The connected customer

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In September of 2011, Bank of America announced it would start charging customers $5 per month to shop with their debit cards. In early October a 27-year-old gallery owner in Los Angeles named Kristen Christian set up a Facebook event page, inviting 500 of her Facebook friends to move their accounts to local credit unions by November 5, which she called “Bank Transfer Day.”

The ATM revolt

“Together we can ensure that these banking institutions will always remember the 5th of November,” she wrote. “If we shift our funds from the for-profit banking institutions in favor of not-for-profit credit unions before this date, we will send a clear message that conscious consumers won’t support companies with unethical business practices.”

Christian’s groundswell movement quickly snowballed. Within three days 8,000 people had signed up to attend the event.

“I was tired” wrote Christian in another post. “Tired of the fee increases, tired of not being able to access my money when I need to, tired of them using what little money I have to oppress my brothers & sisters. So I stood up. I’ve been shocked at how many people have stood up alongside me. With each person who RSVPs to this event, my heart swells. Me closing my account all on my lonesome wouldn’t have made a difference to these fat cats. But each of YOU standing up with me… they can’t drown out the noise we’ll make.”

By November 4, the day before Bank transfer Day, at least 650,000 people had added $4.5 billion to credit union savings accounts. That same week, Bank of America dropped its plan to charge additional fees.

A power shift.

Customers are becoming aware that they have the power to collectively organize and protest, and today they have the tools to do it. Revolutions never start at the top. They start with the people, when they begin to recognize the power that comes from numbers.

A single customer is as powerless as a drop of water. But put enough drops together and you’ve got a force on your hands that will never be contained or controlled. Revolutions like Christian’s ATM revolt begin the same way: one molecule bonds to another, and they connect. With every new connection the mass and momentum of the whole increases.

Information technology and revolution.

This isn’t the first time in history that new information technologies have sparked revolution. It’s a recurring pattern.

Before the printing press, books were hand-written manuscripts available only to the clergy and the wealthy. The mostly-illiterate public relied on those in power to interpret humankind’s body of knowledge. Any communication between ordinary people relied on word of mouth and was mostly limited to short distances. In short, information was distributed in pockets and silos.

Information technology and revolution

The printing press gave people a way to share information in a peer-to-peer way, bypassing traditional power structures. The rapid information sharing that followed, via books, pamphlets, newspapers and scientific journals, effectively ended the Middle Ages and sparked the Age of Enlightenment, the Industrial Revolution, and ultimately the political revolutions that resulted in the first constitutional democracies.

Today the web is having a similarly profound effect, allowing people to bypass traditional media channels and power structures to communicate with each other directly. Once again, information and ideas which were contained in pockets and silos are spreading far and wide. Once again, innovation is accelerating. Once again, mass peer-to-peer communication is enabling and empowering social, intellectual and political revolutions.

Peer-to-peer information technologies like the printing press and the web unleash powerful revolutionary forces. But revolutions begin in the streets. They often go unnoticed or ridiculed in their early stages. It took 100 years of bible-printing before Martin Luther nailed his 95 theses to a church door in Wittenburg. It was another hundred years before the first scientific journals were printed, and another hundred before the American Revolution broke out in 1775. It took more than ten years for colonial dissent to simmer before the American Revolution broke out into open war.

But today events unfold at a more accelerated pace. It’s happening faster this time.

95 theses.

In case you didn’t notice it, another 95 theses were nailed to the wall of the web in 1999, when Rick Levine, Christopher Locke, Doc Searls and David Weinberger wrote the Cluetrain Manifesto.

In the same way that Luther’s 95 theses directly challenged the most powerful institution of his day, the Cluetrain Manifesto directly challenges today’s most powerful institutions, and its messages seem more prescient than ever. I’ve pulled a few of the statements from the Cluetrain Manifesto, along with an observation or two for each.

Markets are getting smarter… faster than most companies.

Clearly social networks such as Twitter and Facebook, which didn’t exist in 1999, have gained momentum far more quickly among the general population than they have in corporations. Customers are connecting and sharing information at a far faster rate than the companies that serve them. There’s no question that when it comes to social networking, companies lag behind their markets.

Networked conversations are enabling powerful new forms of social organization and knowledge exchange to emerge. As a result, markets are getting smarter, more informed, more organized. Participation in a networked market changes people fundamentally. People in networked markets have figured out that they get far better information and support from one another than from vendors.

Think about where you go when you want to make a buying decision today. In general, you go to peers first. If you want to go to a restaurant, you might go to Yelp or Urban Spoon to read recommendations and reviews from customers. Booking a hotel? If you care about comfort and service, you might go to hotels.com to read some reviews, or if price is a priority, you might go to Priceline where you can set your own price. Want to watch a movie? You can find the best picks at Rotten Tomatoes, Netflix or IMDB, where movie-watchers have a voice.

