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Clearing the Fog

In a previous column, I wrote about the activities of companies like Yahoo, Google and Intel using internal future markets as a new approach to creating business intelligence, helping them address diverse issues such as properly pricing the risk involved in allocating scarce corporate resources to providing early warnings that internal projects or product developments may not be as on track as being reported.

While future markets are useful for capturing and distributing collective corporate knowledge about a specific topic, they can be very hard to implement, maintain and/or sustain. Furthermore, as my friend Tony, a CEO of a very successful $200 million software company says, executives like him have to make more rapid decisions "in a room full of fog." While Tony agrees that internal futures markets may be valuable in and of themselves, they are not nearly enough in his mind to help him with his typical decision issues. Tony emphatically states that he needs business intelligence capture methods that can provide him and his other company managers with a rich diversity of information, quickly, and with a level of specificity that can help "clear the fog."

Tony's decision making problems are not unique, and over the past five years especially, several different but complementary practices have taken root in corporations. One such concept first developed in the early 1990s that has gained traction especially in high technology organizations are the creation of organized corporate communities of practice. Communities of practice, according to educational theorist Etienne Wenger, one of the original developers of the idea, are a joint enterprise of mutual engagement that binds members together into a social entity, and which share a repertoire of communal resources, e.g., vocabulary, routines, values, etc. According to Wenger, communities of practice in organizations create places of "engaged learning."


Jerry Gaspar, a recently retired senior vice president, engineering and technology at Rockwell Collins in Cedar Rapids, Iowa, calls communities of practice "forums for people to come together to informally share knowledge, solve problems, mentor and be mentored, and find better ways to meet job requirements of better/cheaper/faster." I like to think of them as internally organized group "busmen's holidays" that focus on technical interests or functional specialties. Rockwell Collins, a developer of commercial and defense communications and aviation electronics systems and named by Forbes magazine as one of the best managed companies in the US over the past five years, first implemented communities of practice in 2002, went from having zero to 72 communities in place by 2004, and I believe there are somewhere around 100 in place currently. I have the opportunity to attend a number of Collins' communities of practice sessions, which are often held during lunch hours, and they draw together a large number of people having a diversity of experiences which makes for very rich conversations on the subject of interest. It is common for Collins employees to belong to several communities of practice, so cross fertilization of ideas among different communities occur regularly.

While individuals in a community of practice benefit from Wenger's idea of engaged learning, the company benefits as well. Information from these communities of practice are communicated frequently upwards to Collins senior management, and sometimes the information makes its way to the Collins enterprise risk management group whose job it is to identify, assess, and report on risks that might impact the success of the corporation. Thus, for Collins, communities of practice provide another type of early warning system about things that might otherwise escape notice by more traditional means of competitive or market intelligence. At Collins, this activity is sometimes called "filling in the whitespace."

Collins instituted in 2005 the concept of "open innovation" which the communities of practice also complement. Open innovation is based upon the idea of creating, as Darrell Rigby and Chris Zook wrote in their October 2002 Harvard Business Review article titled Open-Market Innovation, a free trade of ideas among different - and sometimes competitor - companies. Rather than having a company solely investing in internal R&D as the means to develop innovative products or services, open innovation focuses on using a range of licensing arrangements, joint ventures and strategic alliances as a means to innovate. While none of these are new ideas in themselves - corporations have been engaging in license agreements and strategic partnerships for decades - what is new is the idea of using open innovation as a major means to innovate.

For instance, Collins' management, which invests 7 to 9 percent of its revenue in R&D, believes it needs to have 40 percent of its ideas and technologies generated from outside the company by 2012 because it expects its competitors will do just that. With globalization comes the fact that innovations (and competition) can arise from anywhere. If Collins' competitors are able to gain access to novel ideas that may be developed in another part of the world where the company does not normally operate, they will not only be able to respond to the market place more quickly but at a much more inexpensive price than Collins could - if it had to create competitive products from scratch. This means Collins has to actively search for and engage new partners as part of its business model, which imposes new requirements on how it approaches business intelligence. And yes, Collins has a community of practice on the topic of open innovation in order to determine how to make the process work better as well.

