelevant as the bombing campaign took its toll. While Wired, ZD Net and TechWeb carry on about the rise of Amazon.com’s stock to a closing price near $300, bombs fell in Baghdad and diplomats did their fleshy best to talk sense to angry allies while CNN transmitted the whole thing to the world. News on the technology sites just plain stopped around the time on the day the White House announced the attack. In times like this, we fall back to older media or the Web sites owned by older media, networks that deal with real life, not just technical life. The only cross-roads between these technology sites and the real world of geopolitics seems to come in stock market reports that mention anxiety about Iraq.

That’s because, to a very great extent, human systems and the technical systems that support networked activity are still grossly out of synch. In a crisis, we turn to the tried and true, and those are the face-to-face and telephone-enabled discussions between leaders, and as consumers of information we rely on large networks with the financial wherewithal to collect and broadcast news. Christiane Amanpour doesn't work cheap.

It’s this long road, between the concentrated, capital-intensive organization and the distributed free-for-all the digital punditry gabs about -- a road on which we’ve only just begun to travel -- that I want to talk about.

Let’s start with a sports analogy. I haven’t used enough of those in these discussions, after all. Today’s businessperson is like a 1950s-era football player trying to compete in the 1998 National Football League. He’s out of his element, the rules are strange and dangerous, and the players more so. There are convicts and outright killers playing in the NFL, and our squeaky-clean white bread 1950s tight end will find himself in the hospital by the half-time of each game he plays in.

The Internet is the NFL in 1998 and we are the 1950s player trying to stretch our 1950s muscles to compete effectively on the Internet, but we’re playing without technologies that protect necks from breaking and ribs from cracking. Football players have responded to all the new protective equipment in the game by trying to kill one another with all the more ferocity. The Internet is just plain ferocious, from our perspective, because we have not evolved new models for successful organizations that use the Net. We feel the blows in ways old-style organizations, which competed just as ferociously in the manufacturing economy, evolved protections against. They may be dinosaurs in the networked economy, but all of us Net-types are about as safe as those strangely small horse ancestors caught in a brontosaurus stampede.

Someday, there will be people who operate adroitly in networked markets -- but the current legends of Web commerce, based on their vast wealth built on money-losing companies, have yet to demonstrate that business has made a comfortable migration to the Web.

Look back, to begin with, at the way society and organizations adapt to fundamental changes. The best comparison for our purposes is the industrial revolution, particularly the explosion in democratic-liberalism and capital expansion that tool place in the 1850s. I recommend historian Eric Hobsbawm’s book, The Age of Capital, for an excellent refresher course on this remarkable period. Much of what I have to say about it is drawn from Hobsbawm. According to historian H.M. Hyndman, a Victorian businessman and Marxist, the years 1847 to 1857 were very like the era of the great discoveries by Columbus and the Spanish explorers (which, coincidentally, was also the time that the printing press was being adopted across Europe). Said Hobsbawm of Hyndman’s comparison, "Though [during the decade of the rise of capitalism] no dramatic new discoveries were made, for practical purposes an entirely new economic world was added to the old and integrated into it."

The capitalist explosion that began in the 1850s punctuated a half century during which world trade had doubled. In the thirty years that followed, the volume of world trade grew by 260 percent. Exports of British goods increased by 300 percent during the same period and international investments increased by as much as 400 percent in some countries.

At the same time, growth in the nation that launched the global capitalist movement, Britain, was slowing. English consumption of cotton increased by only 66 percent during the years 1850 to 1870, while it soared elsewhere in the world. What we see in the 1850s is a situation where a critical mass achieved in one region ignited the global explosion of production and consumption, while its own growth slowed dramatically. We can see the same phenomenon in the US today, where PC sales are flattening while growth in overseas sales promise to increase in coming years.

I think it’s useful to look at the growth in steam power between 1850 and 1870, as a comparison to our current situation. In 1850, there were four million horsepower in use, mostly in England; by 1870, global horsepower totaled 18.5 million horses. In Switzerland, there had been 34 fixed steam engines in use; by 1870, the Swiss had 1,000 such engines.

That represents the democratization of horsepower, just as we have seen the democratization of central processor power after the introduction of the personal computer. With the advent of the sub-$300 PC, the potential growth of computer power, and its continued interweaving into the fabric of society will actually accelerate over the next 30 years.

