Chapter 5: Building New Connections

What unity do we find in the various aspects of bad faith? It is a certain art of forming contradictory concepts which unite in themselves both an idea and the negation of that idea—Jean Paul Sartre

Life which is one continuous struggle with other men is hardly worth living—Frederick Winslow Taylor

The four design principles covered in this chapter concern the construction of interfaces between you and your business partners, including customers, suppliers, and even competitors:

5. Replace rude interfaces with learning interfaces.
6. Ensure continuity for the customer, not yourself.
7. Give away as much information as you can.
8. Structure every transaction as a joint venture.

These principles flow logically from the principles presented in Chapter 4, which dealt with building killer apps to interact with the inhabitants of cyberspace in bold new ways. The new relationships require new, dramatically different connections that will bind you to business partners in ways that are as rich as the physical ties that hold your organization together today. The difference is that tomorrow's interfaces will be virtual, adherents rather than victims of the Law of Disruption. Many organizations already find that they are having better information exchanges with outsiders than with insiders, a symptom of the widening gap in technology adoption between firms and the market.

As the Law of Diminishing Firms predicts, moreover, the distinction between what is inside and what is outside is constantly shifting. The new interfaces you create consequently need to be rich in content and function (including entertainment value). They must be fluid, transparent, and easily modified or even rebuilt. Building them with the Internet's open standards and on its nonproprietary global computing networks is not only cost-effective but leads to a more robust result than do the hardware and software you may be accustomed to using. Thanks to the network properties of Metcalfe's Law, speedy enhancement and a ruthless marketplace for superior innovations have kept the pace of improvement on the Net breathtaking.

What might also surprise you is the way you use these interfaces to structure the new transactions. The design principles for building new connections contradict a lot of conventional wisdom. We demonstrate how companies develop killer apps by replacing human interfaces with computer systems and yet still achieve "customer intimacy." This is actually easy to do, in part because the industrial time-and-motion approach to process management has already taken the life out of most customer interactions. What organizations think of as intimate is often just the opposite. Digital technology (thanks to Moore) and a growing body of multimedia interface tools give you the power to build, and build cheaply, superior channels of communication with all your business partners. Replacing human contacts with digital interfaces not only lowers transaction costs but accelerates the process of capturing new information in bits, allowing you to multiply its value.

With a new digital pipeline in place, organizations decide how much of their proprietary data to keep "behind the firewall," that is, away from the other members of its community of value. The new forces—deregulation, digitization, and globalization—require a major shift in attitude. In the old world, proprietary information was a key weapon in achieving leverage over business partners. Now much of what you consider proprietary, like designs, customer lists, and market intelligence, is readily available elsewhere in reusable digital form. In any case, your proprietary data has a greatly reduced time value. In contrast, granting wide access to proprietary data to your business partners, including competitors, invokes Metcalfe's Law, generating new value as the information spreads. In our experience, organizations often overvalue secrecy and underestimate the value of sharing data instead. Those who take proprietary information often return it in more valuable condition.

Other assumptions about the behavior of markets and industries will also be undermined as you begin to translate new environmental conditions into new interfaces that exploit them. Senior executives, for example, often confuse their own difficulties (technical and cultural) in transitioning to cyberspace with those of their business partners. Their suppliers aren't ready to talk about more dynamic and flexible partnerships, they tell us, unsure really of who those suppliers are, let alone how the suppliers' world is changing. They believe customers don't have computers, aren't hooked up to the Internet, or aren't ready to buy and sell over the World Wide Web, but they haven't bothered to ask the customers if this is so.

The truth is that consumers understand and embrace the trend toward decentralized buying and selling through technology interfaces much more readily than sellers do (think of catalogs, 800 numbers, and television shopping). Consumers are only waiting for critical mass. The smart thing might even be to pay for their Internet access, since the reduced transaction costs of, say, electronic billing, might alone justify the investment in a few months.

5.2: Replacing Rude Interfaces with Learning Interfaces

The human touch isn't quite as warm as it used to be. Even in the retail industry, where direct customer contact is constant, companies—like Nordstrom's, FedEx, or the Four Seasons hotels—that provide consistently good service are the awe—inspiring exception, not the rule. In a New York Times story about the decline of customer service, a customer of Filene's department store in Boston reported that after an exceptionally unfriendly transaction, she told the clerk, "A thank you would be nice." To which the clerk responded, "It's written on the receipt."

Well, why not be rude? No organization is immune to a mass revolt (or even a credible threat) by all of its customers, but imagine the transaction costs of a single customer informing all the others of any bad experience. Worse still, think of how hard it is even in local markets for consumers to band together to punish poor service or overpriced goods. Even in long-distance phone service, where rate setting has been turned over to a highly competitive market for more than ten years, overall industry profitability is still astronomical. In theory, consumers have the power to force an industry to the point of bare profitability overnight. But that's only theory. In practice, collective action problems are everywhere, and the costs for customers of organizing and sharing information as a group have been prohibitively high.