Many companies are beginning to use open innovation as a core business model. British Telecom, for example, ha restructured itself to exploit open innovation in its "Twenty-First Century Network" (21CN), which is an IP-based approach to telecom. Whereas in the not too distant past, an internally focused (and almost paranoid) BT would have tried to create every product or service it used or offered on its telephony network (which it also tightly controlled), BT now has opened up its network to third parties to use as an open platform and actively seeks innovations from them. The old mantra in BT was that, "We use what we sell and we sell what we use - which, by the way, we exclusively own, operate and expensively price." But as Maria Pardee, the CIO of BT Retail recently told me, open innovation has transformed BT from being a lumbering dinosaur to an agile competitor. Without making this change, Pardee says that it is doubtful that BT could have survived as a viable company. As a consultant to BT in the 1980s and 1990s, I can relate that it has been quite a transformation in thinking and most importantly, behavior.

Other companies that have announced they also have moved to an open innovation business model include Kraft, followed by Procter & Gamble (which wants to acquire at least 50 percent of innovations from outside the company), Kraft and most recently, General Mills, all food industry companies. In April of 2007, General Mills announced the formation of a Worldwide Innovation Network (WIN) which it says is "designed to expand and accelerate the innovation advances already under way inside the company." Peter Erickson, General Mills senior vice president of innovation, technology and quality states that the company is actively seeking new products and technologies, and has set up a process (http://www.generalmills.com/corporate/open_innovation/index.aspx) whereby companies can submit their own ideas. Erickson says that General Mills sees that open innovation is an absolutely critical competitive advantage: "We believe the next big advance, which may reshape the food industry, has already been invented by someone outside the company, and our goal is to be the first to find it." The company is actively seeking to hear from prospective partners in the areas of baking goods to cereals to soy beverages.

Both communities of practice and open innovation create a rich diversity of business intelligence at a speed that wasn't thought of a decade ago. Another source of business intelligence that is just starting to appear and whose potential is only now being thought about is machine readable news. As we all know, individual stock prices can fluctuate quickly on the announcement of good or bad news, expected or otherwise. With the advent of programmed trading over the past 15 years - the use of computer algorithms to determine when a stock should be bought or sold - speed in making a decision about a particular potential stock trade has become increasingly important to making a profitable trade.

Currently, program trading algorithms are largely based on reacting quickly to market movements - i.e., how different stock prices move which itself are symptomatic in large part to investor reactions to the disclosure of external information and events. Now, what if these trading algorithms could take into account external market information - in essence predict how the market may react to different types of news? Instead of being reactive, the algorithms could anticipate market reactions and act accordingly.

A way to allow this to happen is to encode the news events of the day into a form that trading programs can understand, and based on that information, make predictions (say from historical patterns) about how an individual stock or stocks in a particular industry might react to the news. The news agency Reuters has decided to encode its news, not only of its current news feeds but also to its news archives, and is offering for sale its machine readable information to diff rent investment companies.

This new form of business intelligence might someday be very useful for decision-makers like Tony and help "clear the fog." I can readily see a day in the not too distant future where corporate enterprise risk management organizations develop risk models that can in "real time" assess the current price of risk a decision may entail, and then be able to relate that information to executive decision makers when they make critical allocation of resource decisions. As a risk advisor, one of the major problems I face in assessing the risk of a major corporate decision is developing an up-to-date picture of the external environmental context in which a decision is being made, which is crucial in accurately gauging the risk involved. I see machine readable news as being a very valuable way to improving decision making situational awareness.

Internal future markets, communities of practice, innovation markets and machine readable news are all ways to increase corporate business intelligence. Not only are they complementary, but they force a reconsideration of what constitutes business intelligence. Further, when combined with the emerging concept of Web 2.0 and the rapid expansion of social networks, well, what we think of as business intelligence will require a lot of different thinking and technological support five years from now. And, from my perspective of enterprise risk management, I think each will increasingly become required means of mitigating business risk. Interesting times are coming.

References

  1. Wenger, Etienne. Communities of Practice: Learning, Meaning and Identity. Cambridge University Press, 1998.
  2. Rigby, Darrell and Chris Zook, "Open-Market Innovation, HBR, October 2002, pp. 80-89.
  3. Chesbrough, Henry. Open Innovation: The New Imperative for Creating and Profiting from Technology. Harvard Business School Press, 2003.

Robert Charette is president of risk management consultancy ITABHI Corp. and director of the Cutler Consortium's ERM & Governance practice. He can be reached at charette@itabhi.com.

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