Wouldn't it be smarter for a company to make a conscious decision about what kind of information it will communicate to which stakeholders, through what technology and media, under what contextfor example, directly through a third-party NGO (nongovernmental organization) or through some other vehicleand under what rules and governance of procedures?
Right now, it's staggering to think that when it comes to the disclosure of various classes of information, companies pretty much just wing it. Few think about transparency in a disciplined way or have a strategy for figuring out what should be disclosed, by whom, through what channels, under what conditions, on which media. Beyond old-fashioned public relations spinning, they don't have a comprehensive information strategy.
Companies need to become much more conscious about this issue of transparency, and the levels of vulnerability that they need to start managing. They need to be far less insular and become far more open than before. And I'm not simply talking about creating an appearance of openness. Corporations that are open perform better. Transparency is a new form of power, which pays off when harnessed. Rather than something to be feared, transparency is becoming central to business success. Rather than to be unwillingly stripped, smart firms are choosing to be open. Over time, companies we call "open enterprises"those which operate with candor, integrity and engagementare most likely to survive and thrive. British Telecom, for example, estimates that cancelling all of its corporate responsibility activities would produce a 10 percent decline in customer satisfaction ratings, the difference between market leadership and also-ran status.
Now, having said that, companies should not be opening the kimono completely to all stakeholders on all classes of information. It is dangerous to be open in a willy-nilly, cavalier manner. With transparency comes vulnerabilities and unintended consequences. Stripping down carelessly can be as dangerous as remaining completely opaque. We think it makes sense for companies to assess their current levels of transparency across their various stakeholder groups and to develop a strategy regarding what needs to be done to become an open enterprise. If you do, you can manage the vulnerabilities.
Don't think this will be easy. If you look at something like the Sarbanes-Oxley Act, it has put new requirements on the job of the IT department. But Sarbanes-Oxley is just the tip of the iceberg. It demands compliancenot full transparency, and only for one stakeholder group, shareholders. Sarbanes-Oxley promotes a very limited form of candorforced transparency. Imagine the extra resources it will require to be actively, fully transparent. But companies we think, have little choice.
Take customers. In the past, they were isolated. A few joined quaint consumer groups; others talked to neighbors about products they might buy, or read the main source of objective advice, Consumer Reports. Today, customers self-organize. They go online to learn what others think. In a 2002 survey by Environics International, 88 percent of Americans said they gather information about products before a major purchase.
This access to information is creating power struggles in many markets. Sellers see customers commoditizing them, going to Wal-Mart and Internet merchants to challenge their prices and profit margins, and they're ready to launch a class-action suit at the slightest provocation. Consumers see sellers ripping them off, providing bad service and invading their privacy. Notable exceptions exist, but nastiness rules in many industries, especially big-ticket ones like automobiles, travel, financial services, healthcare, pharmaceuticals and telecom. When's the last time you had a pleasant customer experience with a phone company?
This is all going to have to change, and companies are going to have to forge brand-new ways to define relationships with their stakeholders in order to survive in tomorrow's marketplace. Companies that refuse to do this operate at their own risk. Increasingly, consumers, as in Home Depot's experience over its use of old-growth lumber, will use communication technologies to forge agendas that go beyond personal benefit.
Transparency is also changing the rules regarding what companies disclose to their own employees. Consider the IBM salesperson and what he or she needed to know 15 years ago. Back then, IBM didn't pre-announce products. The salesperson knew about features and functionality. Today, that salesperson needs to have a deep knowledge of virtually everything having to do with IBM, its management and its strategy. They need to answer questions about Sam Palmisano's compensation program and IBM's governance and disclosure policies. They need to know about IBM's strategy, why it did the deal with PricewaterhouseCoopers, why IBM has embraced Linux, and where its partnership with Siebel Systems and SAP is going. That person needs to know about IBM's future technology, directions, and architecture, what the Web services strategy is, whether it dovetails with Microsoft's strategy, and so on. That's why companies must move toward a much higher degree of internal openness and candor toward their own employees. This isn't simply New Age stuff. It's about money and efficiency. When you have openness and candor, you drop transaction costs, you reduce office politics and game playing, you increase employee loyalty, you increase the effectiveness of collaboration and so on.
Transparency is also affecting product design and performance. As a company, you can't make garbage smell like roses anymore. You have to deliver true value, as never before. P&G can say Tide detergent washes whiter 'til the cows come home, and Tide's ad firm can try to convince you that it does, but thanks to communications technology, if Tide doesn't actually wash whiter, chances are much higher today that everybody will know, or be able to find out in 30 seconds what does wash whiter. And because of the Hypernet, the networks over which machine-to-machine communication will occur, in three or four years, your washing machine will know who washes whiter, too, because it'll be a smart, Internet-based communicating appliance.
The transparency revolution also will require new product strategies, new supply chain strategies, new promotional and marketing strategies, and even new pricing strategies. At Progressive Insurance, executives post premiums on the Web, making them highly visible to everybody. Sometimes it's not pretty, as when Progressive's prices are markedly higher than others. When that happens, though, every employee works harder to be competitive as a result of self-imposed transparency. Progressive is also finding that transparency can help build strong relationships with customers because customers trust them to be candid. It also provides an opportunity for Progressive to justify to customers its own pricing structure, in some cases offering the opportunity to remind customers what extra value they may be getting, such as instant settlements, when they buy insurance from Progressive.
Another example of how it helps to harness transparency: When Danish toy company Lego in 1998 introduced a build-your-own-robot kit with a proprietary microprocessor and operating system, a university student reverse-engineered the software and posted it, and instantly, programmers around the world began writing applications that made the little robots do all sorts of tricks. Although the company initially fought this turn of events, Lego came around and now promotes these customer-written applications; the popularity of the gadget has soared. Essentially, customers now work for Legofor freeto create a superior product.
Of course, there are all kinds of tricky issues around this. Transparency creates a pressure for many products to become commoditized. So you have to decide, if you offer a commodity product, do you need the lowest price? Or, do you need to try to move up the food chain and add more value to your products or services, or at least build different sorts of customer relationships that overcome increased rivalries and choices?
And what does it all mean for the supply chain or business partners? I'm on the board of Celestica, an electronics manufacturing services company. When Celestica is building routers for, say, Cisco Systems, the pricing conversation typically goes like this: Cisco says to Celestica, here's how much your materials will be to do this work for us, here's how much labor will cost, here's how much overhead will cost, here's what we think is a fair return on invested capital. Eugene Polistuk, the CEO of Celestica, says it's like we're naked here, and he says you have to get naked for these network business models to work. And, in fact, one of Celestica's key strategies is to increase transparency within its Business Web because that, in turn, drops transaction, contracting, interaction and partnering costs, and it'll help make Celestica the lowest-cost manufacturer of electronics equipment.
Transparency is so important in the supply chain because we're undergoing the biggest change in corporate architecture in a century. Corporations used to be vertically integrated. They did everything from soup to nuts. But now, thanks to networks, the costs of transactions and interactions and partnering between firms is dropping radically, which means companies can now focus on what they do best, and can partner to do the rest and manage it all over the Web. Information flows that were inside the firm are now between firms. In some very basic ways, you have to get naked for many of these network business models to work properly, and to realize the kinds of incredible savings that are possible.