But, with that kind of computational power and the introduction of networks into every nook and cranny of the globe, how are we going to cope with the opportunities? Today’s business models and organizational structures are doomed.

Don’t take my word for it. In the December 28th issue of Forbes, CEOs were asked to describe their businesses in the Year 2039. C. Douglas Miller, CEO and chairman of Norrell Inc., described a world where "managers won’t manage people....workers [will be] individual producers, selling to multiple organizations, and compensated by the value of their output as opposed to the time spent producing. Managers will have to figure out how to source what they need, and make it attractive for the workers to work for them rather than someone else."

I’d take it a step further and say that companies will have to involve suppliers and customers in the total life of the company, going so far as to offer equity in exchange for business. During a meeting recently, I made a note: "How would a PC be priced if it included equity in the companies that produced it and its component parts? What would a PC be worth if it came with stock in Intel and Microsoft?" Certainly, price pressure on PCs would not be so great if, in addition to purchasing computational functionality, one also received a share of the growing digital economy.

This distributed form of corporate ownership, that provides equity in return for work, revenue-producing purchases, and money-saving performance by suppliers, among other things, is what I call an "A Corporation," or alliance corporation. It is a much more suitable corporate form in a nascent economy, because it provides solutions to the initial challenges companies face. By providing equity in exchange for personal information from customers, for example, the value of that personal information is acknowledged without the need to expend capital on customer loyalty programs and incentives which, when all is said and done, don't amount to much compensation to consumers who recognize the value of their preferences.

"A" Corporations also allow for the calculation of risk in transactions, from early-adopter customer relations to preferential treatment or discounts by a supplier, distributor or service provider helping to make a startup successful. Each of these relationships can and must be accounted for and amortized over time -- if you thought corporate finance was complicated when the main product of the economy was physical, just wait until we reach a mature networked marketplace in which all value can be accounted for relatively efficiently.

The networked economy makes these kind of distributed equity concepts that sound far-fetched to contemporary ears, possible. In fact, it is inevitable that radical changes in the notion of equity will change.

In my opinion, this type of organizational transformation has occurred once in our lifetimes, already. The creation of VISA International, a financial institution that blew down barriers in the very secretive world of banking in the 1960s and 70s, and now has revenues of more than one and a quarter trillion dollars a year is an example of the type of reinvention of industries that are necessary in the face of the Internet storm.

I had the great fortune to spend a morning with Dee Hock, founder and chairman emeritus of Visa International a few weeks back. The story of the founding of Visa, which Hock pulled off as a vice president of a Seattle bank working with the vice presidents of three competing banks, is a fascinating example of a network-based business extracted from the living body of an old-style industry.

In order for Visa to work, banks must share transaction information, customer information and shares of revenue associated with each transaction -- it’s a model that would have been, and was, anathema to a banker in the 1960s, when Visa was launched. Hock and his colleagues succeeded only by breaking every rule of traditional banking, laying open transaction data to competitors. They broke down walls -- exactly what a networked business must do, within its own organization and between itself and the rest of the economy.

The Visa model is unique. It works more like a political caucus system than a corporation. By joining the system, a bank earns perpetual membership -- they cannot be thrown out -- and membership in local and, if they are elected by the local board, regional councils and national councils that finalize corporate policy. It is only vaguely like a corporation controlled by stockholders, yet it shares the legal structure of a corporation. The only way it was possible, I was told, was by relegating the lawyers to a corner where they were to stay silent unless spoken to. The founders broke rules, changed rules, and forged an organization where the proprietary information belonging to member banks was liberated by the network to create vastly more value than any single bank could deliver.

Hock calls these kinds of organizations, chaordic alliances, phrase he coined from "chaos" and "order", because he said, "I wanted a word that no one would know what it meant and would struggle with." A chaord, by definition, is any autocatalytic, self-regulating, adaptive, nonlinear, complex organism, organization, or system, whether physical, biological or social, the behavior of which harmoniously exhibits characteristics of both order and chaos. 2: an entity whose behavior exhibits patterns and probabilities not governed or explained by the behavior of its parts. 3: the fundamental organizing principle of nature and evolution.

Some of the key principles of a chaordic alliance are: They are based on clarity of shared purpose and principles, and are self-organizing and self governing in whole and in part. They exist primarily to enable their constituent parts. The are powered from the periphery, unified from the core and are durable in purpose and principle. They are malleable in form and function, equitably distributing power and rights. They harmoniously combine cooperation and competition. They liberate and amplify ingenuity, initiative and judgement. Finally, they constructively utilize and harmonize conflict and paradox.