Now, thanks to digital technology, those costs are coming down, forcing organizations to reevaluate which if any of their customer contacts are really helping the cause. Superior customer service, or what consultants Michael Treacy and Fred Wiersema call "customer intimacy" in The Discipline of Market Leaders, is part of the mission statement of every organization we know. For most, it's a mission impossible. A senior vice president at AT&T once told us with a straight face that his company was "intimate" with 80 million customers a day.

5.2.1: It Can Only Get Better

Stop for a moment and think about the five most recent direct contacts you've had as a consumer with the checker at the grocery store, an airline reservation agent, the customer service department of your credit card company, or even a directory-assistance operator. Did you receive superior customer service? Did you receive any service at all? Did you think to yourself that you'd just as well take your business elsewhere if only you weren't convinced it would be just as bad? And, even if you did receive superior service, was there any indication that the company collected the information you gave it, so that it could better serve you next time? Did the company give you the opportunity to structure the transaction the way you wanted?

Every direct contact with the customer is an opportunity to improve the relationship and to learn more about the customer's needs. But most customer contacts offer little or no opportunity to do either. One of the reasons customers have responded so well and adapted so easily to FedEx's on-line package tracking application (see Chapter 4) is that the human operator who had managed the old system wasn't really acting like a human being in the first place. All he or she did was type the user's input and read back the response from a computer screen. Human beings, it turns out, make very poor computer peripherals.

We know one commercial bank that prides itself on its close relationships with its customers in small businesses, a relationship the bank refers to in its advertising as a partnership. The bank adopted a policy guaranteeing that every customer phone call would be answered by a human being rather than an automated system. A complex rollover mechanism ensures that even if an account executive is unavailable, the call is routed to an assistant. The theory is that in the absence of the executive, the assistant can provide a "human touch" that voice mail cannot.

In practice, the assistants do little more than take messages and, more often than not (usually at the customer's insistence), transfer the call to voice mail anyway. Worse, after 5 p.m., the assistants have gone home and there is no way to get into the bank's voice mail system. When there are no human beings to provide the "human touch," the phone just rings off the hook.

An alternative solution, one that recognizes the power of digital technology, would have been to improve the disliked voice mail interface. Wildfire, a voice-driven "electronic telephone assistant," has done just that. Wildfire does many remarkable things, including screening, routing, and announcing your calls; it "whispers" in your ear when new calls are trying to get through so you can decide whether or not to take them, and it maintains a virtual phone book of your most frequently dialed numbers. Wildfire improves the likelihood that the call will get to you in the first place, solving the real problem the bank had identified.

So even though technology-based interfaces (a voice mail system instead of an operator, an ATM machine instead of a bank teller, a kiosk instead of an information desk) can be cold and inflexible, at least they're predictable. They are already improving many transactions in which the operator merely served as a computer interface device, including most banking, billing, order entry, and order status applications. Technology interfaces are almost never rude. Some even speak more than one language. And soon they will be able to handle voice as well as text and graphics.

Digital interfaces are making especially good progress in industries with long histories of unpleasant customer interactions (retail, insurance, and government, to name three), where they provide both lower cost and higher quality. For a demonstration, visit a Web-based telephone directory like Four11 or the FedWorld site for tax forms and taxpayer information. New York City has deployed experimental kiosks, which deliver a range of the services provided by City Hall throughout Manhattan. One user of the kiosks described the interface as being "like a New York City worker who works 24 hours a day, and it's more friendly."

But digital technology can do better than offering service that is merely not impolite. As many recent examples demonstrate, it is already possible to build superior customer interfaces that mediate human interaction, providing quick and efficient automated service at a level defined by the customer. Like video games, on which they are modeled, these interfaces adapt automatically to users' levels of skill, advancing them through the system's functions as they are ready and calling on a human being when the situation requires one. Equally important, these interfaces record their interactions, providing a rich store of data. We call such systems "learning interfaces," a phrase coined by computer scientist Alan Kay.

Several start-up companies are experimenting with learning interfaces today, often with very positive consumer response. GetSmart is a service that currently helps users find the best-fitting credit card, mortgage provider, or mutual fund. Consumers are guided through the process of selecting and ranking criteria they may not have even realized were important, and the system responds with follow-up questions and, ultimately, the opportunity to apply for the best-fitting solution. GetSmart's learning interface lowers the transaction cost of buyers and suppliers finding each other. An independent company, its revenue comes from referral fees paid by the suppliers once the transaction is complete.

Seattle-based Netbot, Inc., has gone even further with its Jango product, which was acquired in October 1997 by the Excite network. Jango is your personal shopping agent for a fast-growing variety of products being sold in cyberspace. You describe what you're looking for and rank your selection criteria. Jango scours the Web for you, returning with a detailed list of offering vendors. The list highlights what can be a remarkable range of prices for even standard products like laptop computers or music CDs. The product is all interface; over time, it will be able to learn and adapt to your preferences, further reducing the transaction costs of electronic commerce.

