Monday, August 26, 2019

Open Letter to Business Roundtable and Council of Institutional Investors on "Social Responsibility"

You both represent critical interests in the current crisis over Corporate Social Responsibility, and you both issued dueling statements last week that seem to do little more than continue a debate that is generating more heat than light.

That was catalyst for my new post, "The Reformation of Market Capitalism in The Age of the Customer -- Profiting From 'Social Responsibility as a Service' [Working Draft]", which suggests a new, win-win way forward.

Both of your interest groups should consider working to achieve that new reality. The thesis is that it is customers, not shareholders who ultimately bear the costs of Corporate Social Responsibility, and it is customers, not your members, that should vote with their wallets on how that is addressed -- but that businesses must facilitate that, as agents of their customers. Your members have the power to make that happen, and will profit from doing that. I hope you will consider making this sorely overdue Reformation of Market Capitalism a reality. A capsule on why:
  • Concern -- and confusion -- about whether and how market capitalism can have social responsibility is reaching a crisis point.
  • An exhorted responsibility of shareholders to be beneficent to other stakeholders (customers, employees, suppliers, community,...) can have only limited and uncertain effectiveness -- even if CEOs truly wish to be more beneficent. 
  • Customers have the prime authority, since the funding comes from the customers. Social responsibility is ultimately a "tax" on the customer. To be "represented," each customer should be able to vote with their wallet on how much tax they pay, for what.
  • Businesses now have new powers to involve each customer in mass-customizing the service value propositions that they pay for -- including payments for Social Responsibility as a Service (SRaaS)
  • That will apply the genius of the market -- enabling businesses to profit from being socially responsible as each customer supports. Think of it as a social responsibility tax that each customer agrees to pay -- at an individualized level that both parties agree is fair for that customer.
(I have been developing the ideas that underlie this, as published in two journal articles co-authored with prominent scholars. This is a pro-bono project and I would be pleased to assist in exploring this new way forward.) [If reading this on my FairPayZone.com blog, the full post is just prior.]

The Reformation of Market Capitalism in The Age of the Customer -- Profiting From "Social Responsibility as a Service" [Working Draft]

[Updated 9/3/19, see update notes at end 
--the 9/3 update on corporate-customer matching funds is especially notable]

We are at a crisis in our view of the role of business in society, as highlighted in front page stories last week. But I suggest both sides of this long-running debate misread the underlying issues. My work points to a new perspective, one that suggests a "reformation" of market capitalism. This is based on a new co-primacy of customer power that will make most reasonable people on both sides happy...
And here we are. Americans mistrust companies to such an extent that the very idea of capitalism is now being debated on the political stage.
So Andrew Ross Sorkin observed in the NY Times, applauding the Business Roundtable's 8/19 "Statement on the Purpose of a Corporation," calling it "a significant shift, and a welcome one." Many others applauded -- but as Sorkin and others noted, there is still good reason to be skeptical of any real change.

On the surface, the Rountable statement may seem pretty mild: "We share a fundamental commitment to all of our stakeholders." But things are hardly that simple. The Council of Institutional Investors (CII) came out expressing strong concerns:
It is government, not companies, that should shoulder the responsibility of defining and addressing societal objectives with limited or no connection to long-term shareholder value.
While it is important for boards and management to have and articulate long-term vision, ...a fundamental strength of the U.S. economy has been and continues to be efficient allocation of equity capital. If “stakeholder governance” and “sustainability” become hiding places for poor management, or for stalling needed change, the economy more generally will lose out.
Since the CII represents "primarily pension funds, state and local entities charged with investing public assets and endowments and foundations," one would expect them to have relatively enlightened view of the shareholder interest.

The WSJ editorial board was so apoplectic they did lead editorials two days in a row, the second quoting the 1970 article “The Social Responsibility of Business is to Increase its Profits” by Milton Friedman of the "Chicago School" of economics (in The NY Times!) that many blame for the current malaise.

(It also seems that the current legal framework for corporate governance and fiduciary duty to shareholders limits the discretion of corporations to fund social responsibility: "a decision by a board that is not grounded in the best interests of the corporation and its stockholders likely would not be protected by the business judgment rule under the current state of the law.")

The dilemma here can be resolved by recognizing that it is not shareholders alone, but customers who share primacy. Customers are the stakeholders who actually fund the costs of social responsibility, and they have the market power to influence the allocation of those costs (or take their business elsewhere).

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The Ideas in Brief
  • Concern -- and confusion -- about whether and how market capitalism can have social responsibility is reaching a crisis point.
  • An exhorted responsibility of shareholders to be beneficent to other stakeholders (customers, employees, suppliers, community,...) can have only limited and uncertain effectiveness -- even if CEOs truly wish to be more beneficent. 
  • Customers have the prime authority, since the funding comes from the customers. Social responsibility is ultimately a "tax" on the customer. To be "represented," each customer should be able to vote with their wallet on how much tax they pay, for what.
  • Businesses now have new powers to involve each customer in mass-customizing the service value propositions that they pay for -- including payments for Social Responsibility as a Service (SRaaS)
  • That will apply the genius of the market -- enabling businesses to profit from being socially responsible as each customer supports. Think of it as a social responsibility tax that each customer agrees to pay -- at an individualized level that both parties agree is fair for that customer.
Very basic examples of SRaaS offers: [Added 8/28]
  • Would you be willing to pay an extra $4 for environmentally-friendly, biodegradable packaging and no-fossil-fuel shipping?
  • Matching grant: Would you be willing to pay an extra $1, $5, or $20 (select amount) to fund on-the-job training for ex-coal miners who seek to upgrade their skills to work in our factory in Appalachia, if we match your grant dollar for dollar? [revised 9/3]
  • Do you want to rank your product search results 1) by price alone, 2) by price weighted by ESG score, or 3) by ESG score alone?
  • Do you want to filter your product search to require an ESG score of greater than 1, 2. or 3 stars?
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Oversimplifying the problem

There has been a long history of contention (and confusion), and I suggest the issue is not so much a matter of what capitalism is inherently, but of simplistic thinking about how it works. As Sorkin recounts,
For nearly 50 years — following the publication of a seminal academic treatise in 1932 ... — corporations, for the most part, were run for all stakeholders. It was a time defined by organized labor, corporate pension programs, gold-watch retirements and charitable gifts from companies that invested heavily in their communities and the kind of research that promised future growth.
That came to be seen as muddle-headed and inefficient, and Friedman forcefully argued that a business's only duty was to serve its stockholders. Now that view is in growing disrepute -- but the truth is not so black and white.

