Published February 8, 2017

New work in the platform economy

The platform economy will radically change the conventional structures in work and the economy. Understanding the nature of the emerging system is crucial for business and society.

Our economic theories and practices are derived from the era of the mass production of tangible goods and high-cost/low-quality communications. These mind-sets are not only unhelpful, but also wrong in a world of information products and ubiquitous, low-cost/high-quality connectivity.

The information products create societal changes that are potentially even bigger than ever before.

New communication technologies have always had a strong impact on industries and the logistics around production. But this time, the information products create societal changes that are potentially even bigger than ever before.

The Internet is the first communication environment that decentralizes the financial capital requirements of production. Much of the capital is not only distributed, but also largely owned by the workers, the individuals, who themselves own the smartphones and other smart devices, the new machines, the factories of work. When computers were expensive, the economics of mass industrialization and its centralized management structures ruled them. Not any more!

The factory logic of mass production forced people to come to where the machines were. In knowledge work, the machines locate where the people are, making it possible to distribute work to where they are. It is a decentralized world.

From mass production to creative work – what is changing?

The architectures of work differ in whether their components are loosely or tightly coupled. Coupling is a measure of the degree to which communication between the components is predetermined and fixed or not.

It was relatively easy to define in repetitive work what needed to be done and by whom as a definition of the quantity of labor and quality of capabilities. As a result, management theory and practice created two communication designs: the hierarchy and the process chart. In a hierarchy the most important communication and dependence exists between the employer and the employee, the manager and the worker.

Most work today is not about hierarchical, but horizontal, sequential dependence. Those performing the following task must comply with the constraints imposed by the execution of the preceding task. The reverse cannot normally take place. The architecture consists of tightly coupled tasks and predetermined, repeated activities. Communication resembles one-way signals.

Creative, highly contextual work creates a new, third design.

It is about loose couplings and modularity, about networked problem definitions and linked solutions to problems. In creative work, any node in the network should be able to communicate with any other node on the basis of contextual interdependence and creative, participatory engagement.

Work is interaction between interdependent people augmented by technological intelligence.

Networks transform the nature of work

The architecture of the Internet is based on the same principle of loose couplings and modularity. The logic of modularity and ubiquitous communication make it possible for the first time to create truly network-based organizations.

 You don’t need to be present in a factory any more, or in an office, but you need to be present for other people.

Creative, network-based work in the future will not be about jobs, but about solving problems, assignments and interdependence between people. You don’t need to be present in a factory any more, or in an office, but you need to be present for other people.

Creative, digital work and the Internet have brought about circumstances in which the employee in effect chooses the purpose of work, voluntarily selects the tasks, determines the modes and timing of engagement, and designs the outcomes. The worker might be said to be largely independent of some other person’s management, but is in effect interdependent.

Interdependence here means that the worker is free to choose what tasks to take up, what problems to solve and when to take them up, but is not independent in the sense that she would not need to make the choice. The interdependent worker negotiates her work on the basis of her own purposes, not the goals of somebody else, and negotiates who her fellow-workers are on the basis of cognitive complementarity and her personal network, not a given organization.

The architecture of work is not the structure of a corporation, but the structure of the network. The organization is not a given hierarchy or a predictive process, but an ongoing process of organizing.

And we have the tools!

The new rules of networks – who will create value?

The effects of Moore’s law on the growth of the ICT industry and computing are well known. A lesser-known but potentially more weighty law is starting to replace Moore’s law in strategic influence. Metcalfe’s law is named after Bob Metcalfe, the inventor of the Ethernet. The law states that the cost of a network expands linearly with increases in the size of the network, but the value of the network increases exponentially.

When this is combined with Moore’s law, we are in a world where at the same time as the value of the network goes up with its size the average costs of technology are falling. This is one of the most important business drivers today. The implication is that there is an ever-widening gap between network-economy companies and those driven by traditional asset leverage models.

The industrial economy was based on economies of scale inside the corporation. The new focus is outside, in network economies. The most important goal is to create a network structure where the value of all interactions is raised by all interactions; where every interaction benefits from the total number of interactions.

Network-economy based firms have a huge advantage over traditional asset-based incumbents. The key understanding is that it is now the customers or network members who create value, not the network owner.

Digital services can attain the level of customer reach and network size, required to capture almost any market, even as the size of the core company stays relatively small. This is why network-economy based start-ups have such a huge advantage over asset leverage based incumbents. The key understanding is that it is now the customers or members of the network who create value, not the network owner.

From the age of industrial enterprises to the platform economy

The enterprise as we know it was born as a social innovation when the volume of economic activity reached a level that made administrative coordination more efficient and more lucrative than market coordination of these particles.

The important innovation of the modern firm was to internalize activities by bringing many discrete entities under one roof and under one system of coordination. The multi-unit business corporation replaced the small, single-unit enterprise because administrative coordination enabled greater productivity through lower (transaction) costs per task than was possible before. Managers essentially carried out the functions formerly handled by price and market mechanisms.

The practices and procedures that were invented at the dawn of industrialism have become a standard operating system and are still taught in business schools. The existence of this managerial system is not questioned. It is the defining characteristic of the business enterprise.

But two aspects of work have changed dramatically.

The most successful firms are market platforms that enable interaction between customers and network partners.

The most successful firms are themselves multi-sided markets in interaction with entities “outside”, enabling interaction between customers and network partners. These firms are the new market platforms. It is now more expensive to internalize than to link and network.

Second, the products/services the platform firm sells to its clients are not offerings of the firm per se, but offerings created by specific network players in specific situations of “local” network interaction. Scale and scope are combined.

The value of the firm increases, but the costs don’t

The new task is to understand network phenomena. During the industrial era, economists called this phenomenon “network externalities”. Now it is more properly called “network effects”. This conceptually small difference represents a hugely important change in thinking.

What assets were for the industrial firm, network effects are for the post-industrial firm.

The platform economy models are currently the best way to generate and promote growth in environments with low transaction costs.

Our management thinking is slowly shifting towards understanding the new kernel of work: participative, self-organizing responsiveness.

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