The Transparent Corporation

 
 
By eweek  |  Posted 2003-11-04
 
 
 

The Transparent Corporation


The digital revolution is shredding, forever, the curtain that once hid all sorts of information about corporate behavior, operations and performance from public view. Yet few companies are ready to handle the new scrutiny—and this transparency is proving to be increasingly costly and upsetting for companies struggling with new levels of exposure.

In their just-released book The Naked Corporation: How the Age of Transparency Will Revolutionize Business, author Don Tapscott and coauthor David Ticoll assert that to thrive, companies must accept the fact that partners, customers, the government and the general public have unfettered access to more information about them than ever before, and must conduct themselves accordingly; conversely, companies that try to halt the rising flow of information or ignore these forces of transparency do so at their peril.

CIOs, the guardians and designers of information systems inside and outside the enterprise, will play a key role in how companies formulate strategies to deal with the new openness, for better or worse. "In an age when networks put unprecedented amounts of information out there for anyone to see, intended or not, corporations have no choice but to rethink how they build their data streams, and to rethink their values and behaviors," Tapscott told CIO Insight Executive Editor Marcia Stepanek in a recent interview. "If corporations are going to be naked, theyd better be buff!" An edited version of his remarks follows.

The corporation is becoming naked, and its getting uncomfortable for a lot of people. In a world of instant communications, whistle-blowers, inquisitive media and Googling, citizens and communities are routinely putting firms under the microscope as never before.

Theres no more sticking your head in the sand. An old force has been quietly gaining momentum during the last decade; it is now triggering profound changes across the corporate world, with far-reaching implications for almost everyone. This force is transparency.

Transparency means far more than the obligation to disclose basic financial information. Were at the start of a transparency revolution, and information technology may well be the most powerful single force for transparency in our time. Whereas yesterdays dominant broadcast media were about one-way, centrally and corporately controlled, single-message delivery, the multidirectional Internet is the opposite. No one controls its content—except for its users. The same viral marketing that made Napster an overnight success can now pummel an unsuspecting company with sarcasm, in the form of parody Web sites. Increasingly, consumers depend on growing transparency to protect themselves (against price-gouging) and prepare for marketplace combat, while they guard against excessive inroads into their privacy by companies seeking to market to them better.

Visibility and transparency mean that validation of a claim is rarely more than a click away; blind trust is disappearing. In other words, transparency is something that can be done to a corporation as various stakeholders have unprecedented access to do their own legwork, inform others, scrutinize and even self-organize. Companies that are passively transparent are its victims. But transparency is also a force that firms can actively embrace, using candor to build trust and prove their value and values.

Next Page: Blogs, martyrs and creating images of trust.

Blogs and Martyrs


Blogs and Martyrs

This may sound odd, of course, given current thinking about corporations, which are still weathering a crisis of trust on a scale unseen since the Wall Street crash of 1929. But to build trusting relationships and success in a transparent economy, growing numbers of firms in all parts of the globe will have to behave more responsibility and more openly than ever. Firms that exhibit ethical values, openness and candor have discovered that they can better compete and profit. Some figured this out recently, while others have understood it for generations.

Now, when I talk about the Internet, I mean more than the World Wide Web. The Internet extends from Weblogs and e-mail to mobile phones and handheld computers and, just now out of the gate, cameras in mobile phones, wireless communications for specialties like healthcare, education, security and gaming, and communicating chips embedded in everything from running shoes to soup cans to door handles, production lines, diaper boxes and prosthetics. Call it whatever you like—the Hypernet, pervasive computing or ambient intelligence. The point is, the physical world is watching, providing information back to corporate stakeholders. Organizations that wish to sustain high performance in this evolving knowledge economy will have no choice but to create new images of trust, founded in transparency. Todays winners, increasingly, undress for success.

Transparency is not an abstract concept—it has a physical embodiment, the stakeholder web. The Internet has created a web of stakeholders that every company participates in, and these stakeholders are scrutinizing the company 24/7. Most of the time, these stakeholder webs are fairly dormant, until something happens, some kind of important event or activity or information disclosure that triggers an increase in the activity or the size of the stakeholder web.

