whythawk ratings: measuring effective development

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Leveraging your good name; the power of a positive credit rating
 

By Gavin Chait, on 05 April 2007
Is your reputation at risk?
Is your reputation at risk?
In the Internet age, when so much information can be gathered about an individual and their behaviour, talk of privacy has become pervasive.

One of the central themes of the capitalist age for the last few hundred years is this:  how, given the complexity of financial interactions, is it possible to trade with someone else who you do not know and trust that they will deliver on their promises?

In small trading groups it’s easy; you know each other personally and can vouch for each other.  When you get a passport photo shot even today embassies often ask you to get the back signed by a priest or public representative you have known for a decade or more.

As society has grown larger and – more importantly – as our interactions have become entirely disintermediated across the distant-proximity of the Internet we have found it harder than ever to know who to trust.

eBay and other trading platforms allow each party to a transaction to rate the other.  Transaction participants can evaluate the opinions of others prior to committing to dealing with someone they don’t know.

The problem on the Internet, though, is that your good name at eBay won’t follow you to Amazon or any other site that you may wish to use as a trading platform.  In each spot you have to start all over again and gain the trust of that new community. Even worse, though, is that those who sabotage their reputations entirely in one spot simply create a new persona for themselves at the same site or elsewhere and start all over again.

The formal sector doesn’t work that way.  Every financial transaction you make where you borrow money in advance allows you to develop a credit history.  No doubt you have experienced the frustration of going to a bank and being told, “You have no credit history.  We cannot lend anything to you.”

Just like jobs, how do you gain experience if no-one will hire you?

Banks make use of credit ratings to evaluate your ability to repay them.  The credit history is maintained by various third-party rating companies who the banks subscribe to.  You may feel excluded if you’re not part of it, but you’d be even more frustrated if you moved town and had to start all over again with a new bank.

Credit ratings allow you to use your good name as a bargaining chip.  Your rating follows you from bank to bank and you can demand a better level of service than you would otherwise get if you were an unknown.  

Ratings act to improve competitiveness since companies usually price in a typical default rate for their industries into the products they sell.  If it is clear that you won’t default then they can reduce the price accordingly.

In a modern economy, filled with third-party rating services, you are able to build up a good name as an asset simply by behaving honourably.  Good behaviour is automatically rewarded while bad behaviour is punished.  There is a natural feedback loop – call karma if you like.

The Internet, clearly, has a long way to go before companies develop common reporting standards that allows for ratings to take place.  But, once it does, then your value as a customer should be reflected in ever better payment terms and prices.

In the future you may certainly maintain your privacy, but at the cost of being told, "You have no good name, I can't sell you anything."
Keywords : credit risk, reputation, good name, commerce, Internet
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From Linux to Mozilla: donations mean that open-source isn't really free
 

By Gavin Chait, on 04 April 2007
Image
Donate to keep us Free!

The video image flickers in the conference hall. "Even if you took our computer away, we would save and buy another. For it has opened our world and increased our profits," says a peasant farmer, in a shed housing a battered desktop PC, surrounded by other nodding farmers.

ITC, one of India's largest diversified companies, has re-engineered their soya procurement and processing chain by supplying Internet-connected computers to rural villagers. ITC felt that, if farmers had greater access to information, they would be able to supply ITC with a better quality of product at a better range of prices. Intermediaries under-paid farmers, mixed the soya beans together in a jumble of low and high value beans, then charged ITC at the higher-value price. It was an inefficient and inherently unfair process.

The ITC E-Choupal Project has been an unbounded success with farmers getting significantly better prices and ITC spending much less time and effort on grading and processing their beans. A development project with a commercial edge has not only introduced the farmers to technology, but given them the financial where-withal to maintain their technical advantage.

CK Prahalad talks over the video, "The poor are prepared to pay for services and products. They want to. Real poverty is relying on permanent donations and handouts."

A world away, across Europe and America, lives the open-source movement; built on the premise that software and information should be free. GNU likes to make the point that "free" means, "free as in speech, not as in beer," however software is a product, not a point of view.

A protected employee, with a few free hours a day to spend time coding and developing software, can choose to release it for free. But it isn't really free, is it?

On every page – from Wikipedia, to Ubuntu Linux, to Mozilla, to Creative Commons – there is that little logo that gives voice to the lie that anything can truly be free: "donate".

It is a little plea, "Please, we really want to keep this software free, but we need your money to do so." Then it isn't free, is it? And donations have none of the certainty of a commercial product. With proprietary software I know the price and companies are governed by laws that dictate what I can do if the product I bought doesn't perform as advertised. With open-source the price is vague, "give whatever you can afford, please," and quality open to interpretation.

Discussion forums across the open-source movement are filled with nasty, spiteful remarks like, "You promised the update would be out last month and it still isn't. When are you going to bring out the new version?" Even the users of free software behave as if they have a right to treat the producers as if they are full-time professionals.

The open-source movement considers itself an off-shoot of the whole NGO / development establishment that thinks that donations don't count as earnings because the product was given away. Donations are earnings. Get over it.

