About Xavier Forneris

I am fascinated by the world of Business and Entrepreneurship and I created this Blog with a simple objective in mind: to share my passion, to share ideas, and to generate a dialogue on a broad range of Business-related topics. My interests are very diversified (to a fault!) and include Business Strategy, Leadership, Corporate Social Responsibility (CSR), Corporate Governance, White Collar crime, Ethics, FDI, to name a few. My dual background in Law and Management will probably influence my choice of topics and my writing. Finally, as I have been working in the area of Economic Development for the last 17 years, no one should be surprised if I write quite a bit about emerging economies. However, I want to stress that the ideas and opinions I will express will be mine and solely mine and should not be interpreted as reflecting the ideas or positions of the World Bank Group.

The state of American tennis: how to get out of the doldrums?

By Xavier Forneris.

Followers of the blog may be surprised to see a post about sports in general and tennis in particular. Well, tennis is one of my passions, it is a business as well as a sport and form of entertainment, and don’t forget that my blog has “eclectic” in its name. I need to live up to this reputation.

Now, if you are a US-based tennis fan I suspect that the last thing you want to read is yet another article or blog post on how and why US tennis is in the doldrums. I apologize in advance but…have you looked at the ATP/WTA rankings lately [i]? Not our finest hour.

 On the men’s side here’s what the top 20 rankings look like on 10 Oct. 2012:

 ATP Single Rankings (1-20)

1. Federer, Roger (SUI)
2.  Djokovic, Novak (SRB)
3.  Murray, Andy (GBR)
4.  Nadal, Rafael (ESP)
5.  Ferrer, David (ESP)
6.  Tsonga, Jo-Wilfried (FRA)
7.  Berdych, Tomas (CZE)
8.  Del Potro, Juan Martin (ARG)
9.  Tipsarevic, Janko (SRB)
10.  Monaco, Juan (ARG)
11.  Almagro, Nicolas (ESP)
12.  Isner, John (USA)
13.  Gasquet, Richard (FRA)
14.  Raonic, Milos (CAN)
15.  Nishikori, Kei (JPN)
16.  Cilic, Marin (CRO)
17.  Wawrinka, Stanislas (SUI)
18.  Simon, Gilles (FRA)
19.  Kohlschreiber, Philipp (GER)
20.  Dolgopolov, Alexandr (UKR)

What do we see in terms of countries and regions represented (knowing full well that tennis players do not represent their country but themselves –except in the Davis Cup, the Fed Cup and the Olympics- and that many of them move and often live and train outside their country of birth)? The following observations can be made:

-A first, sad observation [sad for those, like me, who love the US and consider it home] is that there is no American in the top 10. The first American is #12 John Isner. He actually is the only American male in the top 20 players at the moment.

-The top 5 players are from Europe (I’m referring to the continent not the European Union; I’m thus including countries such as Switzerland, Serbia or Ukraine). In fact 15 out of the top 20 players are from the “old continent”.

-Of the European nations, Spain and France are the countries with most players in the top 20, with 3 each: Nadal (#4), Ferrer (#5), Almagro (#11) for Spain; Tsonga (#6), Gasquet (#13),and Simon (#18) for France. Switzerland and Serbia have 2 players each: Federer (#1) and Wawrinka (#17) for Switzerland; Djokovic (#2) and Tipsarevic (#9) for Serbia.

-It’s worth noting that 5 of the top 20 players stem from Central/Eastern Europe: in addition to the 2 above-mentioned Serbs, there’s a Czech (Berdych #7), a Croat (Cilic # 16) and a Ukrainian national (Dolgopolov #20). Some might be tempted to add Raonic to this list (born in Montenegro and residing in Monaco) but owing to his Canadian citizenship he will join John Isner in the North American contingent.

-There’s only one player representing the entire Asia-Pacific region: Nishikori from Japan (#15).

 -Finally, one South American nation deserves to be mentioned: Argentina, which counts 2 players in the top 20 (in fact both are in the top 10): Del Potro (#8) and Monaco (#10), continuing the legacy of Guillermo Vilas and José Luis Clerc.

One may object that maybe the Americans are just behind the 20th ranked player, and on the verge of entering the ‘first tier’ of the rankings. Unfortunately, if we look at the list of players from #21 to #40, we see that there are only 2 to 3 Americans there: Querrey (#22) is the best ranked in that second tier, followed by Roddick (who retired from professional tennis after the US open but it still in the list at #27), and Mardy Fish (#28).

