Tuesday, December 18, 2007

The Naked Business

An essay on how to treat customers and employees like owners and reap the benefits.

In any meeting, a negotiator can adopt a variety of strategies. Typically, they horde information, pick apart their opponent's every move in hope of understanding hidden meaning, and ultimately attempt to gain the upper hand through manipulation. Sometimes you outsmart your opponent and win. Many times, you are so busy protecting yourself that a deal never happens.

There is a less common negotiation strategy that relies on going completely naked. Instead of hoarding information, you give it freely. You openly explain both your needs and what you have to offer. If the other person reciprocates with open arms, you can work together to capture amazing opportunities.

It occurs to me that many private companies play the game of business as a negotiation situation where their customers and employees are opponents that must be outsmarted. Many deals are left on the table. What would happen if they instead used the naked negotiation strategy? Imagine a company that says to their customers with conviction and honesty, "Here is what I have, and here is what I need. Let us work together to create mutual value."

The rules of an Open Kimono business
The following are simple rules of thumb that guide the behavior of a Naked company.
  • Rule #1 - We are all in this together: By purchasing a company's product, a customer becomes invested in company's continued success. By working at a company, an employee also becomes invested in company's continued success. In all areas, both the customer and the employee contribute to the business and deserve to share in its success as owners.

  • Rule #2 - We share information freely: Where possible, aggregate information that is shared freely within a company should be shared freely with the customers of a company. More is gained from sharing than from hoarding. We seek to build trust, empower both customers and employees, and solve problems together with the best tools possible.