Open-source is a novel and exciting way of creating new products for the commercial market. All that is happening with open-source is that customers are directly involved in product development and are sharing in the financial risk of that development. Any entrepreneur knows that they have to spend the time and money up front to bring their product to market before they can charge for it. People will only pay for it once it's perfect. Consider this new form of venture capital Crowd Finance or Crowd Development.

Many open-source products are getting to the point of commercial viability. And I, for one, won't object to paying for them. The people who developed such awesome software as Joomla! and Firefox deserve to be financially compensated for the time and effort they put into creating it.

That way, others will see their success and be stimulated to better it. For financial reward.
Keywords : donations, commercial, free software, open source, venture capital, crowd finance, crowd development
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The US$ 5 trillion market at the bottom of the pyramid
 

By Gavin Chait, on 30 March 2007
Milk me please, I'm worth it
Milk me please, I'm worth it
“If you’re not prepared to eat your own lunch, someone else will,” is a fine sentiment.  And, if all you’re prepared to offer others to eat is boiled potatoes and dried-out steak, beware the day that someone else comes along and offers seared tuna, marinated in soy-sauce, on a bed of grilled veggies.

A warning to company strategists:  be prepared to challenge yourself, ignore past successes and re-invent the future.  If you’re not going to then don’t be surprised if some other upstart comes along and does so, taking your market out from under you in the process.

Limitations are often the source of fertile and profitable new ideas.  Who would have thought that people would ignore the convenience of conversation for preference in sending more expensive short-messages on their cell phones?  Who would have thought that this would stimulate a multi-billion Dollar industry?

C K Prahalad, speaking in Johannesburg at a conference organised by Global Leaders, declares that, “the essence of entrepreneurship is that aspirations overcome resource limitations.”  And aspirations drive innovations.

The challenge is in seeing the aspirant poor as a potential market and not as a bottomless pit requiring donations and hand-outs.  The aggregated wealth of the poor is US$ 5 trillion, according to a study conducted on behalf of the World Bank.  “Children are told, ‘Eat your veggies, there are starving people in Ethiopia!’ and so they grow up associating poverty with starvation and impossible despair,” says Prahalad.  “It is very difficult to transform that type of thinking into ideals around investment; that the aggregated wealth of the poor is significant.”

It is possible, though.  Companies are reinventing themselves and their products to take advantage of opportunities presented by the poor.  Prahalad gives the example of Gujarat Cooperative Milk Marketing Federation (GCMMF), now the biggest milk producer in the world.

GCMMF buys their milk directly from individual village subsistence farmers – more than 2.5 million of them across India.  The milk is valued according to fat content and volume.  They collect an average of 6.3 million litres per day, supply 2 340 million tons of animal feed per day back to the farmers, and earn $ 840 m annually in revenue with $ 30 m exported.  Clearly there is wealth at the bottom of the pyramid, both in earning and sales potential.

Much of this requires a significant change in the way in which a company is prepared to work: a highly decentralised approach; partitioning of the task (on site / off site, decentralised payments and services); world class centralised facilities to aggregate and control the products as they arrive.

More impressively, though, is the way in which expensive services and products can be reinvented to serve the poor.  Aravind Eye Care in Madurai, India, is a pure example of what is possible.  Cataract surgery in the developed world costs around $ 2 – 3 000 depending on the nature of the intervention.  A comparison between the Royal College of Ophthalmology and Aravind Hospital by the UK National Survey in 2001 declared that Aravind was superior on virtually every level.  Aravind Eye Care charges between $ 50 and $ 300 per operation.

“It’s easy to get a 5 – 10% cost reduction,” says Prahalad, “but you have to completely rethink your strategy to get a 50x reduction in price.”

It is essential to build new strategic capital and disruptive business models.  Set the price you want to charge, set your profit margin and then, whatever is left, you have the cost price that you must meet in order to offer your product.  Aravind has been profitable since they started.

The most startling result, though, is this:  products developed to be used by the poor rapidly become innovations that can be used by the rich.  Cheap ophthalmic surgery, hotels or cell phone charges rapidly get disseminated.  Companies that are able to produce this much of a strategic advantage have no problems convincing customers around the world to shift their allegiance.  If a new upstart is offering you a 5% price change you may not be interested; but 50 times less for the same quality?

Says Prahalad:  “We need to create inclusive capitalism.  If we exclude the poorest we will get social unrest and outrage – the poor will become so agitated that the rich are targeted.  The informal economy is essentially a local monopoly; inefficient and abusive of an asymmetry of information.”

There are profits to be made by developing products that are aimed at the poor.  If we improve consumption at the bottom of the pyramid we also improve livelihoods.

“Ultimately,” says Prahalad, “Every person must be seen as a consumer who can afford world class products and services.  Even the poorest must be allowed to shape their own experiences, act as a producer and have access to global markets.”

By allowing the poorest to co-create products and services you also create opportunities in every market around the world.
Keywords : strategy, innovation, fortune at the bottom of the pyramid, prahalad, poverty, wealth
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