Some companies dont even realize they have a stakeholder web until they get charged with doing something inappropriate. Home Depot, for example, had a fairly dormant one until one day, the Rainforest Action Network became part of the web and got very active, deciding that Home Depots suppliers were logging old-growth forests. These activists didnt go to some global government to complain, because there isnt one, nor will there be in our lifetime. Instead, they went to the Internet, and they organized a powerful campaign. As a result, a couple of years later, Home Depot has become a leader in defending old-growth forests. The firm had to get buff—to have values and behavior consistent with those of its stakeholder web. This is just one, small example of the force of transparency on an organization.

New strategies, mostly aimed at building trust, must be put in place. But dont fake it, spin or fib. In the transparent society, youve really got to be as good as you say you are, because its getting harder and harder to control the fallout when conflicts with your story arise. Martha Stewarts downfall is emblematic. Martha was the icon of the pastel-tinged family lifestyle, and her message was trust at the highest level. Her fantasy was how to articulate an aesthetic of caring into daily life. If not Martha, then who? Because of the forces of transparency, and Marthas inability to control the message once the companys stakeholder webs began buzzing, the appearance of hypocrisy hurt the company more than whatever it was that Martha was accused of doing. The Internet makes everything appear much larger. Trust took a double beating. And partly what kept Marthas troubles alive were special sites on the Web and the information machine that churned out "Martha Watch" blogs and parody Web sites throughout her ordeal. She had little control over any of it.

Next Page: Strategies for managing corporate information transparency.

Transparency Strategies


Transparency Strategies

Wouldnt 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 context—for example, directly through a third-party NGO (nongovernmental organization) or through some other vehicle—and under what rules and governance of procedures?

Right now, its 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 dont 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 Im 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 engagement—are 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.

Dont 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 compliance—not full transparency, and only for one stakeholder group, shareholders. Sarbanes-Oxley promotes a very limited form of candor—forced 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 theyre 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. Whens 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 tomorrows marketplace. Companies that refuse to do this operate at their own risk. Increasingly, consumers, as in Home Depots 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 didnt 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 Palmisanos compensation program and IBMs governance and disclosure policies. They need to know about IBMs 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 IBMs future technology, directions, and architecture, what the Web services strategy is, whether it dovetails with Microsofts strategy, and so on. Thats why companies must move toward a much higher degree of internal openness and candor toward their own employees. This isnt simply New Age stuff. Its 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 cant 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 Tides ad firm can try to convince you that it does, but thanks to communications technology, if Tide doesnt 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 itll 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 its not pretty, as when Progressives 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 Lego—for free—to 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? Im 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, heres how much your materials will be to do this work for us, heres how much labor will cost, heres how much overhead will cost, heres what we think is a fair return on invested capital. Eugene Polistuk, the CEO of Celestica, says its like were naked here, and he says you have to get naked for these network business models to work. And, in fact, one of Celesticas key strategies is to increase transparency within its Business Web because that, in turn, drops transaction, contracting, interaction and partnering costs, and itll help make Celestica the lowest-cost manufacturer of electronics equipment.

Transparency is so important in the supply chain because were 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.

Next Page: Where transparency is problematic for valid reasons.

Transparency Versus Protection


Transparency Foggers

Of course, there are many obstacles to complete transparency, and some of these are valid. There are trade secrets and other proprietary information rules. Much of the financial-services industry is based on opacity—banks are intermediaries between customers and those with money or sources of capital, and if customers really knew that there was very little value being created in the middle, theyd find a way to disintermediate banks. Look at E-Loan, a dot-com survivor. It turned profitable in the fourth quarter of 2001. It ended 2002 with $393 million in consumer loans on its books. Its site lives and breathes the transparency of its lending process. In the short term, it may be possible for older companies to maintain a degree of opacity and, therefore, a viable business model, but in the long term, customers may find other alternatives.

Another problem is the limit of knowledge. People didnt really know what was going on with Enron until it was too late. Sure, you could have gone into an Enron discussion group in 1998 where someone with a handle named janisjoplin298 led a discussion about how off-balance sheet financing and opacity was going to kill Enron. But it was pretty difficult to parse out that comment from tens of thousands of glowing, breathless comments about how Enron was going to be Americas corporation for the next three centuries. Even in this open world, some of the most important messages are going to get lost.