Other than them it’s mosly -again- a European-dominated field: 2 German players (Haas and Mayer), 4 Spaniards (Verdasco, Granollers, Lopez, and Andujar) -which in my view confirms Spain’s position as the lead nation in the world of tennis today-, one Italian (Seppi), one Russian (Youzhny), two Frenchmen (Chardy and Benneteau), one Serb (Troicki)…I could go on and on..The final count is that 15 of the players between ranks 21 and 40 are from Europe; 2 from the US, and 1 from Latin America (Belluci, the only Brazilian in the top 40).

ATP Single Rankings (21-40)

21.  Haas, Tommy (GER)
22.  Querrey, Sam (USA)
23.  Verdasco, Fernando (ESP)
24.  Granollers, Marcel (ESP)
25.  Mayer, Florian (GER)
26.  Seppi, Andreas (ITA)
27.  Roddick, Andy (USA)
28.  Fish, Mardy (USA)
29.  Lopez, Feliciano (ESP)
30.  Youzhny, Mikhail (RUS)
31.  Chardy, Jeremy (FRA)
32.  Troicki, Viktor (SRB)
33.  Benneteau, Julien (FRA)
34.  Klizan, Martin (SVK)
35.  Melzer, Jurgen (AUT)
36.  Baghdatis, Marcos (CYP)
37.  Nieminen, Jarkko (FIN)
38.  Anderson, Kevin (RSA)
39.  Bellucci, Thomaz (BRA)
40.  Andujar, Pablo (ESP)

And if you have the patience of looking at the next 20 (from 41 to 60), you’ll see more Europeans and South Americans and only 1 US player (Harrison). To be fair we should mention the domination of the men’s doubles circuit by the Bryan brothers, ranked #1 and #2 in the world (though the only Americans in the top 20).

But perhaps, one hopes, the situation is different on the women’s side. I don’t want to depress you but here’s how the top 20 looks like on 8 October 2012:

WTA Singles Rankings (1-20)

1. AZARENKA (BLR)
2. SHARAPOVA (RUS)
3. WILLIAMS (USA)
4. RADWANSKA (POL)
5. KVITOVA (CZE)
6. KERBER (GER)
7. LI    (CHN)
8. ERRANI  (ITA)
9. STOSUR  (AUS)
10. BARTOLI (FRA)
11. WOZNIACKI (DEN)
12. IVANOVIC (SRB)
13. CIBULKOVA (SVK)
14. PETROVA (RUS)
15. VINCI  (ITA)
16. KIRILENKO (RUS)
17. KANEPI  (EST)
18. SAFAROVA (CZE)
19. GOERGES (GER)
20. LEPCHENKO (USA)

Not a great success either: only 2 US players in the top 20: Serena Williams (#3) and Lepchenko (#20 and who was born in Uzbekistan). Otherwise, we see, again, a large majority of Europeans, both from the former Eastern bloc (Belarus, Russia, Poland, Czech republic, Serbia, Slovakia, Estonia) and from ‘Western’ Europe (Denmark, France, Germany, Italy); as well as 2 from the Asia-Pacific region (Li Na from China and Sam Stosur from Australia).

So what does this say about US tennis? Why a country like ours, with 315 million inhabitants,  does not ‘produce’ more champions, more players in the top 20 than Croatia (4.5m inhabitants) or Switzerland (8m)? Why can’t we go back to the ‘golden age’ of Agassi, Sampras, McEnroe and Connors, when the US was the dominating force in tennis?

There must be something that the Europeans or the Argentines are doing better to identify and support their young players and bring them to this level. Can’t we take some cues from the tennis federations or tennis schools in Spain, Serbia, Switzerland, France or Argentina?

I would really be interested in hearing your views on what may explain this disappointing performance, what these other nations do better, what we could learn from them. Some of the contributing factors that I have heard or read about include the following:

–               The ‘hunger’ factor: players from poorer countries from the former Eastern bloc would be more hungry, more motivated, than those in richer countries.

–               The ‘clay’ factor: some explain that European players grow up playing -mostly but not only- on clay and argue that clay experience gives them an hedge in 2 or 3 ways: 1) a greater ability to patiently ‘construct’ a point than hard court players, 2) better footwork, dexterity or balance, 3) greater endurance (think longer games and frequent 5-set matches). In a 2010 interview in ‘The Independent’ [ii], Jose Higueras, himself a former top player from Spain who has been helping the USTA, confirmed that the Spanish players’ ability to move in all directions is one of their great strengths but he also mentioned another factor, which is that the Spanish “school” of tennis places less emphasis on developing junior champions. They only use junior tournaments as a way to develop.