The Business Roundtable had said in 1997 (as recounted in Quartz) that “The paramount duty of management and of boards of directors is to the corporation’s stockholders.” Now their new statement changes this, to affirm "a fundamental commitment to all of our stakeholders," listing them in this order: customers, employees, suppliers, communities, and shareholders. Some are pleased to see shareholders listed last, some incensed. But others point out that it is not clear 1) whether this has any real operational meaning, and 2) what might actually change, or how.

Making sense of the stakeholders and how they are served

My work on how the digital world changes business relationships provides a new perspective that cuts through much of this confusion with a powerful new simplicity (see my book and/or this post).

It all comes down to the operational roles of the different stakeholders. We have customers, employees, suppliers, communities, and shareholders. We also have managers, who may be the shareholders, but often are the representatives* of the shareholders. Clearly, the shareholders own the business, and the managers are hired to be the shareholders' representatives*. The owners have power because our whole system of private property-based capitalism gives owners special rights. [*See 8/27/19 update below on the agency theory of corporate ownership.]

There have always been critiques of this system, including communism, socialism, cooperativism, and many other variations on shifting ownership/control of the means of production to other stakeholders. But before we throw the baby of market-based capitalism out with the bathwater of its abuses, let's look deeper.

The question is how shareholder's rights interplay with the rights of the other stakeholders, and that is where it gets interesting.

Those who favor market capitalism argue that its genius is that the market creates value with the economic efficiency and emergent wisdom of Adam Smith's invisible-hand of the crowd -- something that other systems are unable to match. Whether you approve of Friedman or not, it is worth reading his 1970 article to understand the mechanism he describes.

I think Friedman oversimplifies how the stakeholder interests interplay, but much of his core argument about how profit-driven market mechanism work is valid, and many critics fail to understand how hard it is to make sound economic decisions without profits as an incentivizing and score-keeping mechanism. Friedman and the CII are right that the Business Roundtable statement offers no meaningful operational guidance to the hard questions of how competing interests are effectively and fairly served.

The co-primacy of the customer

Without customers there is no business. The central role of business is to create value by selling services to customers. Doing that effectively produces revenues, and hopefully some profit, both of which enable the business to continue to create value by selling services to customers. Other stakeholders may be more or less important (sometimes very important), depending on context, but none have as fundamental a role in making a business work.

Businesses can do well by doing good. To the extent a business successfully creates value and obtains revenue from customers, it can share that value (in the form of revenue) with the other stakeholders. Properly managed, it can pay employees and suppliers, and support its community. Good management recognizes that creating and sharing that value enables the creation of more value.

But the only money that comes in is from customers. No value can long be created or shared, except as funded by customers, who pay for the what they value.

You forget one thing, Milton!

Milton Friedman was right, up to a point:
What does it mean to say that the corporate executive has a "social responsibility" in his capacity as businessman? ...the corporate executive would be spending someone else's money for a general social interest. Insofar as his actions in accord with his "social responsibility" reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money. ...if he does this, he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.
But what Friedman seems to forget is that the customer has a say in how much they pay, and will take their business elsewhere if the price does not map to the value they perceive that they get.
  • If the customer will not pay a "tax" to support whatever level of "social responsibility" to other stakeholders they see as desirable and fair, no tax is received. 
  • If the customer willingly allocates part of the price they pay to such a tax, shareholders will be fine with that. 
  • If the customers refuse to allocate any payment for social responsibility, shareholders will not be able to sustain paying to share that value with other stakeholders.
No amount of exhortations to "social responsibility" can change that fundamental reality. Friedman knows that shareholders control the business, and that they do not want to pay an unnecessary tax, but he forgets that the customer may be more than willing to do so, and may go elsewhere if stymied in doing so. It is ultimately the customer, not the shareholder who pays the tax.

Why should we expect the shareholders to spend money on social responsibility unless the customer is willing pay for it? The question is what level of tax will each customer pay, to be spent on what kinds of "social responsibility?" 

This is what the FairPay framework is focused on, as outlined in my blog, and in two journal papers co-authored with eminent marketing scholars (one suggesting where digital business is going, and one digging deeper into its human roots).

A new precision in individual consumer power

This is something entirely new -- a new precision in consumer power, to be applied at the individual level for individual ends. We already see growing consumer power in boycotts and social media, but those are very blunt instruments, with little more wisdom than a mob (and generally reactive, not proactive).

When computer-mediated dialogs and AI work with each customer to decide specifically what to offer to them and what price to accept from them, this can become an effective commercial layer of digital democracy about precisely what social responsibilities the business fulfills -- working as a representative* of each customer and their individual values. That is the theme of this post.

Back to the future of human commerce

First, some perspective -- look back at the history of how humans behave as commercial creatures. We naturally think about the norms of commerce as we experience them, but we are locked in the anomalous mindset of recent decades.

Traditionally commerce was dominated by local economies of individuals and small groups who had long-term relationships with those they traded with. It was natural to view value broadly, to consider the human dimension of the value of goods and services, and their impact on the local stakeholders. Traders who failed to consider their stakeholders did not thrive.

Behavioral economics has rediscovered in the past few decades that people are social creatures. They have an inbred desire to cooperate, to value fairness, transparency, reciprocity, and even altruism, and they are swayed by emotion and self-image. They refer to this as homo reciprocans (reciprocating man). That is in contrast to the older narrow conception of classical economics, of homo economicus (economic man), who acts purely in his rational self-interest. Commerce was very communal, and people evolved over many millennia to develop and thrive on the traits for cooperation and trust that supported that.