5.2.2: Eliminating Customer Sacrifice

One of the most valuable features of a learning interface is that it gives the merchant an understanding of what consultant Joe Pine has termed "customer sacrifice." Customer sacrifice is the difference between what a customer settled for and what the customer would have wanted in the best of all possible worlds. Consider home grocery delivery pioneer Peapod. Peapod's Web-based service provides customers a high-quality selection and ordering function (even for items such as produce typically judged by appearance and smell). Subscribers access the system over the Web and submit orders to Peapod electronically. For a fee, Peapod picks the inventory at one of its partners' stores and delivers it directly to the customer. Peapod is now doing significant business, with 45,000 subscribers by mid-1997.

With its direct access to customer preferences, Peapod is teaching its grocery store chain partners more than they bargained for about customer sacrifice. Before Peapod, according to a senior executive at one large chain, the company believed that its ability to meet the customer's needs was extraordinary, given customer satisfaction ratings that were typically 96 percent. But an analysis of Peapod's records demonstrated otherwise. Since customers could identify their first and second choices, the data demonstrated precisely when the store did not have the merchandise the customer wanted. The reality was that Peapod shoppers got what they wanted only 70 percent of the time. "That information startled the hell out of everybody," he told us. It also provided the data needed to fix the problem.

Replacing human interfaces is by no means a downsizing strategy. Customer contact personnel freed from these mechanical interactions can focus instead on meaningful customer exchanges, including new customer development and working with existing customers to identify additional services the company could provide. More importantly, learning interfaces transform the customer interaction into two-way conversations. The immediate benefit of these conversations to the seller is that they know instantly when they are not serving the customer's needs. Over the longer term, the learning interface becomes the primary mechanism for creating the communities of value we described in Chapter 4. Enhancing the interface to let customers talk to each other as well as to you changes the dialogue from two-way to N-way. That, at least, is the beginning of community.

5.3: Ensure Continuity for the Customer, Not Yourself

Hoping to stall the painful move from the world of atoms to the world of bits, many of our clients begin by hiding behind their customers. The mass market isn't ready for this, they say. People are afraid of computers. The Internet is scary. Scary for whom? There's little doubt that digital technology and the killer apps they enable are making life difficult for most everyone in business. Old ways of doing business disintegrate overnight, reducing the time to respond from years to days. For customers many of the changes are beneficial. More to the point, they are entirely consistent with developments in commercial life consumers have been enjoying for years. The Law of Disruption is what you have to worry about. Managing continuity for customers and other business partners means doing what you can to protect them from the fallout.

Andy Lippman, director of the MIT Media Lab's Digital Life program, which studies the social dimension of computing, made this point eloquently during a recent consulting project. The client, a group of related trading and transportation companies, was concerned that its customers and suppliers would be uncomfortable switching to electronic interfaces. But why worry about that? Lippman asked. They deal with electronic interfaces all day—the telephone, the television, ATMs, grocery scanners, car dashboards, even automated bus transfers. Customers don't know, or don't care, that technology has replaced familiar ways of doing things when the interface is designed to continue the old metaphors. Digital gauges on dashboards still "look" like gauges. Electronic bingo cards, in another example, are designed to simulate blotting out called numbers.

Electronic commerce, in essence, combines the unhurried convenience of catalog shopping with the superior interface of TV shopping, innovative developments that customers adapted to almost from inception. (Revenue from TV shopping will reach $60 billion in the United States by the year 2000 at its present rate of growth.) Table 5.1 compares the different perceptions of electronic commerce held by customers and merchants. The table highlights how the migration to electronic commerce disrupts the activities of merchants in ways that are perceived by consumers as incremental improvements to interfaces they already know.

For customers electronic commerce is like an interactive catalog, supplemented with audio, video, and (eventually) real-time interaction with other shoppers. The merchant, on the other hand, must deal with the fact that electronic commerce erases much of the value of physical stores, which must be transformed into showrooms, demo centers, or staging areas for direct home delivery. As customers grow to expect customized goods not just for information products but for manufactured goods—blue jeans, cars, and home computers, for example—manufacturers will need to find ways of using technology to improve production and delivery systems by several orders of magnitude, adding memory, perhaps, that stores the customer's specifications. Final assembly will have to be outsourced to the delivery system itself, turning trucks into miniature manufacturing plants.

Several electronic commerce start-up companies are building businesses that do nothing but minimize disruption for customers and merchants. Cybercash, for example, was launched to solve the difficult problem of handling electronic payments cheaply, safely, and without having to utilize relatively high-cost credit card systems that do not respond well to large volumes of low-price transactions.

Cybercash initially offered a simple third-party verification service to belay exaggerated fears of credit card fraud by customers who were being told by credit card companies that the Web was not a safe place to reveal their account numbers. (It is, in fact, as safe as doing so over the telephone or in stores with electronic card readers.) Cybercash, and rivals DigiCash and Mondex, have since launched experiments in providing technology that acts like cash ("E-cash"). E-cash is stored on intelligent credit cards that can be plugged into computers or given to participating merchants. Mondex has already coordinated merchant and customer immersion pilots in England and Canada and on New York City's Upper West Side.