–               The ‘infrastructure’ factor: others credit the tennis infrastructure in these more successful countries. For instance, RPT (an outfit founded by Luis Mediero that certifies coaches in the Spanish techniques) explains that Spain has ‘more than 1,000 tennis schools distributed all over the country, 100 competition tennis teams, 53 ATP and 33 WTA tournaments and hundreds of national tournaments in different categories’[iii]. Youzhny, the Russian player said of Spanish tennis: ‘They have a lot of courts and good facilities to practise…It’s not really expensive to practise in Spain for Spanish people.’

–               The ‘training technique’ factor: for yet other people, the differences in training techniques between Europe and the US, on what academies and coach teach and emphasize would play an important role in their respective performance.

–               And of course, the ‘success breeds success’ factor: it’s clear that the lack of (male) American players in the top 3, top 5 or top 10 generates less interest in the sport in the US (granted, it has never been one of the major sports – baseball, football, basketball), which in turn brings less sponsorship and TV coverage, which attracts fewer young people to the sport, and fewer young practitioners generate less champions…

Are we trapped in a sort of vicious circle? I hope not and that the up-and-coming players- Ryan Harrison, Jack Sock, Christina McHale, Sloane Stevens, Coco Vandeweghe among others- will prove in the coming months/years that US tennis is back. The excellent performance of the US tennis team in the Davis Cup 2012 (only eliminated in the semis by Spain) is also very encouraging.

So what do you see as the possible solutions for US tennis? Do you think any of the following are viable options?

–       Make clay more prominent (and hard court less uber-dominant)?

–       Have a well-funded tennis program in primary and high schools to ‘cast a wider net’ (as recommended in a recent New York Times article [iv]?

–       Make tennis more affordable and accessible to everyone, less exclusive as a sport?

–       Open the doors even more widely to foreign coaches and players? This would entail granting them visas to work and study in this country as well as fellowships to colleges/universities, so they would bring with them their techniques/skills and help rise the level of tennis. Many of the young foreign players who will come here to study and play will likely want to stay in the country and become citizens, which could also help increase the number of US champions over time.

Is there anything else we are not doing or not doing enough? I hope this post sparks a constructive debate and not a negative one. Our objective, as US-based tennis fans should not be to point fingers at the USTA, or at this or that person, but to find solutions to make tennis a bigger, more visible sport in this country, where more champions keep the interest growing and not declining as seems to be the case now. I’ll see you on the court.


Sources used and credited:

[i] You can retrieve the men’s rankings covered in this post on the ATP World Tour website at: http://www.atpworldtour.com/Rankings/Singles.aspx. You can retrieve the women’s rankings covered in this post on the WTA website at http://www.wtatennis.com/page/RankingsSingles/0,,12781~0~1~100,00.html

[ii] Read the article about the domination of Spanish tennis and the interviews of Higueras and Youzhny in “The Independent” at: http://www.independent.co.uk/sport/tennis/how-the-us-open-turned-into-the-spanish-masters-2074063.html

[iv] Read the New York Times article about the state of US tennis and the role that public schools could play: http://www.nytimes.com/2012/09/10/sports/tennis/to-excel-in-tennis-united-states-should-look-to-high-schools.html?pagewanted=all&_r=0

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Inclusive Business competition: winners were announced

By Xavier Forneris

Last December, I mentioned a competition launched by the Group of 20 (G20) and IFC -full disclosure: IFC is my employer- to find the best examples of “Inclusive Businesses”, i.e., businesses that provide goods, services and livelihood opportunities to the poorest of the poor, those who live at the “base of the pyramid” (BOP).

The results have been announced a few days ago in Los Cabos, Mexico (June 18) and the winners are:

Agrofinanzas (Mexico)
Apollo Hospitals Group (India)
Bakhresa Grain Milling (Malawi)
Brilla, a program launched by Promigas (Colombia)
Corporación Universitaria Minuto de Dios (Colombia)
Ecofiltro (Guatemala)
Engro Foods Limited (Pakistan)
Jain Irrigation Systems Ltd. (India)
Manila Water Company (Philippines)
Millicom (Luxembourg)
Reybanpac Unidad de Lácteos (Ecuador)
Sustainable Harvest Coffee Importers (United States)
Tenda Atacado Ltda (Brazil)
VINTE Viviendas Integrales (Mexico)
Waterlife India Private Limited (India)