I was particularly intrigued by Dee Hock’s comment that one of his regrets was that he did not extend ownership of Visa to cardholders. This is an issue that comes up again and again in Web site businesses -- how do you incent people to give up information that is valuable to others, but merely potentially valuable if kept secret. What brings the person to the table to give up their secrets, the juice that makes a site hum?

Obviously, the answer is ownership. If, by sharing, the person gains some equity in the work and intellectual property of others, they have an incentive to contribute. It’s the idea of contribution that makes chaordic institutions possible; they recognize a variety of inputs, not just cash capital.

But, of course, there’s no legal structure that accommodates offering equity to suppliers, partners, customers and employees on an organic basis that values their contribution relative to its value at the time it was made, and in the future, when its value may increase. Hence, the need for the "A" corporation form, and to begin the long process of winning IRS and accounting recognition of this more dynamic way of managing equity and capital.

With Visa, the level of revenue each member of the system earns is based on the number of cardholders it recruits, the amount those cardholders spend using the cards, and the overall profitability of the Visa system. In retrospect, the compensation model is relatively straightforward, volume begets revenue.

Web companies wrestle with business models that just don’t make sense, because they don’t compensate all the nodes in the network that create value. At Amazon.com, one of my favorite targets, the customer isn’t compensated for the personal information they let the company collect, nor for the reviews they submit, except to the extent that the site can "customize" information based on that shared information. Over the long haul, there’s nothing to lock the customer into the site -- they can always go somewhere else, share the same information, and get the same or better service.

Amazon's general strategy, of expanding what it offers in the way of products, by adding video and music to books, and now preparing to reach into other consumer goods, dilutes the brand in a very dangerous way. "Amazon" used to mean "books online," but what will it mean when it also sells travel or tires? And how will that be different than what Wal-Mart might be offering via networked services? What, besides the brand will differentiate the two, Amazon and Wal-Mart? If it's going to be a logistical contest, my money would be on Wal-Mart. If it's going to be a service-based contest, my money wouldn't be on either of these companies.

With a very high customer acquisition cost, Amazon’s profitability depends on the long-term revenue generated by each customer. If, by continuing to do business with Amazon, the customer earned shares in the company, they’d stick with the company. Instead, Amazon fails to make a profit each quarter while wracking up a vast market capitalization that will not be supported by future revenue. If, following the chaordic principle that says, They exist primarily to enable their constituent parts, the company would develop revenue, while lowering costs through reduced customer acquisition and retention costs, building a profitable company for the shareholders, which includes its loyal customers.

Profitable companies are different than Web stock phenoms that have succeeded at marshalling the currency of celebrity, but not enough revenue to cover costs.

The new company, and even the old-style company that decides to recreate itself as an "A" corporation that serves every member of the market as a stakeholder, can succeed in the networked economy.

Alas, we don’t know how to organize and manage these companies, whatever they are. I am sure that, whatever the solution for a particular Web business, it will not apply in another situation without substantial modification. There are, at this point, just principles for this new form, but not rules -- and I wonder if the IRS or an accounting firm will ever accept the fluidity of this corporate structure. Unlike today’s legal structures, where we choose from the "C" corporation, or "S" corporation or Limited Liability Corporation, there will be as many forms as there are companies, or networks of companies.

It all sounds so new physics, doesn’t it? In fact, the new physics have been adopted by management theorists who recognize that something is not right with contemporary organizational models. Unfortunately, a fractal perspective, a quantum management style, or an org chart based on the Hiesenberg uncertainty principle just don’t cut it when it comes to inventing a company anew.

I’ve recently spend some considerable time reading Margaret Wheatley’s Leadership and the New Science, a book that attempts to explain how unexplainable organizational theory could be, if anyone dared to think like a physicist. It’s a fine book, but the reader very quickly becomes trapped in its metaphors, which are drawn from the top pop physics titles of the past fifteen years.