Customers will grow comfortable with E-cash initially because it will simulate the familiar experience of using paper bills and coins. Eventually they will learn that electronic money has advantages over cash, which will lead to new uses. E-cash can be programmed (so that, for instance, parents can limit what their children buy with it), it can be switched from one currency to another without incurring high transaction fees, and it can generate mountains of useful data as it is used to help fine-tune buying decisions and products. The key will be to bring the customers along as quickly and as smoothly as possible, not as slowly as is convenient or most profitable for the developers. As one Mondex user put it, "Convenience is addictive."

WebTV's CEO, Steve Perlman, ran an end-run around computer manufacturers that were scampering to build cheap Internet access devices by playing to the customer's preference for the familiar. Perlman recognized that many consumers don't want a computer at all, only access to the Internet for features like the Web and E-mail. Since every home in the United States already has television, which owners are entirely comfortable operating, Perlman's killer app is to use technology to extend the TV rather than to introduce a new, unfamiliar device. Instead of forcing consumers to accept the computer makers' mind-set, Perlman adopted the consumer's perspective, and transformed televisions into simple Web access devices by connecting them to a phone line, remote control, and optional keyboard, coupled with a subscription-based access service oriented toward nontechnical (and happily so) users.

5.3.1: Don’t Project Your Hang-Ups into Cyberspace

In launching digital goods and services, too many organizations do just the opposite of what WebTV did. They try to minimize their own disruption at the cost of adding confusion for the customer. When United Airlines announced its electronic ticketing feature in 1996, the launch included a ridiculous ad that suggested E-tickets solved a pressing problem for travelers: the risk of losing their tickets. "Even this guy couldn't lose our latest airline ticket," the ad said, showing a businessman with papers coming out of every corner of his briefcase.

But who really worries about losing their airline ticket? The real advantage of the E-ticket was enjoyed by United, which could bypass the ticketing charge from the organization that assigns unique numbers to physical tickets. The approach that would have been understandable to passengers would have simply been to offer sharing some of this cost savings with early adopters, like the members of their frequent flyer program, until the new system became familiar enough to pitch to occasional travelers as a true convenience.

Electronic tickets actually created more hassle for travelers. Gate personnel were poorly trained to handle them, and airport security personnel still don't understand, a year later, why passengers are unable to show them a ticket, as is required to get access to the gate. Without a paper ticket, it's difficult to switch at the last minute to another airline if United's flight is delayed or canceled. Instead, United wished away these problems, and the result is that passengers are still confused by the new "service."

Failures to manage customer continuity are easy to find on the Web. Motorola, a leading manufacturer of other people's killer apps, had until recently a nearly impenetrable Web site that was organized not around the different ways customers were likely to visit but around its own internal structure. To find information on a good or service, you first had to determine which of several similarly named business units made it. We went in search of information about the sports paging device that was the subject of the lawsuit between Motorola and the National Basketball Association mentioned in Chapter 2, but never found it, getting lost in a maze of data about satellite systems and wireless protocol standards.

It is difficult, perhaps, for large bureaucratic organizations like Motorola to break down internal barriers and share information with each other, but it is a particularly bad idea to reveal these institutional infirmities to customers and frustrate their efforts to do business with you in the process. Compare to Motorola the genuinely engaging site of Toyota. This site was developed not internally but by Saatchi & Saatchi, Toyota's advertising agency. Saatchi & Saatchi clearly understood the value of customer-centered interface design. The Toyota site does not bore you or confuse you by telling you anything about how Toyota sees itself but tries instead to create for you the experience of being a Toyota owner. Using attractive graphics, video clips, and text that projects an engaging, edgy attitude, the Toyota site combines the best elements of advertising, test drives, and slick car brochures. Together they tell the user a story about what it is like to be a Toyota driver. The secret was developing the interface for the customer, not the company.

5.3.2: Evolving Interfaces Smooth the Transition

Starting with the customer's viewpoint is only part of the solution. Your interface must also bring the customer along as he or she is most comfortable from the old world to the new. The interface is the tool for doing so. This is the strategy being followed by the best of the banking and retail sites on the Web today. Security First Network Bank, the Internet-only bank, initially presented itself with a three-dimensional model of a bank branch office. Click on the information desk and learn about the bank. Click on a teller and you were transferred to transaction processing. Click on the security guard and you learned how the bank's assets are insured by the U.S. government. As customers became more familiar with the added capability of the new media, Security First's site evolved along with them. The site now minimizes the branch office picture and instead customizes the interface dynamically based on the customer's previous activities and identified preferences. In late 1997, the company evolved even further and decided to sell the bank itself and concentrate on software and services to help other banks make the move to cyberspace.

Our trading and transport client decided, based on these examples, to organize its electronic offering around the concept of the customer's home, since most of its goods and services are aimed, one way or another, at homeowners. The breakdown of activities between the different divisions will be hidden from the users, who will see an interface that walks them through the familiar activities of home improvement. This client will eventually expand its offerings and bring in related functions, like security services, home buying and selling, and management of the various systems inside the home. Ultimately the interface will become a part of the house. Our client will need to make massive changes to achieve these objectives. But its customers won't.