 

For more information on the competition go to: http://www.g20challenge.com/

To read about the winners, go to: http://www.g20challenge.com/winners/

And to learn about IFC’s Inclusive Business Models program and activities go to: http://www1.ifc.org/wps/wcm/connect/AS_EXT_Content/What%20We%20Do/Advisory%20Services/Inclusive%20Business

 

Facebook’s “less than stellar” IPO

By Xavier Forneris, May 22, 2012

Since I started my blog last December I have written several posts on the valuation of internet businesses in general and social media in particular. I noted that the valuation of these companies and the hype surrounding their IPO’s seemed, with some exceptions, excessive. To the chagrin of my friends who love their Facebook and Twitter, I mentioned my concern about the possible occurrence of a new internet “bubble”. I said that the then forthcoming Facebook IPO would be an interesting test.

Well, the IPO took place last Friday (NASDAQ:FB), as everyone knows by now, and it has been less than stellar thus far, and this is an understatement. From an offer price of $38,  Facebook’s stock opened at $42 on Friday, May 17. It hovered above $40 and then started to sink quickly. With heavy support from Morgan Stanley, the lead underwriter, the stock closed on Friday at just above the IPO price. But Morgan Stanley could not afford to support Facebook’s stock price indefinitely. In both trading days this week (Monday and Tuesday), Facebook’s stock plummeted. Tonight (05/22), it closed at about $31, down 18% from the list price. And it continued to fall in after hours trading ($30.50 at 07:59pm EDT).

And now the blame game has started to determine whose “fault” it is: Mark Zuckerberg, Facebook’s Chairman and CEO? David Ebersman, its CFO? The underwriters and their analysts? Greedy or naïve investors who equated “like” and “buy”? Not surprisingly, several theories and possible explanations have already appeared in the media. These theories are not mutually exclusive and could all have contributed to the situation.

According to Business Insider’s Henry Blodget (05/22) the analysts at the lead underwriters for the Facebook IPO may have secretly cut their estimates and this information about the estimate cut was “verbally” shared with institutional investors but not with smaller, individual investors. Once these institutional investors heard about the estimate cut they became more cautious about the IPO, possibly buying less shares than they initially intended.This form of “selective dissemination of information “ might constitute a violation of U.S securities laws and could very well prompt an investigation by the SEC and /or FINRA. Before Blodget, Alistair Barr reported on Reuters (05/22) that the research analysts at the lead underwriters—Morgan Stanley, Goldman Sachs, and JP Morgan—had cut their earnings estimates for Facebook during the company’s IPO roadshow, a highly unusual event.

Another possible explanation is that the offer price was selected for “perfection”, meaning that Mark Zuckerberg and his team would have chosen that particular price in order to attain the most symbolic objective of a $100 billion valuation. This is another way of saying that the price was “disconnected from the fundamentals”, which is seldom a good thing.

Incidentally, I reported a few weeks ago that when Facebook acquired Instagram for $1 billion, Facebook had to “show its hand” and give Instagram a price for its own stock because it was not an all cash deal. According to media reports that price was about $30 per share of Facebook…pretty close to the $31 closing price today. Maybe, the stock should have been offered at $30 instead of $38…

Finally, some are saying that too many shares were offered while others are blaming NASDAQ for its system failures on the first trading day. What ever the reason may be, I think we can all agree that this is already a public relations disaster for Facebook. It could turn even “uglier”: a Los Angeles-based law firm already filed a lawsuit against Facebook and the IPO’s underwriters; while in New York another group of investors seeking class-action status sued Nasdaq.

Now, I don’t know who’s to blame, if anyone, nor would I dare to predict what the stock price will do in the future. Over the long run, Facebook may turn out to be a great investment. With close to a billion users, Facebook has a very real and significant potential for more advertising revenues. The future will tell if the company can translate this potential into real revenues.

