Opening Governance in the Private Sector

Anita McGahan — March 17, 2016


By Jay Horwitz and Anita McGahan

The opening of governance is transforming large multinational companies, small enterprises, and every type of private-sector enterprise in between. At the same time, the opening of governance is calling into question whether corporations are needed at all to take up opportunities for creating value, especially when those opportunities are tied to big data.

What does it mean to open governance in the private sector? At the most basic level, the idea of opening governance involves questioning whether the large and cumbersome decision-making processes that saddle most companies are necessary.In some cases, companies are so inefficient as vehicles for making something happen that they are not necessary at all. For example, the open-source software movement has generated countless algorithms by engaging programmers who want nothing more than to have their code used.

In most cases, though, opening governance offers companies new ways of organizing to lower costs, improve operations, increase customer relevance, and generate new revenue. Costs go down when crowdsourcing replaces expensive marketing analysis; when big data expose supply-chain problems; and when field managers are given more authority because their decisions can be communicated quickly up an organizational hierarchy. All of these opportunities can make companies more agile. For example, in banking, big data makes it easier to monitor and assess the performance of loans to small-business customers. Because the costs of lending are lower and because monitoring is more effective, a bank can justify delegating more authority to branch managers to make the loans in the first place.

Opening governance improves operations as well. Through “innovation jams,” online-suggestion boxes, and employee competitions, companies are crowdsourcing ideas about how to jettison outdated processes and procedures. Data collected online point to hot spots and bottlenecks in just about every facet of an organization’s operations. Starbucks, for example, used big-data and analytics to identify an opportunity to improve delivery times on drinks to rushing commuters by allowing online ordering of drinks in advance.

Many companies have improved the relevance of their offerings to customers by opening governance. Prominent companies have built new businesses by giving end-users the means and incentive to provide information about where they’ve been (e.g. Yelp and Foursquare), what they like (e.g. Reddit, Amazon, Netflix), who they are friends with (e.g. Facebook), who they are influenced by (e.g. Spotify, Twitter), and who they have business relationships with (e.g. Linkedin). By synthesizing customer feedback, these organizations are offering tailored services that are immediately relevant, and then delivering those services with unprecedented speed. Uber has turned the taxi industry on its head by making rides easier to order, track, and pay for.

Opening governance has also opened up unprecedented sources of value. In healthcare, the secure transmission of radiology data enables quicker and more accurate X-ray analysis. Because physicians and other health providers can communicate securely, they can consult with one another more widely. The improvements in patient care are remarkable: earlier diagnosis, more accurate diagnosis, better treatment plans, greater treatment compliance, and fewer complications. Analogous revenue improvements are emerging in a wide range of core service industries including education, finance, transportation, retail, logistics, distribution, media, entertainment, and lodging to name a few.

Revenue enhancement is also exploding in manufacturing. In the automotive industry, 3-D printing systems enable greater vehicle customization, but only when decision systems are set up to convey customer preferences back through the distribution chain. Here, opening governance is defined by the restructuring of resource-allocation decisions into algorithms for running manufacturing lines based on real-time data on customer preferences. What opening governance does is substitute the interventions of factory managers with optimized, machine-generated instructions on which cars to build when. The opening of governance becomes the third leg to complement big data and analytics.

Just as in the public sector, the opening of governance in the private sector means greater transparency and accountability in top-management decision-making. The movement from the collection of big data toward effective inference requires exposing algorithms, such as when an airline tells you why you weren’t upgraded despite being first on the list. Making effective inferences and getting the algorithm right is critical, as anyone who was denied a seat on an airplane can tell you. Given the range of issues, the scope of the opportunity, and the consequences of getting this wrong, we need to deploy a generation of talented doctoral students and faculty to tackle opening governance. That’s just what we are seeking to do.