That direct connection was lost as business scaled to mass production in factories, and mass-marketing in department stores.  Instead of individually negotiated prices, prices were pre-set, take it or leave it. Customers became just numbers, not people. Businesses became alienated from their customers and both lost sight of this dynamic of win-win co-creation.  Short-term profit became decoupled from long-term sustainability, managers optimized what was easy to measure, and stockholders became fixated on this simple zero-sum game of quarterly profits. There have been ups and downs, but the overall trend has been a devolution of the human center of commerce.

But over the past decade or so, modern marketing has realized that there is a longer game of customer journeys, loyalty loops, and recurring revenue (especially subscriptions and memberships) that it is measured by customer lifetime value (CLV), not current-period profit. That longer game enables a business to grow sustainably and become even larger and more profitable.  Digital customer relationships and digital services are enabling and fueling a re-awakening of more traditional business norms, but we have not really understood where it will lead.

The Age of the Customer

Forrester has called this The Age of the Customer (emphasis added):
In this era, digitally-savvy customers would change the rules of business, creating extraordinary opportunity for companies that could adapt, and creating existential threat to those that could not. ...In this new world, companies have struggled to make hard choices and act. It requires leaders to think and act differently – in ways that feel foreign, unfamiliar, and counter-intuitive. And honestly, it is simply hard to do. ...These dynamics will endure as new technologies like artificial intelligence and robotics emerge to challenge core notions of what it means to be a company, what it means to build human capital, and what it means to compete and win.
Businesses like Amazon and Apple and startups like Warby Parker already profit by delighting the customer, and by listening to what the customer values. FairPay shows how this can go much farther, so that businesses can shift their offers to mass-customize them to what each customer values and is willing to pay for.

That shift can undo the negative, zero-sum turn of the last century, and show companies how to profit from more win-win relationships with their customers.  That is where the new leverage is.
  • If customers will pay for it, it can generate profit. 
  • If customers value it, they will pay for it.  
  • If customers value win-win behavior that benefits not only themselves, but their broader desire to be good citizens, they pay for it, it generates profit, and so businesses profit from that.  
That hits the real bottom line, making their stockholders happy.
  • To the extent that happens, there is less need for exhortations to consider secondary bottom lines and ESG (environmental, social, governance) criteria that are hard to manage without direct market incentives.  
  • The genius of the invisible hand will, itself, drive managers to maximize profit by being socially responsible.
FairPay hearkens back to something reminiscent of old-style negotiation, except instead of negotiating a price for a transaction, we negotiate a logic for how generously to price over a series of transactions, and what forms and levels of value the price should cover.  It is a relationship-based social contract.  Much as the invisible hand sets prices to allocate scarcity of supply across a market, FairPay has the effect of an invisible handshake that sets prices to allocate share of wallet along a relationship.

Each consumer votes with their wallet.  As Milton Friedman said, the manager’s responsibility “will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.” To do that, the manager will seek to demonstrate whatever level of social responsibility the customers are willing to pay for.  The customers will decide how much they are willing to be “taxed,” and what the manager should spend those “taxes” on.  [This can get very specific, at an individual level, as explained in the 8/28/19 update below.] The shareholders will want that, and external political mechanisms will be less needed because market mechanisms will do the job.

Social Responsibility as a Service (SRaaS)

Consider how this constitutes a more or less explicit category of service -- social responsibility service, analogous to customer service.
  • In the case of customer service, business used to sell naked products, at the buyer's risk. Gradually they added guarantees and support call-centers and white glove service -- all for a fee (more or less explicit) and often with a choice of options as to service levels.
  • Social responsibility service (to other stakeholders) can be similarly customized and funded at different levels by customers, in tiers and sectors. Then it becomes just another service the business can offer to customers who will pay for it. Plenty of behavioral economics assures that customers can be enticed to voluntarily pay for services they value.
Thus every business can offer Social Responsibility as a Service, as a companion service to whatever other services they offer. That can make their customers happier and more loyal -- and they can earn a fair profit for doing it. Smart businesses realize that listening to customers is in their own profit-maximizing interest.  We need only exhort both businesses and consumers to focus on more directly effective dialogs about value of all kinds.

FairPay does this by more explicitly structuring each customer's ongoing journeys as a repeated game that builds cooperation on adaptively customizing value propositions that provide that customer the  value they desire at a price both parties agree is fair. It draws on a synergistic combination of elements, each proven individually. It also points to simpler combinations of just some of those elements that can be good enough in many use cases.

>>>>>>For more specifics on just how FairPay does this, see the 
>>>>>>"Sidebar: Pricing, FairPay and Allocation by the Customer" (below).

Reforming capitalism from inside

What we need to do, is not to try to heal capitalism from outside (which no one has a good solution to), but to encourage managers to reform it from inside (thus exploiting the genius of market economics). I refer to this as a reformation because the Protestant Reformation was driven by the realization that what mattered was the relationship between each man and God, with the priesthood as facilitator, not as intermediary. The Capitalist Reformation will be driven by the realization that what matters is the relationship between each customer and each business, with government as facilitator and guardrail, not as intermediary.

So before we throw out the baby of market incentives with the bathwater of perverse incentives, we should see if the baby of reformed capitalism in the 21st Century can learn to walk with social responsibility. I think we will be very happily surprised.

The challenge is that we are still stuck in our old logic.  In an economy dominated by scarcity and uniformity, being responsive to the customer is hard, and done only at the margins.  But as the digital economy gains from automation, abundance, and personalized relationships, being responsive and customizing value propositions gets easier and more essential. Businesses are just beginning to understand the new logic of how to leverage that.