Sources / Read More:

“EXCLUSIVE: Here’s The Inside Story Of What Happened On The Facebook IPO”, Henry Blodget, Business Insider, May 22, 2012. Retrieved at: http://www.businessinsider.com/exclusive-heres-the-inside-story-of-what-happened-on-the-facebook-ipo-2012-5

“Insight: Morgan Stanley cut Facebook estimates just before IPO”, Alistair Barr, Reuters, May 22, 2012. Retrieved on Yahoo! News at: http://news.yahoo.com/insight-morgan-stanley-cut-facebook-estimates-just-ipo-051601330–sector.html

“4th Update: Facebook Shares Continue Selloff On 3rd Trading Day”, Drew FitzGerald, Dow Jones Newswires, retrieved on The Wall Street Journal online edition, May 22, 2012, at: http://online.wsj.com/article/BT-CO-20120522-719402.html

Facebook: an IPO in the coming weeks, a recent acquisition, and the issue of valuation

By Xavier Forneris

In my Dec. 8, 2011 post on valuation of internet businesses I talked about the possible Facebook IPO, noting that the IPO might raise $10 billion, which would value the company at about $100 billion (about half the size of Microsoft). Since then, two major developments occurred: first, Facebook confirmed its intention to go public. And second, Facebook made a major acquisition which gives us an interesting insight into Facebook’s potential value. In early April, Facebook bought Instagram, a photo-sharing service, for $1 billion . And since it was not an all-cash deal, Facebook had to give Instagram a price for its own stock, which apparently was about $30 per Facebook share. That share price would value Facebook at “only” $75 billion. However, in a very interesting piece, the New York Times  (Business section, April 19) wrote that, as part of the acquisition negotiations, the companies discussed a possible Facebook valuation of $104 billion. This is consistent, and even slightly above the analysts’ estimates which I mentioned back in December when the Facebook IPO was a growing -but yet unconfirmed- rumour on Wall Street and in Silicon Valley. This higher valuation is also consistent with what Facebook is said to have traded for on the secondary market (up to $40 a share).

The actual IPO, expected in May, will reveal whether Facebook’s valuation is closer to $75 billion or $104 billion. In a way, either value would be quite remarkable for a social network that started in 2004 and only had $3.7 billion in revenue and $1 billion in profit last year….Regardless of the exact amount, it is safe to assume that there will be more questions about the methods and multiples used to value internet businesses as well as more talks about the “next internet bubble”.

Morocco’s Success in the Aerospace Industry

 The Wall Street Journal ran a very interesting piece today on  Morocco’s success in developing its aerospace industry.

The story should inspire and give hope to many developing countries. It proves that advanced manufacturing is not totally out of the realm of possibilities for these countries. Manufacturing is generally not a big part of the economies of many developing countries – that tend to rely on agriculture, extraction of mineral resources, or light and basic manufacturing. Morocco is not the first developing country to foray into a sophisticated industry such as commercial aeronautics. The WSJ mentions, as prior examples, Brazil, Indonesia, Mexico and South Africa. Brazil is probably the most successful example, with its aircraft maker Embraer.

This story, as the story of Intel’s investment in Costa Rica in 1998, also shows what a powerful ‘game-changer’ foreign direct investment (FDI) can be. In the case of Morocco, there was clearly a strong resolve and policy drive by the Government, but it is FDI that helped achieve what probably appeared to many observers as a very ambitious, not to say utopic, objective a decade ago, bringing capital, technology, skills-building and market access. Over the past 10 years the country has managed to attract significant investments from aerospace leaders such as Boeing, Safran, United Technologies and Bombardier.

What is also interesting in the case of Morocco is that the success story started with a relatively modest operation. Around 1999-2001, Royal Air Maroc, the national carrier, managed to convince Boeing (a long-time supplier of RAM) to partner with it and a French electrical wiring company to start a small project preparing cables for Boeing 737 airplanes. The level of quality achieved by workers surprised everyone and…the rest is history.

The sector now employs almost 10,000 workers who earn about 15% more than the average monthly wage (which remains relatively low for Western standards at US$320/month). As the WSJ correctly points out, creating jobs is a strategic imperative for the stability of the country, in the aftermath of the Arab Spring. Morocco remains deeply affected by high unemployment, particularly in the young segments of the population.

In my line of work, I am well aware that there is much more to say in order to explain why Morocco succeded and why replicating this success story will be very difficult for many other developing economies, but as a development professional working on private sector development, I found the piece very interesting and encouraging and wanted to share it with you.

Source: Morocco’s Aviation Industry Takes Off, by Daniel Michaels, The Wall Street Journal, published in the U.S edition on 21 March 2012. Link to the WSJ article:

http://online.wsj.com/article/SB10001424052970204059804577226763868263758.html

Xavier Forneris.