Now, how many times have you heard someone in a meeting describe an organizational phenomenon as "fractal" or "quantum"? If you’ve heard it once, you’ve probably heard it too many times. I mean, after all, what’s fractal about teamwork, exactly? People point to the graphs created using Mandelbrot sets, which look like the inside of a kaleidoscope and a teenage acid trip all mixed together, and try to explain how the iterative results of teamwork are similar to a little tiny solar system in the fingernail of a giant. The thing is, they are just talking about the metaphor, the idea that teams are complex and difficult to understand. If you’re lucky (or damned, depending on your perspective), you’ll hear someone’s role in a group described as being that of a "strange attractor," the outlines of a chaotic system’s range of activity.

Listen to Wheatley: "While we have lusted for order in organizations, we have failed to understand its true nature." She goes on to explain that the bounds of a chaotic system, the strange attractor, are defined by the dynamics of leadership within an organization.

When we read something like this, the result is, that we begin looking for the strange attractors in human groups, assuming that there is something unique, something strange that will make it evident to us. We look for a charismatic leader, when that’s just one aspect of the solution needed. We look for an eccentric, but that’s just a fragment of the total picture. Wheatley’s analysis is much more fine-grained than this. She explains that "It is not that we are moving toward disorder when we dissolve current structures and speak of worlds without boundaries. Rather, we are engaging in a fundamentally new relationship with order."

So, let me suggest a different way to experience fractals, instead of looking at the pretty Mandelbrot diagrams that make such pretty pictures.

Where I live, you can tell a lot from the sound of rain. The pattern of raindrops on the window at night tells me and my neighbors a lot about what is happening outside, even if we never look outside. The progressing rhythm of the rain, which builds up in the pit-pat sounds tells me whether there will be a lot of standing water at a particular intersection, how many puddles will be in the yard, whether the morning will be colder than the previous evening, and so on. Northwesterners experience fractals in the sound of rain and become attuned to it; it’s not a regular or predictable phenomenon that can, based on the last rainstorm, tell us what will happen next time. You become accustomed to it, an order emerges out of the sound of rain -- you hear the fractals. And, as long as you don’t get caught up looking for the fractal patterns, you learn from experience. It’s Wheatley’s "fundamentally new relationship with order."

Now, that’s all very well and good. How do you tell a lawyer that you want to create a quantum organization, a fractal workplace, or a job description for a strange attractor in chief? You don’t.

You have to talk about equity structures, compensation and the responsibilities that each member of the company will carry out.

A good book to serve as a counterpoint to Wheatley’s Leadership and the New Science is Robert Greene’s The 48 Laws of Power. This is a hard book, it is full of draconian, machiavellian advice about lying to get ahead, scapegoating and deception. It’s old-style politics and corporate power. And it’s just as important in the era of new science metaphors, because people are essentially the same creatures they were when Ford rolled out the first car, and Caesar crossed the Rubicon.

We shouldn’t forget in this era of holding hands to create a power circle at the end of meetings, that someone in the room may still be our Brutus. Initiating a new corporate culture means nothing if you have not created new equity structures that provide incentives to people that compel them to keep their daggers in their belt.

Somewhere between these two books is the compromise that describes an optimal organizational model. It balances ownership and power with consideration and contribution to establish a delicate, dare I say quantum?, organizational environment where change is possible.

I don’t kid myself that the idea of networked business somehow wipes clean the slate on the past. We have to start where we are. We’re priveleged to start from where we are, because a lot of work has been done.

But start we must.

I suggest a model of distributed ownership, as I described above, where contributions are compensated, regardless of the source of the contribution. How do you get from today’s venture capital funded business with a significant liquidity event three and a half years from launch that provides at least a four hundred percent return on investment, adjusted for inflation and the initial cost of capital?

We can structure an "A" corporation in such a way that it is possible to begin to make fundamental changes in compensation -- using the good old C corporation. The question is how to manage the creation and distribution of shares. The idea I have is that we begin with a massive pool of undistributed stock, say a billion or a trillion shares at a par value of $00.000001 or less. Issue shares based on contributions to the firm, whether capital, assets or work (revenues produced, savings realized. By recognizing revenues and savings as value and paying for them, you have a basis for compensating suppliers, for example).

Now, this works, as long as dividends are paid only to distributed shares. At the end of the year, you will need to calculate the number of shares distributed and divide the net revenue by that figure, establishing a dividend. Basically, you treat undistributed shares as common stock and distributed shares as preferred stock, which gets a preferred dividend.

A founder will, over time, own the same percentage of company that they began with (plus additional shares earned each year), and newcomers would enter the system with an opportunity to earn more than the founders, if they deliver more than the founders.