5.4: Give Away as Much Information as You Can

In the early 1980s, health care manufacturer Baxter Travenol enjoyed considerable competitive advantage over competitors by letting customers submit orders directly to Baxter's computer system. To do this, the company placed terminals in the order departments of hospitals, making it easy for purchasing personnel to buy from Baxter. The terminals gave hospitals access only to Baxter's catalog, but ordering electronically was easier than filling out paperwork, and once used to the Baxter system, the hospital was loath to learn a new one or to accept the terminal of a competitor.

Baxter's system was a closed network, the user equivalent of the strategy in full force in the computer industry in the early 1980s. IBM locked in its customers by selling them equipment that ran only IBM systems software, which in turn supported applications that were written only for the IBM system. Similarly, its data communications network, SNA, ran only on and between IBM processors. Most of the other computer companies at the time pursued a similar strategy. Once locked in to a closed standard, customers were unwilling to incur what economists call switching costs, giving suppliers a captive market.

The age of closed systems is over, and companies like IBM, DEC, and several European computer manufacturers that built their empires on them have either disappeared or made the painful switch to open architectures and open systems. The new world is fueled by open systems, and the few holdouts in both systems and application software will inevitably give up. In designing killer apps, the rule for the interface is always to make it as open as possible and to give away information rather than hoard it.

The primary forces behind this transformation are once again Moore's Law and Metcalfe's Law. Moore's Law makes it possible to spread new applications across global computing networks cheaply and efficiently, dramatically lowering switching costs. Metcalfe's Law, meanwhile, extends the number of people who can innovate with the system and consequently who can increase its value.

Baxter's system only let customers send orders. It did not give them access to other interesting bits Baxter might have had, closing off the potential for customers to create new transactions themselves. IBM, similarly, was determined to use SNA as insurance for its corporate strategy of keeping computing hierarchical, reliant at the top on the mainframe computers from which IBM made its highest profits. This meant that SNA development had to be kept strictly internal, and all that was ever revealed to customers was the minimum they needed to use it.

SNA was soundly defeated by the Internet's decentralized communications protocols, which had no corporate backing but were instead being developed by a research lab made up of the entire world. Because everyone has access to the standards and can propose changes to them, new directions and new uses are possible. The Internet evolved organically into a nonhierarchical network, where every device—even cheap ones—can participate fully. This architecture, because of its unlimited scalability, has proven critical for unleashing killer apps, and the force of its added value overcame one of the greatest marketing organizations in history.

5.4.1: The Decline of Switching Costs

Imagine a start-up health care supplier of today competing with the Baxter Travenol of the early 1980s. Where Baxter operates and maintains its own computer network, including the processors, communications links, and individual terminals, the start-up will piggyback its order entry system off the Internet, which any customer can easily access with a range of devices. The modern competitor can also build its software out of inexpensive, powerful components like multimedia browsers and the ever-expanding extensions and plug-ins that feed the World Wide Web.

What's more, the new competitor can take advantage of the very openness of the Web to proffer links not only to customers but to distribution partners (a FedEx or a UPS) and to product manufacturers themselves (including Baxter). As a result, the start-up will offer a wider selection of products, better prices, and more flexible delivery options, and it could operate at substantially lower cost than the closed Baxter environment. Its margin is derived from the system's openness, in other words, not from the captive market. This is essentially the business model that wholesaler Marshall Industries has adopted in the electronics components business (see Chapter 4). It could and is being replicated in many other markets.

The destruction of captive markets signals the decline of switching costs for customers. Switching costs are not unheard of in the open environment, but they are of a very different—and fragile—nature. Switching costs are easier to overcome, as a general rule, the less they depend on locking customers into inflexible alternatives. A Gillette razor has high switching costs because changing your source of blades requires you to change the hardware. Software, including IBM's SNA, is easier to replace.

When the interface is built on open standards, switching costs can be established, if at all, only for the actual information users provide to the system. Users of Intuit's financial software, for example, or of Charles Schwab's e.Schwab, invest considerable time entering personal financial and investment data into proprietary databases supported by these programs. This investment creates the potential for an information switching cost. Even if the customer eventually finds another piece of software preferable, say Microsoft Money or E*Trade, switching would require reentry of the customer's information and time to learn the differences between the old system interface and the new one.

Unlike hardware and even software, however, information switching is less disruptive and easier to avoid. Building a bridge from your competitor's interface to yours would be next to impossible at the hardware level. Building a razor that takes Gillette blades would almost surely violate a patent (in effect a regulated switching cost). Courts have gradually ruled, in contrast, that information formats and interface "look-and-feels" are not entitled to such extreme protection, limiting the ability of interface developers to lock users in. A competitor today can easily build a conversion program to transfer your data to its format, as many software products in generic categories like word processing, spreadsheets, and graphics have already done. And the pressure is building, not easing, for Web-based interfaces to support common standards as a starting point for both data and look-and-feel.