As businesses learn to elicit what each customer values at a fine-grained level, and to seek to deliver it, they will learn to actually profit from social responsibility.  As they do that, we will all benefit from the fairness, altruism, and reciprocity of homo reciprocans, We will awaken their willingness to support Corporate Social Responsibility (CSR) with their own wallets, and to fairly reward the businesses that cooperate with them in that, working as their representatives.*  Friedman’s title will become correct, but just not quite as he understood it: “The Social Responsibility of Business is to Increase its Profits.” The customers will see to directing that properly, using their power of the purse.

Perhaps we should be calling it “Corporate/Customer Social Responsibility.” (CCSR? C2SR?)

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SIDEBAR
Pricing, FairPay and Allocation by the Customer

To clarify my points, we need to go back to basics -- pricing. Pricing may seem boring, but it is at the heart of how we allocate resources among stakeholder "actors." The power of pricing calculations to ensure desirable allocations is at the heart of debates over capitalism and socialism. It is also at the heart of FairPay and my points about customer power. FairPay suggests a broad reformation of how businesses relate to their customers, and how we consider all aspects of value, not just social responsibility.

Pricing is where digital changes everything, and that is what FairPay seeks to reform. We are seeing it first for digital services like news and other content. But over time, increasing automation will shift the economics of scarcity for almost everything. Scarcity of materials and labor, and other marginal or variable costs needed to replicate goods and services, was the core of classical economics, but is now becoming a non-issue. The scarcity that remains is increasingly in the human effort to create new services (and new factories and robots and AI) that then run and replicate services with little added cost. Adam Smith's invisible hand works by using price to allocate scarce supply against demand -- but it cannot allocate abundance. That is why we have confusion over what the price of digital information should be, and why we need a new logic for pricing. This new logic is primarily applicable to ongoing relationships, but more and more of commerce is moving from isolated transactions to recurring relationships.

One early and very telling example is the business of news. Most publishers are still stuck in the old logic – to counter the death of scarcity they seek profit by imposing artificial scarcity, locking their news behind a one-size-fits-few paywall that only their most avid readers can afford.  More enlightened publishers (like The Guardian) have learned that readers will voluntarily pay for news (for themselves, as well as for those who do not or cannot not pay) -- just because they value having the quality news available to all. Similarly, creators of all kinds have learned to use crowdfunding services -- and that the seemingly crazy logic of pay-what-you-want can actually be sustaining. These may seem very narrow markets, but most markets have a blend of elements that are costly and not shareable, and elements that are abundant and shareable.

The repeated game of fairness

The new fairness game that we have outlined shows how this new logic may be applied with increased power and controllability, in a way that works for both the business and the customer. Consider how we can change the game for a subscription, from:
Here is our monthly price, take it or leave it.  We hope you will take the risk -- and be satisfied enough that you will continue this game.
to:
We will reduce the risk and let you help decide the fair price after each month’s use -- but we will continue this game (beyond a few trial cycles) only if we agree that you are being reasonably fair.
The logic of the FairPay game is that each customer pays for what that customer values, within limits of fairness that the business can accept. Thus each customer decides what social responsibilities they are willing to pay for. They vote with their wallet, and the business collects those votes as dollars going into their bottom line.

So, with a new logic like this, how can we hack Milton Friedman's concerns about social responsibility?  Consider these examples that address the growing trend toward digital and experience goods that cannot be effectively valued until after they are purchased and used:
  • A digital newspaper lets readers subscribe and decide what to pay after each month of use. It reminds them what they read, what writing those stories cost per reader, and what share of its revenue goes to the reporters and investigative expenses.  It reminds them of how its recent reporting benefited the community and the prizes earned. It lets readers pay bonuses specifically to reporters they wish to support.  (A non-profit Guardian might accept any level of fairness, but a for-profit New York Times might warn a reader who it thinks is being repeatedly unfair that it will shunt them back to a conventional set-price subscription unless they meet higher standards of fairness.)
  • An online retailer of furniture lets established customers pay for items in two stages, first, at-sale, to cover the marginal costs of the items (and perhaps a small profit margin), then, after it has been experienced for a month, with an added bonus that reflects the customer’s perceived value of the purchase, plus the perceived value of the business’s employment, sourcing/curation, and sustainability practices.  (Again, customers it deems to be repeatedly unfair might be shunted back to standard set prices.)
In each of these cases the business has a dialog with customer in which price relates to value received. The customer has co-equal power to define what aspects of value matter.
  • For the newspaper, value is not just how many weeks the subscription was accessible, or how many stories were read, but whether those stories had real value, what costly investigative journalism or analysis was done, how much was paid to valued reporters, what community values were supported, what waste was prevented, and the like. Some of these "social" values might be segregated to be paid for with explicit "bonus" payments to these other stakeholder categories. To the extent customers value those elements by paying for them, that is no longer "taxation without representation" as Friedman claimed. (See operational details for this example.)
  • For the retailer, value is not just the raw utility of an item, but the quality and style of design, the conditions for employees and at supplier factories, support of local and source communities, environmental practices, and the like. Again, these could be identified as "bonus" payments and again, "taxation" voluntarily paid. (See operational details for this example.)
[Update 8/28/19>] Examples of discrete social responsibility offers to customers

This can get richly nuanced, but to clarify how these SRaaS offerings can be made discrete and easy for individual customers to opt in (or not), at whatever level they choose, consider these simple forms of SRaaS offers:
  • Would you be willing to pay an extra $4 for environmentally-friendly, biodegradable packaging and no-fossil-fuel shipping?
  • Matching grant: Would you be willing to pay an extra $1, $5, or $20 (select amount) to fund on-the-job training for ex-coal miners who seek to upgrade their skills to work in our factory in Appalachia, if we match your grant dollar for dollar? [revised 9/3] 
  • Do you want to rank your product search results 1) by price alone, 2) by price weighted by ESG score, or 3) by ESG score alone?
  • Do you want to filter your product search to require an ESG score of greater than 1, 2. or 3 stars?
Just like any other product pricing, packaging and bundling decision, such offers can be put to the customers as a menu of options. A business can start with a few narrow trials with selected segments of customers with a propensity to support social responsibility -- to begin this new kind of cooperation, and then grow from there. (The specifics of such offers and the corresponding usage of funds can be validated to customers with independent impact certifications and metrics, very much as is now being demanded by impact investors.)  [See further update 9/3 on matching funds, below.] 