Base of the Pyramid (BoP): the “must-reads”

In 2008, Stanford University’s Social Innovation Opinion Blog published a post by a Grace Augustine titled BoP 101: Essential Reading for Those Interested in the Base of the Pyramid” (Oct 07, 2008). I encourage everyone interested in this space to read this post, which can be retrieved at: http://csi.gsb.stanford.edu/bop-101-essential-reading-those-interested-base-pyramid

I’ll first summarize Augustine’s post and then complement it with some papers and books published both before and after her post. In the interest of brevity, the names of the publishers or journals where these papers appeared are omitted, but an internet search on the title and author will generally lead you to the relevant publication.

In her post Augustine does not just provide a list of “must-reads”; she offers a useful and short genesis of the BoP theory, summarizes what each of the papers added to the conversation, and also mentions key developments around the theory (e.g., UN Global Compact, Millenium Development Goals, the MNC’s quest for new markets in a slowing global economy, etc.), which provides useful context to understand why the theory emerged and gained traction.

Augustine starts, logically, with what is widely seen as the seminal piece, the first article on the BoP: ”Strategies for the Bottom of the Pyramid: Creating Sustainable Development” published in 1999 by two academics: C.K Prahalad (University of Michigan Business School) and Stuart Hart (then at the University of North Carolina’s Kenan-Flagler Business School). Prahalad and Hart are often considered the “fathers” of the BoP theory, which they viewed both as a business strategy for transnational companies and as a potential tool for poverty alleviation.

This serves as a useful reminder that the BoP theory is rooted in the premise that traditional aid has had limited impact on poverty alleviation and that the time has come for a new strategy. This argument was not totally new. The same year as Prahalad and Stuart wrote their first article on the BoP, Amartya Sen published Development as Freedom (1999). The aid indictment was subsequently reinforced by influential development scholars who challenged the traditional model of development aid (Hernando de Soto’s The Mystery of Capital, 2000; Sachs’s The End of Poverty, 2005; William Easterly’s The White Man’s Burden, 2006). So Prahalad and Hart were not the first nor the last scholars to write about the shortcomings of aid as a way to alleviate poverty but they saw the BoP theory as a new avenue for tackling the poverty challenge.

The concept was refined in a second piece, published in 2002 by A. Hammond of the World Resource Institute (WRI) and the same C.K. Prahalad in the Harvard Business Review (HBR), titled Serving the World’s Poor, Profitably.

The “co-fathers” of BOP, Prahalad and Hart then separately published two books on the BoP theory:

  • The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits, C.K. Prahalad (2004)
  • Capitalism at the Crossroads: The Unlimited Business Opportunities in Serving the World’s Most Difficult Problems, S. Hart (2005)

Augustine described both books as must-reads while summarizing their respective themes. She then mentioned a 2006 critique of the BoP theory posted by University of Michigan professor Aneel Karnani on NextBillion.net: Fortune at the Bottom of the Pyramid: A Mirage.

Finally, Augustine mentioned a few publications on sub-topics of the BoP theory:

BoP and Innovation:

  • The Great Leap: Driving Innovation from the BoP, S. Hart & C. Christensen (2002)
  • BoP Protocol, S. Hart (second version)

BoP and Economic Development:

  • Reinventing Strategies for Emerging Markets: Beyond the Transnational Model, T. London &  S. Hart (2004)
  • A Base-of-the-pyramid Perspective on Poverty Alleviation, T. London (2007)
  • The Next 4 Billion Report, WRI/IFC (2007) [which Augustine describes as the most comprehensive document for defining and understanding the BoP market].

BoP and Finance / Impact investing:

  • Meeting Urgent Needs with Patient Capital: an article by Jacqueline Novogratz, founder and CEO of Acumen Fund, one of the pioneering organizations in this field, published in MIT’s Innovations journal.

Unfortunately, Augustine’s overview ends in 2008, at the time of her post. I hope she has done or can do an update, for it was extremely clear and useful contribution. Here are some of the post-2008 reports and publications I would like to recommend, as well as some pre-2008 ones which were not on Augustine’s list:

  • Accelerating Inclusive Business Opportunities: Business Models that Make a Difference, B. Jenkins, E. Ishikawa, A. Geaneotes, P. Baptista, amd T. Masuoka. IFC (2011)
  • Creating Shared Value, M. Porter (2011)
  • Scaling Up Inclusive Business: Advancing the Knowledge and Action Agenda, B. Jenkins & E. Ishikawa. IFC and the CSR initiative at Harvard Kennedy School (2010)
  • The Next Billions: Unleashing Business Potential in Untapped Markets. World Economic Forum (2009)
  • Creating Value for All: Strategies for Doing Business with the Poor. UNDP (2008)
  • Make Poverty Business: Increase Profits and Reduce Risk by Engaging with the Poor, C. Wilson & P. Wilson (2006)
  • Developing Native Capability: What multinational corporations can learn from the base of the pyramid, S. Hart & T. London (2005)
  • Banker to the Poor: Micro-Lending and the Battle Against World Poverty, M. Yunus (1999)
  • Unleashing Entrepreneurship: Making Business Work for the Poor, UNDP, Commission on the Private Sector and Development (2004).