5.4.2: Dying with Their Boots On

Some organizations remain committed to closed interactions with customers and appear ready to go down fighting rather than make the painful but potentially liberating switch to growing global networks and standards. In the market for legal information services, two dominant competitors, LEXIS/NEXIS and West, offer their information services to lawyers exclusively through private networks and proprietary software. Both began experimenting in 1997 with Web-based access, but still on the old subscription model and using their aging closed interfaces. LEXIS/NEXIS and West remain almost entirely text based, and their private search tools are poor seconds to the Web's search engines. Much of these companies' actual data, moreover, are public data (laws, court opinions, and other government publications).

These competitors have been so focused on matching feature and function with each other, implicitly agreeing not to compete too much on price, that they appear to have completely missed the killer app coming right at them: the Internet's superior user interfaces and exploding public databases.

A number of completely innocent experiments now appear likely to obliterate the market for the closed services, right under the noses of the dueling giants. Cornell University offers a database of opinions from the U.S. Supreme Court that is not only free but much easier to use, search, and print. Government agencies, at the same time, are offering more and more of their information directly to the public (such as the House of Representatives' Thomas, the Patent & Trademark Office's database and searching tools, and the Securities and Exchange Commission's EDGAR system for company filings). It won't be long before someone takes these fledgling experiments, puts them together, and wipes out the information empires of both LEXIS/NEXIS and West.

There is a winning digital strategy for these information providers. Although they charge based on access, the real value they provide is enhancing the raw information they collect with commentary, indexing, and organized notes services. Instead of access, the companies could sell their expertise on a subscription or a transaction basis (for example, answering specific tax questions). Doing so would ultimately bring them into competition with their current customers, lawyers and accountants, but without the considerable markup the professionals add in answering simple legal and regulatory questions for their clients. LEXIS/NEXIS and West are so comfortable charging for access and so convinced that their value is somehow inextricable from the closed networks and the mountains of paper they generate that neither has given serious consideration to this or any similar option. Indeed, the last time we spoke to both companies, they were still denying the existence of any serious threat from the World Wide Web.

A similar misfortune seems likely to befall the real estate industry, where buyers and sellers of houses and condominiums are actually kept apart, not brought together, by the closed multilisting systems maintained by real estate agents and brokers. These systems list only property offered by other agents, and are only available to the agents themselves. The agents protect the value of this closed system by agreeing to share commissions equally on sales-half for the seller's agent, half for the buyer's. Since there is no commission to share on unlisted properties, buyer's agents do not show properties that are not in the system, forcing buyers and sellers to use an agent whether they want one or not.

Agents, as we have said, generally provide value only to the extent that they reduce transaction costs for buyers and sellers. In the absence of other mechanisms for buyers and sellers to find each other and negotiate terms, the commission charged by real estate agents may have reflected a fair return on the service provided. Not anymore. In the rental market, several remarkable Web sites, like Visual Properties, walk users through the process of deciding what kind of apartment they want, what features they need, desire, or don't care about. These applications provide tenants with a list of available properties ranked by the tenant's own criteria, along with floor plans and virtual walkthroughs of the units. Applications, credit checks, and much of the administrative noise are automated and electronic. Soon, landlords and tenants will be able to negotiate in real time, face-to-face, using videoconferencing.

A number of interested parties, like Microsoft, Yahoo!, and Digital City, have strong incentives to build similar interfaces for home purchase and sale, a direct competitor to the real estate agents. These killer apps will make it easy for buyers and sellers to create their own real estate markets and to exchange much more information—including photographs, videos, and replicas of key documents—than the text-based listings used by agents. The new competitors won't need commissions, since they can derive revenue from advertising or possibly from the listing itself, as if it were a classified ad.

Real estate agents show no signs of seeing the coming threat, and consequently no signs of opening up their listing services or enhancing them to stay competitive. Once the killer app hits, we suspect they will find commissions are no longer a dependable source of income. Instead, real estate agents will need to figure out what actual value they still bring to buyers and sellers. Then they'll need to find a new way of charging for that value.

5.4.3: Giving Away the Store

Sometimes even organizations that make their living on open systems struggle with their counterintuitive behavior. Technology leader Hewlett-Packard recently found itself with this problem. The company had survived a devastating shakeout in the computer industry during the 1980s by focusing on open standards and architectures rather than proprietary ones. So HP was naturally disposed toward the Internet revolution when it occurred. HP was hooked on internal E-mail early on, and from the beginning of the Web's history has offered one of the best presales interfaces for customers wanting to search through its vast catalog of products and technical specifications.

Internally, HP also found that open systems were crucial to achieving reduced product development times, a key requirement for a company that relies on innovation and speed to maintain market leadership. The HP brand stands for customer responsiveness and superior engineering (as the recent commercial of a copier that does everything, including mowing the lawn, satirizes). Innovation has a practical benefit as well, since HP makes its best profit margin during the first 180 days after a new product is launched. After that, given the nature of open architectures, competitors start to catch up.

The natural tendency for HP was to open all its systems, including its product development processes, to customers. Customers were already involved in product development, and the collaborative technology had proven itself not only internally helpful but scalable to large global project teams. HP customers already had access to the Internet, so the financial cost of opening the interface would be minimal.