Companies can now communicate with their markets directly. If they blow it, it could be their last chance.

Some companies have figured out how to create these kinds of direct relationships. Amazon allowed customers to write negative reviews on the store’s website since the day they launched. That was a controversial decision at the time. Why would a retailer allow anyone to post information that would help a customer make a decision not to buy something? Jeff Bezos recalls a publisher calling him and saying “I don’t think you understand your business. You make money when you sell books.” But Bezos knew better. He understood that what connected customers value is a company that will help them make better buying decisions. And today we all understand that.

There are no secrets. The networked market knows more than companies do about their own products. And whether the news is good or bad, they tell everyone. Companies must ask themselves where their corporate cultures end. If their cultures end before the community begins, they will have no market.

When the Cluetrain Manifesto was written Dell was the poster child of the PC industry, a company that had grown from a college kid’s startup to a $12 billion technology leader in just 13 years. But in 2005, Dell learned a tough lesson when they shut down peer-to-peer customer forums in 2005, and Dell customer (and blogger) Jeff Jarvis, who had recently bought a machine that almost immediately malfunctioned, expressed his dissatisfaction on the web in a post titled “Dell lies. Dell sucks.” Jarvis coined the term “Dell Hell,” saying Dell didn’t “respect [customers] enough to listen to them. Within a week, Dell Hell was a story in the New York Times and Business Week. Hundreds of other bloggers chimed in to tell their “Dell Hell” stories, Dell remained silent, and the PR nightmare snowballed. Dell sales plummeted along with its reputation. At the time, Dell had an internal policy not to communicate not to reply publicly to blogs.

Dell hell

Dell has learned from its mistake and in 2010 launched a customer listening command center to monitor and proactively respond to online conversations, and Founder and CEO Michael Dell is active on social media, engaging with customers directly.

If that isn’t enough, Wikileaks has demonstrated definitively that no secret, corporate or political, is safe for long.

There are two conversations going on. One inside the company. One with the market. In most cases, neither conversation is going very well. Almost invariably, the cause of failure can be traced to obsolete notions of command and control.

So far, the market conversation is doing better than the internal one. Most companies still see social media as primarily a marketing function, a new communication channel, as opposed to a fundamental shift from one-to-many broadcasts to peer-to-peer conversations. But as companies engage with customers they will find that they won’t be able to respond effectively without internal social networks that mirror the ones their customers are using.

The Law of Requisite Variety, a concept from information theory, says that a system can’t stabilize unless it is capable of states that match the variety of states in its external environment. In other words, if you want to engage in a high variety of external activities, you will have to create a system that allows for an equal amount of variety in your control systems. Most companies are still figuring that out.

To traditional corporations, networked conversations may appear confused, may sound confusing. But we are organizing faster than they are. We have better tools, more new ideas, no rules to slow us down. We are waking up and linking to each other. We are watching. But we are not waiting.

In 1999, statements like the ones above seemed a bit hyperbolic to many business executives, but today most businesses are paying attention.

Customers have begun to recognize, and exercise, their power. This power, in and of itself, is not necessarily new. Customers have always had the power to choose what they wanted to buy. They have always had the power to share their experiences with friends and peers. They have always had the power to promote, or demote, a company based on what it promised and what it delivered. Customers have always been able to vote with their wallets.

But they weren’t connected. And that little thing we call linking makes all the difference.

Any dictator will tell you that in order to control the state, you must control the media. So ask yourself: who controls the media today? And which way are the trends heading?

We’ve been saying the customer is king so long that it has become a cliché. And in most cases, our actions don’t match those words. But customers will be kings and queens, not only in name but in fact. One by one, customers are recognizing the power that comes from a world where their choices are infinite and their voices are amplified. They are connecting. They are organizing. They are gaining mass and momentum.

Despite Martin Luther and his theses, the Catholic Church is still here today, and although its power and reach is greatly diminished it will not be going away any time soon. And big business isn’t going away either. But the landscape is shifting, and there are few in business today who would deny it.

To think that this customer revolution won’t affect your business is naive. It will affect every business. It is already shifting the balance of power. It will change the way power is controlled and exercised. It will change the way companies are organized and the way they do business.

Eventually every customer will be a connected customer. And if you want to win over connected customers, you will need to become a connected company. If you’re already on this journey, congratulations. If not, today is a good day to start.