The invisible handshake -- one-to-one markets for social responsibility

Increasingly, businesses will earn premium profits by catering to customers' desires to support social responsibility. Customers who cannot afford to pay such premiums could be supported by more affluent customers who see that as their duty to support, not only for themselves but for those less fortunate. (Those who could pay but refuse to might be shunted to set-price models -- FairPay can be offered as a revocable privilege.) Some businesses will cater to the segment of recalcitrant customers who refuse to allocate any of their wallet to that kind of social responsibility, but the profit margins for doing so will be smaller.

(Further detail on FairPay is here, including a variety of use cases, and discussion of how and where to start, and how to grow from there.)

Instead of exhorting managers and shareholders to pay out of the customers' wallets for competing social benefits that that the managers have no clear basis to decide among (and perhaps in conflict with their legal fiduciary duty), we should be exhorting customers to pay from their own wallets for the social benefits they want to support.

If we do that, we may solve 80% of the problem, and do it with high market efficiency, leaving just the remaining 20% to be addressed by regulatory protections.

The greatest danger in times of turbulence is not the turbulence, it is to act with yesterday's logic.

 -- Peter Drucker 


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[*UPDATE 8/27/19:] Terminology: agency vs representation

My original use of the term "agent," now replaced by "representative," may have been too strong and loaded with issues, for reasons outlined in the 2017 HBR article, The Error at the Heart of Corporate Leadership. I now use "representative," to make it clear that it is the possibly contingent role as a representative of an interest, whether as agent, fiduciary, or otherwise, often in balance with other interests, that I refer. 

The relevant thrust of my argument is that managers are naturally driven by financial incentives to themselves and to the shareholders they serve (in whatever legal capacity) in the calculus of their decision-making and allocation of resources. The surplus of the revenue they take in, net of costs and reinvestment, goes to the shareholders. The revenue comes from the customers. One can shift from agency theory to entity theory and broader views of roles and constituencies to be served, but the question remains -- what objective function are boards and managers to maximize in each resource allocation decision? I suggest that rather than an undifferentiated mix of interests to be balanced in vaguely defined ways, the best claim to a vote generally goes to the customer (especially when the customers are a broad base of consumers). That argument may be situation dependent, and market forces may to some extent enable the votes of other stakeholder constituencies to be quantified into bottom line terms. But it is usually customers who have by far the clearest bottom line market power with respect to each business -- it is customers that businesses must increasingly listen to. 


Thus it seems both desirable and practical that primacy of the customer in driving a market calculus for resource allocation will be the best way to manage allocations of resources to all forms of social responsibility. My argument is that we need to get far more systematic and granular in getting the customers to vote with their wallets on all of those allocation decisions. That is not at odds with efforts to quantify effects on other stakeholders -- it is supportive of them, in that a customer-driven social value calculus is the most practical driver for the balancing of other social value quantification efforts. We are already moving to customer-driven enterprise -- this just applies that driving force to social responsibility.


This HBR article notes that the key weakness to company/entity-centered governance is "complex relationships and responsibilities; success is difficult to assess." What I suggest here is a new and sensible way to balance those responsibilities and to assess success at the bottom line.


[UPDATE 8/28/19:] Social responsibility down the value chain - B2B2C

While this was written with primary focus on B2C companies, it should be understood that it applies equally to B2B2C. 

B2B business is primarily driven by homo economicus, but the ultimate customer of B2B businesses is usually a customer in a B2C relationship. Consumers want social responsibility down their supply chain, so that implies a corresponding social responsibility chain. B2C businesses will want to be able to demonstrate that social responsibility to their customers, and so their B2B suppliers will need to demonstrate that social responsibility along each step in their chain so they can pass it up the chain to their consumers. Sounds complicated, but not really very different from any supply chain value issue.

[UPDATE 9/3/19:] Matching funds, for new leverage in CSR

An important variation on the above suggestions for customer-funded CSR is to add a "matching funds" feature. To offers to facilitate CSR efforts like this one suggested above...
  • Matching grant: Would you be willing to pay an extra $1, $5, or $20 (select amount) to fund on-the-job training for ex-coal miners who seek to upgrade their skills to work in our factory in Appalachia, if we match your grant dollar for dollar? [as revised 9/3]
...the business could make a matching funds offer: "We will put in $1 for every $1 you put in."

This has two significant benefits:
  1. It explicitly shares in the cost. Instead of putting all of the burden on the customer to fund such efforts (and even possibly taking a profit margin out of that, as suggested above), the business may invest some of its own funds. That would be a "tax" on the shareholders  only to the extent that it is not recouped in higher profit margins, and only for efforts that the customers signal with their wallets that they really care about. (That results in high likelihood that the investment will lead to higher profits as well as greater social welfare, so it is less likely to really be a "tax.")
  2. It motivates the customer to contribute. Matching funds are accepted as effective practice in charitable and political fundraising, and have also been proven to motivate pay what you want business payments (see the Gneezy paper in my Resource Guide). This brings clear business-customer cooperation to directing and funding CSR efforts.
Matching gift programs are widespread for business-employee cooperation, but I am not aware of similar efforts to enable business-customer cooperation in directing and funding CSR. Why not adapt that already proven model to this most important stakeholder?


------------------------
More about FairPay

A concise introduction is in Techonomy"Information Wants to be Free; Consumers May Want to Pay" and the broader perspective in The Relationship Economy -- It's All About Valuing Customer Experiences.

For a full introduction see the Overview and the sidebar "How FairPay Works" (just to the right, if reading this at FairPayZone.com). There is also Selected items (including links to videos and decks). 


