First question: Why do companies exist and how do they win?
Starting a discussion about the Future of Work with an economics debate may seem odd, but indulge me if you will for a moment. The average lifespan of a Fortune 500 company in 1920 was 67 years and today that figure is around 15 years. As HR starts to experiment with new technology including analytics, AI and cognitive computing we are more than aware that we live in times of unprecedented and accelerating change. The very fabric of how people behave and companies operate is being turned on its head. Understanding why companies exist and why they organise the way they do is crucial in understanding how they operate—a critical question for HR.
So, back to my question. Ronald Coase who won the Nobel Prize for Economics in 1991 explains that firms exist because aggregating assets under one roof is efficient benefitting from lower transaction costs. Building on this the Resource Based View of the firm articulates that companies outperform their competitors because of possessing or having access to superior assets; maybe buildings, equipment, a strong brand or Intellectual Property.
Essentially companies win by owning things. People, production plants, supply chain, processes, ideas and innovations.
What if the rules changed overnight?
What if the days of ownership being the main source of competitive advantage for most industries was gone, in fact, ownership of assets was a hindrance? This is exactly the world we face where the new currency is agility, speed, transparency and innovation. If you’re reading this thinking you’re too big for this to apply to you or things won’t move that fast in your industry just ask Nokia, Kodak, HMV, Blackberry or Blockbuster.
Accenture research says customers now expect product innovations every 6 months, so the Intellectual Property you so carefully protect with patents will quickly become obsolete. Facilitated by the Open Source economy you can now access other people’s design, code, training content and software for free. Competitive advantage now resides in how quickly you can innovate and get products or services to market.
Owning expensive assets with huge sunk costs reduces flexibility and agility. In his excellent book ‘Exponential Organisations’ Salim Ismail provides many examples where companies outsource their entire manufacturing cycle to companies like Alibaba, as do Apple with Foxconn. Individuals or companies are using setups like Tech Shop for product development or R&D space, accessing expensive equipment they’d previously have to own for a fraction of the cost.
These trends are no different for human resources. Organisations leverage large groups of people external to their organisations in developing new ideas, products or solving problems with astounding results. As an example, Netflix received 44,104 entries to a competition run to improve their algorithm for video rentals that would save millions of dollars.
Savvy companies are also choosing to employ less of their workforce as payroll staff. This is not only for increased flexibility and reduced costs but also to provide a huge injection of ideas and innovation challenging the status quo.
Welcome to the Gig Economy
Welcome to the new world where increasingly the majority of your workforce will be provided by the Gig Economy. Advances in technology enables next to no transaction costs in accessing this on-demand workforce. In fact, it’s cheaper as you pay for what you need when you need it with none of the IT, office or employment overheads.
In a recent report McKinsey estimates 162 million people (20% – 30% of the workforce) in Europe and the US engage in some form of independent work. This on-demand economy is growing rapidly with millennials set to make up 50% of the workforce by 2020. Still not convinced by the impact of the rise of the Gig Economy? The UK government are paying particular attention to the topic in their recent review of modern work, the Taylor Report. There are questions that still need to be answered but be in no doubt that the Gig Economy is here and growing by the day.
I’m aware all large corporations have used contract staff or outsourcing arrangement for a number of years so much of this may not seem new. However, there is a vast difference between using people or groups outside your company for non-core work and actively incorporating the Gig Economy into your strategy and actively engaging in the ecosystem.
To be clear we’re not talking about supplementing the existing workforce with contractors. We’re talking about a world where increasingly your preference for employing people outside of your most senior positions will be this on-demand workforce. This demands a whole new mindset, corporate culture and set of processes.
What do we need to be thinking about in HR?
Think of every HR process, over 90% are designed to service an out of date business model of ownership. This all has to change and impacts every area of HR; remember speed, agility, transparency and innovation is the new currency.
People need to be recruited, authenticated and on boarded in days, not weeks or months. Utilising technologies like Blockchain and ‘Uber like’ rating platforms will undoubtedly help. This workforce needs to be managed and rewarded through clear, stretch, short-term outcome based objectives (see the OKR approached used by Google). Don’t incentivise people to stay, treat them so well they want to come back. You also need to change your thinking around how you develop people that may only be with you for six months. If you don’t develop this workforce you may not attract them or they may not have the skills you need. Does your succession plan already primarily consist of people outside your organisation?
If all this sounds a bit daunting and you’re thinking you might prefer to stick with your current model I’m afraid that might not be your choice. Leaving aside the need to evolve to a more dynamic on-demand business model, more and more this is how people are choosing to work. So how are you going to sustain good engagement and culture with a constant influx of new people? How do you manage the different processes for the on-demand workforce and payroll staff, or do they even need to be different?
We live in a time where businesses are adopting the mantra of ‘disrupt or be disrupted’ and traditional professions will need to do the same with HR being no exception. Engaging proactively with the Gig Economy with almost certainly be part of the puzzle for the future of HR and their organisations.