Relying on a community to perform tasks for you: Crowdsourcing

By Xavier Forneris

Innovation can not be reduced to hardcore R&D. Developing a new way of doing business, of procuring or delivering a product or service, is a valuable form of innovation, even though no patent is filed. A very interesting innovation in the private sector is the utilization of “the masses”, meaning people like you and I, multiplied by millions. I am referring to the “crowdsourcing” concept.

What it is

For Jeff Howe, who coined the term in a 2006 Wired magazine article (see reference at the end of my post), crowdsourcing is simply:

The act of outsourcing tasks traditionally performed by an employee or contractor, to an undefined, large group of people or community (a “crowd”), through an open call

The community is the “crowd”; the open call is more often than not made on the web, by posting requests on the internet. We can say that crowdsourcing is a variation, an evolution of the well-known “outsourcing” concept. But outsourcing is so last century. Crowdsourcing is the latest thing…or is it?

How new is it?

Although the term only appeared in 2006, a reporter for memebern.com named Stuart Thomas went back to the history books and found that this “new” concept is actually quite old. I hope Stuart will not mind that I use two of the examples he’s providing, which I loved. In 1714 the British government made an open call to the public and offered a cash prize to anyone who could offer a simple and practical method for determining with precision a ship’s longitude. Under Napoleon I, the French government offered a cash prize to anyone who could devise a cheap and effective method of preserving large amounts of food. Of course Napoleon was concerned about a special kind of “food security”: he wanted to make sure that soldiers of the Empire waging war in far away lands would have ample and safe food supply. There are more examples in Stuart’s article, which I really recommend reading if you are interested in the subject (and want to know whether these two historical crowdsourcing initiatives led to any innovation). The point here is that “crowdsourcing” is not as new as some would like you to believe. But the web has been a tremendous enabler…once more I would say. It allows to reach a broader audience and therefore to more efficiently and effectively publicize and then manage the crowdsourced projects.

Who is using crowdsourcing?

You may think that the strategy is mostly used by non-profits and small firms or individual business owners and other start-ups in an effort to cut costs. Sure, but not only. In fact “everybody and their brother-in-law is doing it”. Let me give a few examples:

According to Stuart Thomas (Memebern, Sept. 15, 2011), Iceland is crowdsourcing its new constitution while Microsoft is crowdsourcing aspects of Windows 8. These entities are not exactly your typical feldgling start-up or NGO.

Artists and writers are doing it: best-selling author James Patterson invited members of the public to write 28 of the 30 chapters of his book, AirBorne. That’s crowd-writing. Another example is Wikipedia. What is it if not an encyclopedia written by the masses?

Local governments are doing it: the city of Salt Lake City has been using crowdsourcing for transit planning.

Even scientists are doing it: an astronomy project (Galaxy Zoo, 2007) relied on 150,000 stargazers to classify millions of pictures of galaxies. The task is not complicated but it would have taken several lifetimes to the members of the research team. With the power of the masses, it was done at a comete’s speed…

It is used in advertising. A famous example, cited by Wikipedia, is Doritos (snack food), which crowdsourced the production of an ad for the Super Bowl. Football and Doritos fans had a chance to win a cash prize, a trip to watch the Super Bowl, and the proverbial “15 minutes of fame”.

Entrepreneurs are using it, especially start-ups and small companies, for a range of needs, from designing their e-commerce website to raising capital. The latter is called “crowdfunding”.

But now, large firms are also coming to it, as reported in the Wall Street Journal (17 January 2012). The Journal cites AOL which used crowdsourcing last year to get an inventory of its video library; it adds that AOL, Microsoft, and LinkedIn have all used the services of Amazon’s Mechanical Turk crowdsourcing service (over 500,000 registered “workers” from 190 countries).

The applications are infinite. At this stage of the paper, if you are a parent, like me, you can’t help having this inner dialogue: “Are my children crowdsourcing their homework? No way! I don’t think so. I hope not. They can’t do that. Can they?”.