The problem was the very openness of the system. Inside HP and even with suppliers, it is all well and good for prerelease product information to be shared and worked over by as many people as possible. But if that interface were open to customers, the proprietary value of the data would quickly disappear. Opening the system, after all, creates a tremendous temptation for competitors. Once we open the fire doors that separate us from the world outside HP, a senior HP I/S executive told us, there's nothing to keep our chief competitors from discovering our plans for the next generation of products. And that would mean the end of HP's early advantage.

HP resolved the conflict in favor of broad, open access, in part by recognizing that some competitors were already inside the door. Canon, the chief competitor in the ink-jet business, is also the key partner in the laser-jet business, supplying the engines for these devices. Canon, in other words, already had access to much of HP's engineering expertise. HP realized that its own expertise was not so much in product innovation but in the speed of that innovation. Given the same product specifications, HP can get a new product to market consistently faster than its competitors. The risk of losing proprietary data, then, was less grave than the company initially thought. Put another way, much of the proprietary data turned out not to be all that valuable in the first place.

HP also understands, as the legal information providers and real estate brokers so far have not, that whatever value is lost from opening the interface and giving away information needs to be balanced by the additional value received. Including as wide an audience in the development, sales, and manufacturing processes as available technologies permit subjects that data to Metcalfe's Law, increasing rather than diminishing its usefulness. The bigger the network, the greater the utility. The moral of the story, and the general lesson of this rule, follows: Give away as much information as you can. Users give back more than they take away.

5.5: Structure Every Transaction as a Joint Venture

As killer apps squeeze out transaction costs, improving the competitiveness of the open market at the expense of large corporations, organizations must shift their activities accordingly. The business firm of the future will be a networked one, with technology providing partners with the needed communications channel that today might require an internal department. The concept of virtual organizations is now taken for granted, and the reality is rapidly approaching. GM, for example, recently sold Hughes Electronics, noting that it could get the same value through various alliances with an independent Hughes, thanks to digital technology. Ten years ago, access required ownership.

5.5.1: Davids versus Goliaths

Businesses all over the world are spinning off, selling out, and downsizing like crazy. These phenomena have been going on so long that it's more appropriate to think of them as features of the business environment than as trends. The restructuring of the corporation is a direct response to the new forces and the Law of Diminishing Firms. Firms get smaller when size isn't necessary or competitive. The new forces, led by the digitization of information, make it both possible and necessary to operate in smaller, more focused and more flexible units. Soon you will be able to treat basic transactions with the same attention you would a complex joint venture, bringing in the best set of business partners and allocating work, risk, and ownership as best suited.

A new breed of competitor is already following this rule, perhaps under your competitive radar. Entrepreneurs, start-ups, and the self-employed, who don't have infrastructures to dismantle, are taking advantage of inexpensive new technologies for collaboration as quickly as they are developed. Firms with no offices, no fixed employee bases, and no physical presence to speak of, are already making effective use of the Internet and related technologies to compete head-on with traditional firms. They're really not firms at all as much as loose affiliations of individuals with different skills who can use the low-transaction-cost digital marketplace to form and disband easily around projects.

Larger organizations must now learn to buy, sell, partner, and compete with a new breed of virtual firms, digital Davids in a world long ruled by Goliaths. In Holland, for example, the largest Internet access provider is not the national phone company but XS4ALL, a company started by a motley crew of former teenage hackers. By refusing to follow the business model of a telephone company, XS4ALL captured over half of the access market from the Dutch PTT in a matter of months.

The new forces will soon give rise to short-lived joint ventures that exist solely to complete one transaction, effectively replacing permanent organizations, long-term contracts, and strategic alliances. Competing against such firms isn't impossible, but it is certainly different. On the side of the traditional organization are powerful information assets like brand, relationships, and expertise, which, if properly digitized and optimally distributed, can form the basis of new competitive advantage. On the side of the Davids, however, is their lack of physical assets. They have no aging infrastructure or corporate bureaucracy, and lack the legacy of value-warping regulation. As one colleague of ours says, "A regulated economy creates a regulated mind-set," and the latter—as evidenced in telecommunications, defense, and the airline industry—seems harder to undo.

One industry that is already feeling the pinch of these stealth virtual ventures is the public market for capital. Heavily regulated at the national and state levels, the finance industry has turned its complex rules into barriers to competition. It limits the number of traders and the timeliness of information (the New York Stock Exchange requires its members to respect a twenty-minute delay in active quotes). Entrepreneurs hoping to raise money for new enterprises must engage a vast bureaucracy of underwriters, investment bankers, and lawyers, all of whom take a piece of the proceeds for their help in dealing with each other.

Andrew Klein, owner of microbrewery Spring Street Brewery, chose not to play by the rules and instead used the Internet to find the new business partners he needed to fund an expansion. Filing his own registrations, he cut out several layers of expensive intermediaries on Wall Street and sold $1.6 million in stock directly to 3,500 individual buyers. Klein didn't stop there. With permission from the Securities and Exchange Commission, the beer-maker launched Wit Capital in late 1997, an on-line investment service that will replicate the Spring Street experience for any company—or private investor—that wants to avoid the usual suspects in the securities market. Exploiting the dramatically lower transaction costs of cyberspace, Wit Capital and other Internet-based services are making it possible for complete strangers to form partnerships and finance new ventures.