The important thing is that the organization be structured in such a way that the founders and early members of the company do not have the opportunity to monopolize power or compensation. This is one of the key lessons of Visa. As Dee Hock put it, "All deliberation must be conducted and decisions made by groups that include all affected parties, but dominated by none." By vesting power and value in the periphery, where, presumably, the new ideas, technical innovation, and market-changing events first come into contact with your company, you ensure that the organization remains open to change, to improvements and that everyone who contributes will earn a fair share.

Haven’t you seen companies where, once the founders and an inner circle are comfortably ensconced, the innovation and new value just dries up and blows away? The company starts spending far more money on maintenance of its current position that development of new ones? The networked organization can’t do that, because, like the network itself, when it senses a disruption in the flow of information, power or wealth, it starts to route around that flaw. So, the network allows people to eat away at their lumbering old organizations, quitting, spinning off, hijacking customers and generally reducing the stability of the center until it disappears.

This season’s rash of lay-offs is not just another corporate downsizing exercise, it is part of an ongoing dissolution of old organizations in the face of new, networked models. But, because everyone continues to reinvent their businesses as old-style corporations with old-style equity models, we’re merely creating another generation of companies that will come unglued over time. The fact is, millions of people face personal catastrophes over the next 50 years, because they will lose jobs without having established ownership positions through new compensation models.

In many ways, we’re reenacting that period after 1850, albeit with a different set of concerns and problems. Consider what happened then. In 1848, revolution swept Europe. In virtually every capital outside of the British Empire, kings and princes were overthrown, along with a few fops who were playing the role of democratic leader. But, within 16 months, every one of these revolutions had failed, and in many cases the old rulers were back, with more power than ever. Yet, over the next 30 years, the world did completely reinvent itself. Workers created unions, earned better wages, and began to share in some of the rewards society had created. The vote was extended to many more people, though still far from all of them. It was as though the revolution of 1848 had happened, after all.

There was a lot of pain throughout that transition, and there will be more suffering in our day, as people see their lives upset by the changes in work and organizations. However, because of the technologies we have at our disposal, there is the opportunity to build organizations that thrive, based on growing pools of equity distributed according to contributions. Someone is going to invent a company that ultimately transforms an entire market, bringing everyone, from original manufacturer of raw material to the last customer along the value chain into the equity pool. This one firm will act like a vacuum, pulling others into the new equity model, converting them wholesale into new forms, because everyone’s expectations will be changed by exposure to this economic model. They will all see what’s in it for them and they will want what they see -- ownership, involvement, power.

Call the organizations I’m describing part of a new distributed capitalism. By spreading the wealth, these businesses will sweep more wealth into their orbit. Equity will transform all the relationships that we currently struggle to manage and sustain in an economy that is based on keeping one’s wealth to oneself.

By making connections and letting value flow, the distributed capitalist economy magnifies the value of commitment to long-term participation in or with a company. The argument that all transactions will be reduced to haggling over price will be silly in this type of economy. Firms will offer service and equity to customers, bringing those customers into an intimate relationship, so that they are invested in the long-term success of the company. Price as we think of it today will be obliterated, because price will include long-term value based on the performance of the company the customer buys from. What would a PC be worth if you got equity in Dell, Microsoft and Intel along with the hardware? What would an automobile be worth? Probably, after you discounted the cost of the hardware in the PC and the car, the PC would be worth more. But, you see my point -- when the customer is investing in a company through their purchase rather than simply making a brief exchange, the company’s future cost of marketing, customer acquisition, research and development are reduced, raising the potential for profit.

The distributed capital model resolves some of the most difficult business problems we see emerging on the Net. It creates compensation for personal information shared by the customer, while also giving the company an opportunity to benefit from longer customer relationships. It gives customers an incentive to get involved and stay involved in the self-organizing markets that surround a company, including online communities, customer support and R&D processes that improve products or services while lowering costs.

So, I’m asking you now: Wouldn’t it be better to be the founder of a firm that uses the networked technologies introduced in the past decade to transform ownership and compensation, so that your share grew in value as the model swept across the economy? That would be surfing the wave of change.

Sites on my mind:

Far Eastern Economic Review
Doc Searls
Bill Martin
WebTalkGuys
Manufacturing Dissent

Copyright 1992-2002 by
Mitch Ratcliffe and
Internet/Media Strategies Inc.
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