Has the traditional FIRM gone the way of the dinosaurs?

Is there a place left for the traditional firm, in the new on-demand, sharing economy?

As we continue to look deeper into the shared economy, we’re seeing the uncertainty of the lifespan of the traditional firm. To explain what is happening in the market, we’ll have to look at peer production, the commons, on-demand economy, crowdsourcing, the change in worker motivations, and how the new market environment will take no prisoners of those that don’t adapt.

To begin, a few economic and financial terms come to the forefront and need to be explained. In an article from June 2016 about Peer Production, the Commons, and the Future of the Firm, Yonchai Benckler of the Harvard Business School talks about how the internet and the world wide web affected transaction cost and brought forth peer production, the commons and a new direction for the large organizational firms.

We’ll try to explain in layman’s terms what he describes as the main factors of change and what it means for the firms.

PEER PRODUCTION
Peer production is a decentralized form of innovation/creation, that has non-proprietary control over the product, playing with diverse motivators for the participants. A few examples of peer production endeavors are: FOSS (Free or Open Source Software), e.g., Apache, Wordpress, and knowledge bases, like Wikipedia.

Peer Production is characterized by:

• decentralization of conception and execution of problems and solutions: Collaborative innovation, bringing together diverse individuals, from diverse fields, that working together on a common issue manage to push innovation faster, and come up with largely more diverse solutions.
• harnessing diverse motivations: The motivations are not financial or material based. They are pro-social, and non-material, non-self-interested motivating factors. The motivations usually are based on
• separation of governance and management from property and contract: Peer production is often self-monitored, self-guided, self-managed. The peer production products are usually open source, free of intellectual rights, with lower capital cost of production, and lower transaction costs.

“Innovation is a collective, not (an) individual process. It is a process of learning, and therefore depends crucially on communication.”

Innovation is the main driver for growth. Speed of innovation is massively faster in the FOSS and the communication (internet) based companies vs. in the traditional system of “proprietary information”, developed and owned by large firms.

Benckler also mentions that innovation is a factor of the collective, of multiple people cooperating and working toward “the commons”, and is not an individual process.

THE COMMONS
What Benckler means by “the commons” is what is being produced by a large group of people collaborating, either paid or unpaid, with pro-social and intrinsic motivations, that are contributing to a larger project, a project that is created to benefit everybody (Free or Open Source Software), a product that benefits us all, the commons. This type of enterprise is governed by the community. It’s mostly self-regulated, without the hierarchical-organizational style management style found in a price-mediated innovation style large firm. Nimble, agile, highly innovative, the commons employ workers that are motivated mainly by the common goal, not financial compensations.

In the Knowledge Production Systems 3 dimensional diagram, Benckler shows that:

1. the more knowledge-intensive the project is, the higher the risk of investment, the higher the uncertainty, the more freedom to operate the knowledge workers need, the more explorative the solutions, the more a need for the commons innovative function.
2. the more routine a task is, the less incentives there are, the less knowledge intensive the workers are, the less freedom of creation and innovation is needed, the more strict the management styles are.

THE FUTURE OF THE FIRM
The idea of the firm is changing, as the firms are forced to evolve to keep up with the changes in technology, and the changes in the consumer.

“One possible answer is that firms will remain significant only where physical capital costs of production are high and concentrated.“

In conclusion, a question still remains: Will the FIRM survive?

What is the advantage of a firm over an ad-hoc gathering of knowledge-based workers that are presenting a solution to the same problem? With lowered transaction cost and the high innovation associated with the commons, the Firm seems to go the way of the dinosaurs. But, incorporating a wide variety of motivating factors to the employee, paired with social integrity where workers can build “communities of meaning” and can openly collaborate, could be the answer to the survival of the Firm. Those kinds of firms will be able to thrive and be competitive in the face of open and dynamic networks of ad-hoc collaborators. Those firms will survive. Here are a few strategic resources for firms that will help you get started on this transition.

The slow moving, hard to direct, and less nimble firms will shrivel, and eventually be bought up by firms that CAN adapt, that CAN integrate the new workforce into their ranks by using a larger social-meaningful business philosophy, a supportive social network within the organization, a more meaningful “benefits package” that includes, not only the “traditional benefits”, like health care, dental care, retirement options, but also health incentives, volunteering options, and ways to make the place we live a better world for all. Those seem to be the driving factors for the new generation of employee.

The firms will have to adapt to the new realities in order to be competitive in the market. So, ultimately there is still a place for the traditional firm, as long as the firm is adapting the new “incentive schemes” as well as offering a more long-term socially-conscious and socially-involved motivators.

At A Cubed Advisory we offer a custom built program for firms to migrate into the workplace that their employees not only like to work in, but that can attract massive talent, with help in creating a new HR approach, a new incentives package that entices and attracts top talent, a new social network that helps feature your starts, and lets you tap into the on-demand economy that brings you temporary and/or contract superstars, which help increase innovation, lower overall employee costs, and bring your company into the new economy.

Stay with us as we talk about altruism and non-material motivations in the new market environment in our next articles on the Value Sharing Economy publication.

This article was first published on the ACubedAdvisory.com website.