(FairPay is an open architecture, in the public domain. My work on FairPay is pro-bono. I offer free consultation to those interested in applying FairPay, and welcome questions.)

Thursday, August 22, 2019

A Platform for Teaching Men to Fish -- "Revenue-as-a-Service" for Non-Profit Impact

Fund development of a platform that enables non-profits to sustain themselves
Give a man a fish and you feed him for a day;
Teach a man to fish and you feed him for a lifetime.
The same applies one level up:
Fund teachers of fishing and you feed their teaching for some days;
Fund a platform that supports teaching men to fish and you feed all of them for all of their lifetimes.
This could be a very high leverage opportunity! Making a transformative new tool widely available and affordable.

Foundations and others who fund charitable service organizations face a huge problem:
  • Current strategies for funding non-profit services have yet to exploit the power of digital relationships to transform how they work with their customers and donors.
  • Digital technology is already enabling transformative tools, especially for businesses on the leading edge of relationship commerce. Businesses are shifting to recurring revenue models, managing customer journeys and loyalty loops, and the most enlightened are engaging in dialog the brings a mutual focus on co-creation of value. The FairPay framework described in this blog and elsewhere supercharges value-centered relationships, and applies to non-profit organizations  (NPOs) as well as for-profit businesses.
  • But non-profits lack business sophistication and can rarely afford to put resources into developing, testing, and applying similar methods to their relationships. The FairPay framework can transform revenue management at a full range of levels, but much of this potential remains out of reach for many organizations
  • Meanwhile foundations and others are looking for ways to support worthy non-profit organizations, and for ways to make those services more cost-effective in their funding and operations.
(Much the same applies to news organizations that struggle to sustain socially valued journalism (even where there is a for-profit element).

"Revenue as a Service" for Non-Profits -- platforms as a universal leverage point

Viewing this from a systems perspective, this opportunity appears: Fund development of a platform to enable non-profits to sustain themselves by drawing more systematically on support from their community of customers, patrons, and donors. This can provide leverage across a broad swath of service organizations.
  • Non-Profit Organizations (NPOs) -- as well as others, such as news providers -- need a systematic, ongoing way to obtain funding to sustain their operations.
  • That can now be done in very sophisticated ways -- and that sophistication will be constantly increasing -- drawing on advancing technology. 
  • The FairPay framework outlined here suggests a path to transformational improvements in relationship-based revenue models. 
  • Doing that will take skills and resources that may not be economically feasible for small or even mid-sized organizations (even if they would pay back handsomely).
  • That is just the kind of problem that "Software as a Service" was designed to solve: a platform provider (whether for-profit or non-profit) can develop, operate, and continue to enhance a high quality service that non-profit organizations can outsource to. 
  • This can bring economies of scale and network effects to solving the problem of nurturing revenue relationships with large numbers of patrons. (Venture capitalists love platform businesses because of their scalability and high return on investment.)
  • The impact of a non-profit platform could be so transformational that such projects should be very attractive to the charitable foundations that support non-profits and/or journalism. (VCs might be concerned that profit potential of such a platform may be limited by the tight budgets of the NPOs that would use it -- all the more reason for foundations to step in.)
Such a platform would provide "Revenue as a Service." Just what is that outsourced service?:
  • The platform provides the common base of operational software services (based on marketing and behavioral science, technology, and systems analysis), that can facilitate relationship-based revenue management strategy and execution for each of many organizations. Build it once, use it many times. Spread the cost of research, development, and support across many client organizations.
  • Each of those client organizations can retain full control -- setting all the key policies and retaining control of all exception handling. Each decides on all the parameters that define how the system works for them (the platform service may offer suggestions to guide that). Each  gets to have its people handle all human-to-human contact (but can outsource parts of that as well).
There are some existing models for revenue platforms for NPOs. They range from cooperatives like Tessitura, to for-profit services like The News Project, and less structured services for recurring crowdfunding like Patreon. FairPay provides methods for making such services far more powerful, across a far broader range of NPOs. The paths forward are 1) to add advanced FairPay features to existing platforms, or 2) to create new platforms that are clearly focused on FairPay strategies.

"Impact Data as a Service" -- platforms as instrumentation

Funders not only want to get good results, but to get the data to validate whether they are in fact succeeding in that. Common platforms lead to common data and metrics, and common reporting practices.

FairPay drives organizations to increase the quality and frequency of their operational dialog with their community, creating a new level of impact data. Platforms that manage and add new layers of communication with an NPOs's customer/donor community will create new kinds of fine-grained data and metrics -- on just what services are consumed by whom, with what outcomes, how those are valued by those individuals, and how they add value to each community member -- interaction by interaction, over the lifetime of the relationship.
  • That creates a new level of rich data on just what services were consumed and the impact they achieved. 
  • That enables the organization to be more dynamically adaptive and self-tuning, to maximize their co-creation of value with their community. 
  • Funders can use that data to manage their funding and maximize their own impact.
The following sections explain how this is achieved.

The heart of the platform opportunity -- the FairPay framework

FairPay is a radically innovative framework for relationship-centered, “customer-value-first” revenue strategies for the digital era. Its varying forms can be adapted across a wide spectrum of business contexts, both for-profit and non-profit.  (It is an open architecture in the public domain, not a product, and I am working on this as a pro-bono project.)

The original focus of FairPay was on advanced strategies for sustaining for-profit enterprises (especially for digital products and services) -- but the framework spans non-profit services as well, and can be even simpler to apply in non-profit contexts. The core strategies of FairPay have gained recognition in business and scholarly publications. It has strong foundations in behavioral economics, and sheds light on many knotty issues and perverse incentives that are often poorly understood.