Wit Capital is a good example of how digital technology can be used to build new relationships, using the frictionless flow of bits to smooth the transition from one organization's border to the next. But treating every transaction as a joint venture goes further. It requires an attitude toward interacting similar to the one in AOL chat rooms that focus on money and investing—you bring whatever valuable information you have, quickly determine who and what to exchange it with, and derive value from the sum of the parts. It is not who you know anymore, but what.

This is how the investors who use AOL's Motley Fool investment service claim they have been able to beat the market time and time again. One participant notices low inventory for disk drives at the local electronics store; another drives by the manufacturing plant late at night and sees a filled parking lot; a third reads between the lines of a press release. Combined, this information suggests an unexpected demand for product, and the investors predicted correctly a big run-up for the company's stock. The partners in this venture can each take the enhanced information and trade on it. They do business with each other based strictly on the value of their information, without lawyers, contracts, or articles of incorporation.

5.5.2: Partnership Portfolio Management

More than ever, the ability to form relationships and keep them healthy is a core requirement for any business, whether a large multinational corporation or a self-employed entrepreneur. As the distinctions between you and your business partners become blurred by the breadth, depth, and persistence of your connections, managing relationships becomes even more central.

The partnership range (see Figure 5.1) demonstrates the correlation between commitment and intimacy in an organization's connections. The choices range from basic awareness of the partner to outright ownership, as well as such interim arrangements as strategic alliances, licensing, joint ventures, and equity stakes. To design any killer app, you must hone your ability to identify potential partners quickly, determine the appropriate level of intimacy for the relationship, and secure the corresponding level of commitment with as little fuss as possible. Remember that competitors (and future competitors) are waiting in the wings, ready to move fast—maybe faster than you are.

The technology industry itself provides some of the best examples of winning and losing strategies. Microsoft quietly bought or invested in twenty companies in 1996 alone, at a cost of $750 million dollars, in order to gain early access to the nascent technologies these companies were developing. One company Microsoft purchased outright in 1997 was WebTV. Though sales of the WebTV devices (manufactured under license by Philips and Sony) had been disappointing in the 1996 Christmas season, Microsoft paid $435 million for the company, betting on WebTV's ability to develop enhancements that could take the TV beyond computers in communication speed and data storage. A few months later, Chairman Gates continued to build his portfolio of related interests, buying a 25 percent interest in cable TV giant Comcast after Comcast's chairman dared him to prove that he really could make money in the troubled industry. Many of these acquired technologies may prove unmarketable, but Microsoft, like any good investor, knows that it is the overall portfolio that counts.

Poor partnership management, on the other hand, can just as easily be an organization's undoing. Consider the unhappy fate of General Magic. This innovative company, founded by Apple legends Bill Atkinson, Andy Hertzfeld, and Marc Porat, promised to jump-start the market for small handheld computing devices by developing top-quality software to operate them. When the company's stock began trading in 1995, it raced to $28 a share, yielding a market capitalization of nearly $1 billion. The company had developed a powerful operating system and programming language for these devices, which it hoped would finally get the stalled hardware market off the ground. Even more impressive was the list of partners General Magic lined up to market its technology, including Apple, Sony, Motorola, Philips, AT&T, France Telecom, NTT, Fujitsu, and Matsushita. The partners were not only licensees but investors in the company. This unique coalition was formed in the hope of agreeing on a set of standards. Since all the major parties were represented on the "Founder's Council," there was no way General Magic could fail.

But it did. When we visited General Magic in 1996, the company was a shadow of its early exuberant self. It is now struggling to reposition itself as an Internet product and service company. The goal of creating and establishing standards had been blindsided by the Internet juggernaut and its open standards, in particular the Java programming language, which Sun had simply released into the Net. General Magic was so busy balancing the expectations of its partners that it completely overlooked the building momentum of the arguably inferior standards being promulgated on the Web. It was killed not so much by the killer app, but by the kindness of its investors.

Put another way, General Magic had failed to include a crucial partner on its Founder's Council: the user. As of late 1997, the current share price hovered around $1.

5.6: Summary

The new forces not only alter the nature of interactions between organizations but mandate a new breed of technology-enabled interfaces between you and your markets, customers, suppliers, and other business partners. Since functions now move fluidly to the place where they are best performed, interfaces need to be transparent and adaptable to their users. In creating these windows to your organization, you must be sure to choose designs that are appropriate for their users, even if they represent traumatic changes inside your own business. Rather than blindly characterize all of your organization's information as proprietary and secret, balance the true value of these bits against the potential for business partners to increase their value by using them.

Following these rules will take you into the world of the future, where transactions have already moved far along a spectrum from the carefully orchestrated to the purely ad hoc. The more open the system and the more refined your skills at forming, executing, and completing joint ventures, the better positioned you will be to exploit new opportunities, launch new products and services, and unleash your own killer apps.

Getting the rest of the way means remaking yourself from the inside out, the subject of the last set of design principles.