  • Rule #3 - We win through the creation of superior value: In competitive situations, by erring on the side of openness and honesty, we discover mutually beneficial solutions. As a result the company succeeds by being able to offer superior value compared to those companies that attempt to get ahead through trickery or manipulation of perception.
All this is lovely sentiment, but what does it mean? The following practices might vary depending on the exact company, but here is a good start.
  • All major financial data is posted in an easy-to-comprehend fashion on the company web site
  • All major company metrics, goals and progress towards those goals are publicly posted and constantly updated.
  • Periodic customer research is performed and the results are also made available to all customers and employees.
  • 5% of profits are redistributed back to existing customers. Another 5% is given to the employees. If desired, the money can be donated to a charity or reinvested in company stock.
  • When problem areas are identified, customers are encouraged to contribute suggestion, time or resources to the solving of the problem.
Roots of the Naked business
The roots of the Naked business are quite traditional. Successful companies have been using these techniques for years.
  • Public companies: Public companies are required by law to divulge certain internal information to their stock holders. The result is that dishonest behavior is not allowed to fester for long without being exposed to the light of reality. It is debatable however, if public company's slavish devotion to quarterly stockholder gain is a positive long term strategy. A Naked company that has the transparency of a public company, but is measured on pertinent long term business metrics instead of only short term financial data.
  • Open Book Management: By sharing pertinent company information with employees, companies run by open book management empower everyone in the company to innovate towards a common goal. A Naked company uses the same technique to leverage not only the distributed power of their employees, but also the distributed networking power of their customers.
  • Market Orientation: Companies with market orientation listen to both the needs of their customers and the trends in the market when making strategic and tactical decisions. A Naked company's close two-way communication with its customers allows it to respond effectively to the latest market information.
  • Market as a community: Markets are often looked at as system in which buyers and sellers exchange value, where value is defined in financial and material terms. Yet strong emotional bonds form between buyers and sellers that can bring substantial social value to both parties. People will always seek to find meaning in their actions, yet companies often ignore this fundamental need. A Naked company provides both customers and employees with a self-contained community that encourages, nurtures, and thrives upon the creation of social value.
The case against the Naked business
When I bring this concept up to people, the inevitable reaction is "What an idealistic notion. Unfortunately, the world does not work like that." It is utterly self evident that close management of information is essential to any financially successful venture. In no particular order, the following are considered to be fatal flaws in the Naked philosophy.
  • Severe competitive disadvantage: The moment a company provides open information to the public, competitors will use that information to gain an advantage. Copycat tactics, preemptive product releases and attack ads that further publicize embarrassing information are all likely.
  • Expensive: By spending time providing reams of information, small companies are using scarce resources ineffectively. Seeking more sales or creating a improved product will yield better results.
  • Customers lack of business skills:No benefit is gained because customers lack the skills to interpret company information in any meaningful fashion.
  • Public relations nightmare: Honest publication of information means that the company will be displaying warts and all to the public. There is little opportunity to spin bad news or manage your financial data.
  • Customer relations nightmare: If you give customers a sense of empowerment, they will complain endlessly and publicly. This in turn leads to bad press and a loss of sales.
  • No one is doing this: Few profitable companies operate in this fashion. They must have already failed.
The case for a Naked business
The following are benefits of an OK company.
  • Passion: Companies with a strong vision tend to outperform those that focus solely on financial results. By building a culture around a philosophy that people can wholeheartedly believe in, employees and customers will give the extra effort necessary to ensure success.
  • Strong word of mouth presence: A company with a unique and appealing ideology stands out in the crowd. The fact that customers benefit from this ideology yields a powerful source of word of mouth advertising.
  • The customer's network is the company's network: A customer that truly believes that they are invested in a company feels comfortable sharing their contacts and resources. At the extreme end, the customer is a believer that happily volunteers for the company. A thousand customers have a larger and potentially more powerful network than a hundred employees.
  • Faster response to market change: Customers that complain or offer advice provide a highly responsive early warning system to changing needs or competitive threats.
  • Many eyes catch stupid mistakes: Strategic blunders are easier to catch when you have multiple people offering unbiased commentary.
  • Increased customer trust and loyalty: This in turn leads to retention and improved profits. Why go elsewhere when a company concretely demonstrates that it is deeply interested in listening to your needs?
  • Increased employee trust and loyalty: This also leads to retention and improved profits. Employees are the core asset of a knowledge-based company. By keeping them, you build an experience based sustainable competitive advantage.
  • One reality: The cost, both financial and psychological, of keeping multiple books, one for the public, one for the employees, and one for the investors is greatly reduced. The benefit is that customers and employees can talk the same language and use the same data to create mutually beneficial outcomes.
Key implementation areas
Let's suppose for a moment that benefits of an Open Kimono philosophy outweigh the detriments. What are the success factors that must be focused on to gain those benefits?. The follow are key implementation areas that must be addressed in order to achieve success.

  • Dedicated Leadership: Any culturally driven sustainable advantage needs to have buy-in and support at the leadership level. Words alone are meaningless. Consistent public actions by respected leaders help the cultural change permeate through the entire organization.
  • Customer and Employee Education: Data is useless unless the intended audience is capable of understanding it. Putting company information in format that is comprehensible to the customers and employees is a partial solution. Actively educating both customers and employees on the meaning and use of the data is equally important. If there is not an obvious connection between the data and the benefits received by the person digesting the data, then the system has failed.
  • Filtering through the noise: When everyone yells their opinion, it can be hard to capture any useful information. Rigorous data collection and analysis techniques can turn the outpouring of information into actionable solutions.
A strongly customer and employee oriented company is more likely to prosper than a profits oriented company. Profits are still important, but it is wise to remember that they are one metric amongst many. By focusing on satisfying a broad range of benefits instead of merely materialistic and financial benefits, a Naked company attracts and retains both superior quantities of customers and superior quality employees.

In the end, running a Naked company is as much a personal choice as it is a business decision. Openness, honesty, community and mutual respect are concepts I can believe in. All else being equal, what type of business would you want to devote your life to?

take care

PS: With some minor changes, this was an essay I wrote many years ago. In the subsequent years, transparency has come en vogue and it now seems everyone is spouting its praises. Which is a great thing. This message needs to be broadcast as loudly as possible lest it be lost in the morass of sub-optimizers twisting the truth in the name of profits.