What can FairPay do for service organizations? FairPay provides a framework for applying elements that can be mixed and matched to provide a powerful solution to engage customers and donors, and build ongoing relationships with them in a way that motivates them to cooperate in sustaining services that they value. (I use the term "customer" in the broad sense, as including those served as wells as those who donate, regardless of whether they are overlapping or distinct sub-groups. The term "patron," in its broad sense, also conveys that inclusiveness.)
  • Modern behavioral economics has shown that people want to be fair and even generous when asked in the right way to support a service they find valuable. 
  • Game theory teaches that relationships can operate as repeated games, and that well-designed repeated games that are rewarding motivate cooperation to continue the game. (Subscriptions and memberships are forms of repeated games, sometimes well-designed, sometime not so well-designed.)
  • Marketers have learned that they can build profitable recurring revenue businesses based on ongoing relationships (a simple form of repeated game) rather than one-shot transactions, and are beginning to apply the lessons of behavioral economics to enhance that process. They are managing customer journeys and loyalty loops, and engaging in dialog the brings a mutual focus on co-creation of value.
  • FairPay adds more advanced elements to the mix, and combines them to re-align the repeated game to maximize cooperation in creating lifetime value. FairPay builds on transparency and trust to build relationships. It applies empowerment of stakeholders (to show trust), dialog about value given and received (to achieve transparency and motivate willingness to pay to sustain that), and reputation (to sustain trust). 
  • FairPay works best when the business can position itself as a benevolent and fair partner in value co-creation that is worthy of the "price" it needs to sustain the relationship.
  • Non-profit organizations can apply the same methods, and are more naturally seen as benevolent and fair partners in value co-creation.
  • Therefore non-profits have more power to motivate fair contributions from their "customers," and therefore they are able to yield more power to their customers than for-profit businesses are. 
  • That enables them to make contributions voluntary (as is already common practice, but not yet effectively managed with modern relationship-building tools). Such voluntary forms of the more advanced methods of FairPay are relatively easy to apply. 
  • These methods center on regular and ongoing dialogs about value that remind customers of the value co-creation they have benefited from (looking backward to what has been experienced, not just promised for the future), how much they have contributed to sustaining that, and what more can and should be done to add value (in whatever forms are agreed to) in this relationship. That points to what else of value can be done. 
The FairPay framework informs an architecture that can enable NPOs (and journalism organizations) to enhance their revenue-related operations -- to apply the latest business systems, methods, and communications media in a way that optimizes their relationships with their "customers" (again, including donors) to maximize their ongoing sustaining revenue. 
  • This process applies a new kind of leverage -- as a self-adapting engine to create real and valuable impact, measure its perceived value, and adjust the process to do even better.
  • From this perspective, the FairPay framework clarifies how little most businesses and NPOs are currently doing to maximize that, and how much more they could be doing.
More detail on just how this FairPay framework works follows, but first, what does it take to make it happen?    

The platform that supports teaching men to fish

A basic platform for bringing these tools to fund-raising and revenue operations could be built in stages. This is a natural candidate for applying an open source strategy (or a cooperative) to become self-funding beyond a certain initial pump-priming:
  1. Do a basic proof of concept. This could demonstrate the synergy of the combined elements and make the case for further investment. It might take something like 1/2 person-year in total, split between technology and business analysis.
  2. Enhance that to a "minimum viable product" level to be a useful service for a large number of organizations.
  3. Facilitate cooperation of that user community to continue further development, and to attract experts to aid in developing and testing more advanced methods.
  4. Build all of that out into a vibrant, self-sustaining platform ecosystem (much as has been done with other platform or SaaS services like Linux, Mozilla, and Wikipedia).
NPOs (and/or news organizations) could then use this platform to get far more effective and sophisticated in managing their activities as a revenue-generating business, in ways that deepen their social contract with their community.

(As noted above, existing revenue platforms might also be enticed to take the lead in adding FairPay features.)

The FairPay social contract

FairPay works by creating a new social contract for sustaining the creation of desired services.

Consider this change in the game:
  • From today’s conventional repetition game: “Here is our requested price/donation, take it or leave it. We hope you will take the risk — and be satisfied enough to continue this game.”
  • To the FairPay game: “We will grant you the power to pay/donate what you think fair for you after each period of service — we will remind you of the services you got (or funded for others), and will encourage you to pay/donate accordingly.”
This voluntary form of FairPay relies on dialogs about value to frame the value proposition, and to remind patrons of the value they received. It empowers them to determine the "price," engages in transparent dialog about the value that the price should relate to, and tracks reputation to build trust and to know how to nudge fair levels of support.
  • It draws on all available information on when and how services are actually consumed by each patron. Increasing availability of fine-grained usage data will make that increasingly meaningful.
  • It may seed its dialog with individually-calculated suggested prices based on the value and cost of those services. (Even if services may be offered to some at no charge, it may be fair to gently nudge others who have greater means to pay for those services for themselves (and others) as they can afford.) 
  • It regularly solicits payments to sustain ongoing services in an open and transparent way, framing and managing the dialogs about value to remind patrons of the value they (and others) got, and what and when they have paid in the past to sustain that, why they should now pay again, and what new value to expect. 
  • It learns which patrons are fair or even generous in their corresponding payments, so that they can be most effectively nurtured, and resources can be directed to serving those who most appreciate the value offered.  
  • It can suggest additional benefits (perks, tiers of services) based on how fair or generous the customer is
  • In selected uses, it can also withdraw benefits -- for-profit businesses can use that "stick" to enforce fairness, but non-profits might stick to more positive "carrots" (but might still use "sticks" in limited situations).
That is how it drive revenue operations, building on that basic social contract. This is simple in in its core concept, but it is amazing how few organizations engage in real and regular dialogs about value with each customer at this fine-grained level.