Why it works

According to Jeff Howe (quoted in Wikipedia) the concept depends essentially on the open call. Because it is an open call to a group of people, it naturally gathers those “who are most fit to perform tasks, solve complex problems and contribute with the most relevant and fresh ideas.” Howe further explains that because technological advances have allowed for cheap consumer electronics, the gap between professionals and amateurs has been diminished. As a result companies are now able to take advantage of the talent of the public. Promoters can tap a wider range of talent than might be present in their own organization. My take on this: the masses are more creative, innovative, and smart than you and I would have thought. And if businesses find that it’s cheaper and faster than traditional outsourcing or hiring temps, they’ll keep using it.

Is money always involved?

Not always. Some projects offer monetary incentives, cash prizes, but not to every participant. Usually it’s only the person who found the right solution who gets the compensation; there’s a competitive aspect to many crowdsourced projects. But other projects only offer to the contributors a chance of fulfilling a hobby, the satisfaction of having contributed, of working collaboratively, with a community, of being publicly recognized.

Is this ideal, a panacea?

Sadly, like most things in life, it’s neither ideal nor a panacea. There are most certainly fields that do not lend to crowdsourcing because of issues of confidentiality, security, liability. Also, crowdsourcing doesn’t always produce the quality results one is looking for. Contributors are usually not protected by a written contract. Companies are not guaranteed that the contributors will remain involved throughout the duration of a project. Also, it can be abused to source cheap or even unpaid labor. Harvard Law School professor Jonathan Zittrain talks about the risk of “digital sweatshops”, reminiscent of the Nike-China factory scandal of years ago. Facebook faced these criticisms in 2008 when it began its “localization program” inviting users in each country to translate for free. To address these risks, the ‘crowd’ is increasingly vetted in advance, selected and professional ‘brokers’ facilitate the exchange between outsourcing companies and the ‘crowd’. An example is offered by Amazon.com’s Mechanical Turk, which empowers firms, developers and creators by “lubricating the relationship between them and crowdss”, and by “creating a platform through which crowds and employers communicate and perform transactions in a way that is safe for both parties”. Other examples of this trend towards professionalization and intermediation include OnForce, Elance.com, Innocentive, CrowdSpring, and Guru.com.

What functions lend themselves to crowdsourcing?

As mentioned above, not every function can be crowdsourced; as the CEO of a company, you would perhaps outsource what you perceive as support or back-office functions (accounting, travel services , IT, some but not all functions of H.R, etc) but you would not outsource to someone you do not control an activity that is your core competence. The same caution probably applies to crowdsourcing.

ScalableWorkforce has identified 5 business areas that lend themselves well to crowdsourcing:

1. Problem-solving (medicine, biotech, science, manufacturing and engineering)

2. Design (designing clothes, designing websites…)

3. Simple, general, or routine tasks (transcription services, surveys, copy writing, proof-reading, editing, internet research, etc.)

4. Testing (particularly for software, games, websites…). Who would make a more enthusiastic tester of a new video-game than a hardcore gamer? I bet some would pay for the privilege and opportunity to be the first users…

5. Customer support: sometimes the enthusiastic (and unpaid) users of a product can provide better information to other customers than the manufacturer’s staff itself.

In closing, I would be interested in knowing what you think of crowdsourcing. Is it a fad or something that is here to stay, that has great potential? In which field? Have you used crowdsourcing and, if so, where you satisfied with the experience? If you haven’t used it yet, for which task or project would you use crowdsourcing?

Source / Read more:

“The rise of Crowdsourcing”, Jeff Howe , Wired, June 2006.

“Big Firms Try Crowdsourcing”, Rachel Emma Silverman, The Wall Street Journal, paper edition, Jan. 17, 2012.

“9 examples of crowdsourcing before crowdsourcing existed”, Stuart Thomas, memebern.com, Sept.15, 2011. Retrieved at: http://memeburn.com/2011/09/9-examples-of-crowdsourcing-before-%E2%80%98crowdsourcing%E2%80%99-existed

“10 examples of how crowdsourcing is changing the world”, The Social Path, May 29, 2009. Retrieved at: http://www.thesocialpath.com/2009/05/10-examples-of-crowdsourcing.html

 “Crowdsourcing Business Examples”, ScalableWorkforce (undated). Retrieved at: http://www.scalableworkforce.com/crowdsourcing-history-background/crowdsourcing-examples-in-business/