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30 Minutes, 30 Cents, 30 Billion: Fragmenting Business

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A few weeks ago I sat next to an investment banker on a long flight. He works hand in hand with some of the super-quants on Wall Street who perform high-wire arbitrage through mathematical techniques so arcane that “I’d have to get two more math degrees just to understand them,” as my seatmate put it.
“Basically what they’re focused on is predicting the next 30 minutes,” he said. (Actually it may have been “the next 30 seconds,” I forget.  Anyway, day-trading for the Big Bucks, with lots of Other People’s Money).

At my destination, I heard a senior exec of one of the world’s high-tech success stories talk about their business model—“30 cents a transaction times billions of transactions, pretty soon you’re talking real money.” (How many of you remember Everett Duerksen, the originator of that line? Hey I’m not old, just well-read!).

30 minutes, 30 cents, 30 billions. Not your father’s bizmodel.

There is no shortage of economists who will gladly tell you the wonderful role these business models play. They mitigate risk; they lower costs; they create greater liquidity; they globalize geographically fragmented businesses.

Gosh, is there no downside? Of course there is. And it’s one of those two-sides-of-the-same-coin things.

The business world of today is heavily driven by two trends—fragmentation of processes, and globalization of scale. Break everything into tinier and tinier processes, and scale them globally. You get all the benefits listed above, but—what happens if no one has the big picture anymore?

You occasionally get myopic consultants and bankers—for a great example see this blog post from last year. 

But more importantly, you get situations where everyone is transaction-oriented, and no one has a stake in the integrity of the entire process.

The airline industry, many decades ago, was largely financed by insurance companies. The insurance companies tended to have ties to multiple airlines, partly to hedge their own risk.  Then the banks got into the business. Each bank picked a favorite—and given the peculiar economics of the airline industry, all the airline-bank pairs began to beat each other into the ground with excess capacity. The industry hasn’t made money for decades.

For a more current example, of course—subprime mortgages. When an industry gets dissected, disaggregated, and disintermediated, there may or may not be a problem. If a regulatory agency is there to see the big picture, that may be OK. If a risk-assessing industry is in place (bond ratings, accounting firms), that may serve to keep things in check.

But if none of those things are true—if Glass Steagall has been eviscerated, financing products escape regulatory purview, if financial institutions are selling off and collateralizing loans and if credit card companies are chasing fees (read transaction) instead of loans (read relationship)—then watch out. No one’s minding the business store.

In such cases, business becomes a combination of Russian roulette and musical chairs. He who gets in and gets out fast wins. He who stays is a sucker.

How fast is 30 minutes? How small is 30 cents? Small, and getting smaller.

Web Trust 2.0 vs Web Trust 3.0

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Thought leaders John Sviokla and David Pogue both posted thoughtful pieces about the role of trust in a wired, Web 2.0 world.

Pogue—technology columnist for the NYTimes—writes about the positive impact of (intelligently-moderated) blogging on the reputation of the blogging host.   Sviolka, Vice Chairman of Diamond Management & Technology Consultants, writes about The Madness of Crowds, focusing on the dynamics of reputation systems, and how the web enhances them.

They’re both talking about the web as a means of enhancing one’s reputation—but they emphasize very different parts of trust. Who’s right?

They both are, of course, but I’d say Sviokla focuses on what I’ll call Web 2.0 trust; Pogue is talking about Web 3.0 trust.

Sviokla’s subject matter is eBay, Amazon, and Motley Fool’s Caps. He sees these as more powerful in trust-creation than blogs, because, as he puts it:

The problem with Wikipedia, and blogs, and user generated content is that many of them don’t have a strong reputation management process. Put another way, any idiot can have an opinion. The most important thing is does the person who is giving an opinion have a good reputation? Is that reputation attached to his or her opinion? Does the person own the downside risk of the adverse effects of their opinion?

Sounds good, right? Though, as whimsically pointed out in Trust Isn’t Transitive by Peter N Biddle, just because someone can fly a 747 doesn’t mean they can be trusted to carry a handgun. And though I might buy a book from someone with a good reputation rating on Amazon, that doesn’t mean I’d introduce them to my daughter.

That’s where Pogue and Web 3.0 trust come on. Notwithstanding Sviokla’s critique that blogs are unmeasurable and don’t hold people accountable, they perversely have the wonderful ability to humanize. That’s exactly what people are—unmeasurable and hard to hold accountable. And a significant part of how we come to trust them is related to how much we come to know about them—in precisely those hard to measure and slippery ways.

As Pogue points out, when Microsoft lets employees blog, you suddenly see the human side of the firm, and the “Dark Side” gets a little lighter.

In my terminology (the Trust Equation—Credibility plus Reliability plus Intimacy, all divided by Self-Orientation), Sviokla is heavily defining “trust” in terms of reliability. Pogue is emphasizing the intimacy component—not on blogs alone, but in moderated commented blogs—Diablogs.

The intimacy factor is inherently richer, because intimacy is where risk enters the trust equation. People and firms take calculated risks in blogging: how much to moderate, how much to reveal, how close to the edge to get, how one makes those judgments; all these things tell us a lot about the writer, the blog editor, and the firm. Reliabilty says something very deep—but not nearly as broad.

Intimacy also gives us the bandwidth of exposure to assess other’s self-orientation. Are they in it for themselves? Or do they seem to care about me? And self-orientation, I argue, is the single biggest factor affecting how we assess the trustworthiness of another.

Does Google really mean it when they say they “Do no Evil?” The answer won’t be found in Sviokla’s reputation management systems. It will be found in Google’s willingness to let its people speak, from the heart, about what they think. And, seeing their hearts, we will know the judgment to make about whether to trust them.

Not just for book buying, but for introductions to daughters and the like.