  • Engaging an NPO's community on what it offers each of them, what each of them values, and what it needs in the way of support from each of them is the way to build strong sustaining support, enabling it to co-create the maximum value. 
  • Some managers fear getting customers to think about value and price, and some fear that customers will not be willing to engage in such dialog. But behavioral economics shows that customers are far more responsive to productive dialog about value and price than most businesses realize (my latest journal article cites a number of compelling studies, and the most relevant are listed in my Resource Guide). 
  • Managers also tend to forget how much their value propositions vary from one community member to another. (A simple thought experiment can help recenter on the importance of these individual value propositions.) 
  • That, in turn, enables a funder to leverage its impact -- the value it co-creates with its NPO portfolio and each member of their communities.
There is of course much more to how this is done, and it will vary greatly from context to context. Background on these variations is in my previous post, The Elements of Next-Gen Relationships and Pricing -- A Unifying Framework. It provides this summary table of the elements, and then comments on each:

Elements of FairPay
For-Profit
Non-Profit

(Now)
Low Trust
High Trust
(Now)
Low Trust
High Trust
Foundational Elements






Relationship-centered
(repeated game)
?
?
Individual-value-centered
X
?
Post-pricing (“risk-free”)
(after the experience)
X
?
Basic framing and nudging;
transparency and trust
?
?
Amplifying Elements






Participation of customer
in price-setting
X
?
?
?
Individual nudging
based on reputation tracking
X
X
Enforced fairness / revocable privileges ("Gated FairPay")
X
?
?
?
?
Flexible adjustment
for ability to pay
?
?
?
?
?
?

The columns to the right show that while most of these elements are applicable to both for-profit and non-profit organizations, the details will vary, and it will further depend on the level of trust and cooperation in the customer segments to be addressed.

As indicated, most non-profits currently use fewer of these elements than for-profit businesses, but greater use could improve their results (including increasing the satisfaction and generosity of their community). This presents a broad opportunity for a platform to make it easy for non-profits of all sizes to gain leverage.

Again, the clearest difference from how FairPay is used by for-profits is that fairness will often be left as voluntary, to be gently nudged with positive "carrots" rather than enforced with negative "sticks" (such as the revocation of privileges). But motivating fairness should be relatively easy for non-profits, since they can readily point to both the individual value and broader social value of their cause. (And non-profits can generally avoid the most complex element of FairPay, the business logic and policy issues of revocation or other negative incentives.)

The foundational elements are already used to some degree in many contexts, to build on the power of ongoing relationships. Now the amplifying elements can be added in and combined, to bring new synergy to revenue operations.

The general implication of the differences across columns is that the more advanced elements of the FairPay framework are most effective when the parties are perceived as holding up their side of the social contract:
  • for service providers who are perceived as offering real value and warranting trust and commitment from customers/patrons for being fair, transparent and responsive to their value creation needs and desires.
  • for customers who are perceived as fair and honest about communicating their needs and desires, and being fair (even generous) in making contributions to sustain that desired value creation. 
Concrete use-case examples

If this still seems abstract or unclear, please see my other posts with more concrete details of how FairPay applies in specific use-case examples:
Simpler "80/20" solutions with the same platform

Organizations using this proposed Revenue as a Service platform need not use its more advanced features, except as they are ready and wish to. The platform can be configured to deliver just the features each organizations wants. Thus it can provide a service that scales gracefully, from very basic, to very advanced.

One very important simplification of FairPay can serve as a high-leverage 80/20 solution in both voluntary and payment-required contexts. That is the "risk-free" subscription model that relies on post-pricing (after the experience). That can be done without using any of the participative pricing elements of more advanced FairPay solutions (and need not even exploit nudging). That is less of a departure from traditional set-price subscription or membership pricing. But unlike the high hurdle of an all you can eat, fixed price membership paywall, it works as a gentle "pay ramp." (This, too, is explained in my Elements post, and the Whitney and Metropolitan Museum use-case examples listed above.)

Similarly, the platform, itself, can be built in stages, beginning with the more basic elements, then gradually adding the more advanced ones.

Crossing the lines between donors and those served

As explained in my 2016 post on non-profits, FairPay provides new and better way to address the complex issues of pricing and sustainability across the spectrum from donors to those served.  Consider how this works for these two often overlapping constituencies:


·         Recipients -- direct customers/patrons of direct services (the mission). Here, pricing takes on two interrelated dimensions -- what is the fair value of the service, and what is the fair contribution from the recipient (to both the cost of the service to them, and to the added overheads needed to sustain the organization -- and optionally to the cost of service for those who can less afford it).
·         Benefactors -- indirect customers/patrons of indirect services (the altruistic value of supporting services to others, and the value of being a benefactor, including perks and recognition).  Here, the key dimensions are the value of direct services to others enabled by the benefactor’s donations, and the value of the indirect benefits to the benefactor.

The details will vary with the type of customer/patron and the nature of the organization and mission, but the essential task is the same -- to generate sustaining revenue by cooperatively setting prices (for service or donation) that make the value proposition "win-win." (That also includes recognition of non-monetary contributions by those who give in kind.)

The platform as a universal leverage point for achieving impact

The problem that limits the uptake of these methods is the implementation effort, and the need for ongoing testing and refinement (including "devops," the work of enhancing and maintaining the operation). Fund a platform for that, and many more organizations will be able to teach men to fish -- or give them fish -- or whatever other good works they do. The platform is a universal leverage point.

A platform solution across many organizations also has other kinds of economies of scale and network effects, beyond simply outsourcing that service. FairPay dialogs about value generate valuable data about exactly what each customer values at a fine-grained transaction level, as well as reputation data about the fairness of each customer (and how that varies with context). While that data is sensitive, if managed with care it could potentially be used in win-win ways to help guide service providers to engage with those customers who most value their service (for a single service provider, or across all the service providers that use the platform, subject to appropriate privacy controls). That can lead to more effective co-creation of value for everyone.



------------------------
Posts that are specific to non-profits and social welfare:
...and focused on journalism:
------------------------
More about FairPay

A concise introduction is in Techonomy"Information Wants to be Free; Consumers May Want to Pay"

For a full introduction see the Overview and the sidebar "How FairPay Works" (just to the right, if reading this at FairPayZone.com). There is also Selected items (including links to videos and decks). 

(FairPay is an open architecture, in the public domain. My work on FairPay is pro-bono. I offer free consultation to those interested in applying FairPay, and welcome questions.)