The future is podular

One of the most difficult challenges companies face today is how to be more flexible and adaptive in a dynamic, volatile business environment. How do you build a company that can identify and capitalize on opportunities, navigate around risks and other challenges, and respond quickly to changes in the environment? How do you embed that kind of agility into the DNA of your company?

The answer is to distribute control in such a way that decisions can be made as quickly and as close to customers as possible. There is no way for people to respond and adapt quickly if they have to get permission before they can do anything.

If you want an adaptive company, you will need to unleash the creative forces in your organization, so people have the freedom to deliver value to customers and respond to their needs more dynamically. One way to do this is by enabling small, autonomous units that can act and react quickly and easily, without fear of disrupting other business activities – pods.

A pod is a small, autonomous unit that is enabled and empowered to deliver the things that customers value.

By value, I mean anything that’s a part of a service that delivers value, even though the customer may not see it. For example, in a construction firm, the activities valued by customers are those that are directly related to building. The accounting department of a construction firm is not part of the value delivery system, it’s a support team. But in an accounting firm, any activity related to accounting is part of the customer value delivery system.

There’s a reason that pods need to focus on value-creating activities rather than support activities. Support activities might need to be organized differently. More on that later.

Process to pod

Process

Traditionally, it’s been the job of managers to coordinate activity across divisions or lines of business, because processes are usually complex and interdependent. Making changes in one part of the process might solve a problem for that unit but cause problems for others.

The goal of podular design is to reduce interdependency by enabling autonomous pods to focus on clear outcomes that deliver value to customers. Pods can coordinate with each other via clear cultural, behavioral and technical standards.

Chains vs. nets

You can think of any business process as a chain – a series of steps that people go through to get things done. Processes don’t depend on the intelligence or creativity of the people who run them, so much as their consistency and ability to perform a specialized task. The manager of the process is responsible for the intelligence of the system.

A process is a step-by-step set of instructions that’s designed to deliver repeatable results and avoid failure. This is just fine, as long as you want to achieve the same result every time. But processes are also very brittle when it comes to change and innovation. If you are responsible for a part of a complex process, it’s hard to try something new.

Processes are like chains

If you get one step wrong, there is a cascading effect, and everything downstream from that change is affected. Small changes at the beginning of a process can have devastating effects elsewhere in the system.

A chain, as the saying goes, is only as strong as its weakest link. Break one link and the whole chain fails.

Podular systems work like nets

A podular system is like a net. It distributes the work load across a wider area by allowing each pod to focus on goals rather than steps or stages. If one strand breaks, the system can still carry the load.

In a podular system, the burden of creativity and intelligence is on the people in the pod. In a pod, your focus is on solving problems and delivering value rather than executing previously-defined steps. You can no longer pull the levers, move the dials and say you did your job, even though the customer didn’t get what they wanted. Giving the customer what they want is your job.

If processes are fool-proof, then pods are fail-proof.

Standards and protocols

Even without a traditional command-and-control hierarchy, autonomous pods still need to make decisions and coordinate their activity in order to deliver value to customers. The secret of coordination is to make those exchanges as frictionless as possible.

Technical standards

Technical standards are simply interfaces that allow you to connect things at will. For example, the electrical socket in your wall uses a common standard that allows you to get electricity when you plug in a device. When your electrician installed that socket in the wall, you didn’t have to know in advance what you might want to plug in to it. And device-makers can be confident that if their plugs follow a common standard, you will be able to plug it into your wall.

Those of us who travel a lot wish that the world had a common electrical standard, but alas it does not. And, sadly, these kinds of standards are not as common in business as you might think. But things have come a long way in the last ten years or so.

Service-Oriented Architecture (SOA) and Software as a Service (SaaS) are ways to bundle small pieces of functionality into pods that anyone can access. PayPal, for example, handles payments securely and quickly via standard connections with other companies. Any web service or company can easily link in PayPal for payment processing, which means they don’t have to build that function for itself. But even such a simple thing as a standard protocol for email addresses (first initial, last name, for example) can help people connect with less friction.

Cultural standards

Cultural standards, put simply, are the kind of values and behaviors you can expect in a given company. A strong culture reduces the friction in making decisions as well as connections.

Decisions: If you’re in a pod and you need to make a decision, common values can help you make that decision autonomously, without the need to check with superiors. This means you can act more quickly than competitors who need to “check with the boss” before they can proceed. Common cultural standards give you confidence that your behavior will be consistent with those of other units.

Connections: If your pod needs to connect with other pods, it’s easier to link up and collaborate when you know what kinds of behavior to expect – when you speak the same language and work in the same way. Pattern languages are collections of common standards that allow teams to more easily connect and collaborate. Gamestorming, for example, is a pattern language for cross-disciplinary design.

Culture can be as simple as a set of shared values, or it can be codified in rules and policies. The important thing is that the values and rules are understood and the behavior is consistent with them. If the culture says everyone is equal, the CEO better not have a reserved parking spot. Culture is built by establishing behaviors that the whole organization can and will adhere to consistently.

Pods are flexible, pods are fast

When pods are autonomous, they can try new things without worrying about a “ripple effect” that will disrupt the activities of other units. They can adopt new tools and practices quickly, without having to ask permission. They can be flexible in the ways that they choose to respond to customer requests. This means that each pod can be free to innovate, try new things, adjust its work process, and so on.

Even though most innovations will happen at the pod level, innovation doesn’t have to be contained to one pod. Since linking up with other pods is realtively friction-free, an innovation in one pod can be quickly adopted by other pods.

Pods can fail

When a step in a complex process fails, the entire process comes to a halt. In a Toyota plant, workers have the power to stop the entire process when they see a problem or opportunity. This is great in the sense that it enables a process to continually improve, but it doesn’t solve the problem of interdependency – the whole process still must stop in order to accommodate the change.

In a podular system however, each pod can make adjustments without disrupting its neighbors, and even when a pod fails, there is enough redundancy in the system that those services can most likely be found elsewhere.

A recent New York Times article describes how Volvo is reinventing the automotive assembly line to make it more podular. Quality and productivity have soared. According to the article, Volvo’s approach has led to 20% pre-tax profitability and 25% return on capital, making it one of the most profitable car companies in the world.

Pods can scale up fast

Since pods are inherently modular, it’s easier to scale them up to meet increases in demand. There’s a huge amount of tacit experience in each pod, because each pod is like a tiny fractal snapshot of the entire business – focused on customer value instead of a specialized task or functional process step.

Reproduction

This means that when it’s time to scale up a particular service, a pod that has, for example, seven people, can reproduce itself by dividing into two pods which can bring on new members with minimal growing pains.

This kind of growth system is not new. It’s been a standard practice in knowledge-intensive professions for hundreds of years. When a job requires a lot of experience and creativity, people learn by apprenticing themselves to others who are more experienced, and they learn by doing. Think of a medical intern in a hospital, or the patrol cops in your favorite police drama. They always team up the rookie cop with the experienced veteran so the new cop can learn the ropes.

A podular system needs a platform

For a podular system to work, cultural and technical standards are imperative. This means that a pod’s autonomy does not extend to choices in shared standards and protocols. This kind of system needs a strong platform that clearly articulates those standards and provides a mechanism for evolving them when necessary.

For small and large companies alike, the most advantageous standards are those that are most widely adopted, because those standards will allow you to plug in more easily to the big wide world – and the big wide world always offers more functionality, better and more cheaply than you can build it yourself. Platform architecture is about coordination and consistency, so the best way to organize it may not be podular. When it comes to language, protocols, culture and values, you don’t want variability, you want consistency. Shared values is one of the best ways to ensure consistent behavior when you lack a formal hierarchy. Consistency in standards is an absolute requirement if you want to enable autonomous units.

Platform decisions can be dictated from above (for example, the way Apple dictates standards for its App Store) or agreed by consensus (for example, the way Web standards are developed). What’s most important about platform decisions is that they focus on the connections between pods rather than within pods In other words, a pod can do what it likes internally, but when it shares or receives information it needs to speak the same language as other pods.

But to truly enable the pods, platforms should be as lightweight as possible. Consider this: The U.S. military will be using standard internet protocol as the backbone for its net-centric warfare strategy, a podular approach to military operations. If internet protocol is secure enough for the U.S. military, it’s probably secure enough for you.

A podular system trades flexibility for consistency

Pods don’t answer every business problem. Like any other strategic decision, the choice to go podular involves inherent risks and tradeoffs. A podular system is certainly not the most efficient or consistent way to conduct business. There is more redundancy in this kind of system, which usually means greater cost. When units are autonomous, activity will also be more variable, which means it will be less consistent.

The bet you are making with a podular strategy is that the increase in value to customers, paired with increased resiliency in your operations, will more than offset the increases in costs. It’s a fundamental tradeoff and thus a design decision: the more flexible and adaptive you are, the less consistent your behavior will be. The benefit, though, is that you unleash people to bring more of their intelligence, passion, creative energy and expertise to their work. If you’re in an industry where these things matter (and who isn’t), then you should take a look at podular design.

In times of stability, the world belongs to those in power. In times of change, it belongs to the bold, the bright, the brave. Seize the day!

Next post >> Give pods a chance.

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