Another barrier is the cost of openness. Borland Software, a company with $245 million in sales, claims that complying with Sarbanes-Oxley will cost it $3 million a year, which is more than 10 percent of earnings. And thats just Sarbanes-Oxley. Its just a drop in the bucket compared with whats going to be needed to make entire corporations and enterprises fully and actively transparent.

Theres also the problem of our lawsuit-crazy society. Bill Watkins, the president and COO of Seagate Technology, told us that he wants to have the most transparent company in the world. The main people fighting him on this are his own lawyers: the hypercritical media and others may not have a firms interests at heart. Gordon Nixon, CEO of RBC Financial, told us hes a big supporter of transparency, but sometimes he feels like a politician standing up in the Senate, and no matter what you say, somebodys going to take it out of context and jump all over it.

So there are problems. Our society is not yet literate about transparency. We have a lot to learn, as Amazon did in 1999, when it introduced purchase circles, which disclose book preferences for its customers. The circles began revealing information, such as whether employees at Microsoft were snapping up anti-Microsoft books. All of that really crossed the line, and can be chalked up to a lack of literacy about how to handle transparency. Amazon had to back off, learning the hard way that transparency can be a double-edged sword. Amazon still has purchase circles, but has stopped disclosing consumer information without first getting individuals consent, a change resulting from privacy groups complaints.

Yet, despite challenges, theres no doubt which way this transparency revolution is all moving. The horse is out of the barn. The train has left the station. Transparency is an unstoppable force. New kinds of leadership, new kinds of management styles, new kinds of workplaces must inevitably result.

Next Page: The CIO role.

The CIO Role


The CIO Role

The point here, vis-à-vis a CIO, is that transparency places the IT executive in a unique position to help companies rewire their corporations so as to help them devise more responsible strategies for discovering and exposing information about themselves.

To create an Open Enterprise, firms need open, standards-based IT infrastructures that reach out to partners, customers, shareholders and other stakeholders. Because of transparency, Open IT is an idea whose time has come. Most companies already use technology to communicate their agendas, notably by publishing their sustainability reports on the Web. Yet rarely do they fully capitalize on the power of IT to drive, enable and enhance—and embed—their stakeholder/sustainability agenda into the everyday life of the firm and its stakeholder interactions.

Companies have many systems in place that, with minor changes, could help meet such needs. Firms need to develop consistent messages and engagement models for their portfolio of what we call "stakeholder relationship management" applications. These encompass todays customer and employee relationship management tools, emerging partner relationship management tools and future tools for managing relationships with shareholders and communities.

For example, theres a movement called the Global Reporting Initiative, which finds companies reporting not just their financial results but also their social and environmental results. Many companies dismiss this as whacko tree-hugger stuff, which would undermine shareholder value, but there are dozens of major corporations, not just in Europe but now in the United States, that have embraced this idea. It has many names, such as the triple bottom line and sustainability reporting.

Stakeholders are going to want to have more formal mechanisms for learning about how companies are behaving toward the communities within which they operate, toward their employees, customers and so on. This will require a whole new class of information systems. Just as IT had its genesis in the creation of accounting applications to report financial results, so the next stage of IT will be in creating the infrastructures, systems, processes, and measurement tools to report social, environmental and other results to an increasingly demanding web of stakeholders.

David and I concluded that every IT function should be mandated to rethink its applications solutions to embrace a new integrity strategy. For example, some firms have programs to track the financial, delivery and product performance metrics of suppliers. IT managers should think about how to enhance such applications to provide reporting on environmental, working conditions and other stakeholder/sustainability metrics as well. In the absence of such initiatives, opportunities will be missed, costs will be higher and some risk will never be mitigated.

In many ways, CIOs are on the front lines of the shift toward transparency, and have the chance to provide leadership to move the company toward a default position of candor and openness and, in so doing, leap into the center of these huge changes in the nature of business, to build more trusting relationships with stakeholders.

The smart IT executive will learn about this stuff, get up to speed about it, provide leadership and develop a sensible approach. Once again, CIOs have been given a whole new set of business issues theyll need to become familiar with. If they are to be effective, they must build good relationships, and align themselves with the business, and combat the inexorable pressures for inappropriate slashing of IT budgets thats been going on all over. IT is not dead. Its just getting started.

Don Tapscott is an international consultant, teacher and thinker on technology in business and society. He is president of the Toronto-based New Paradigm Learning Corp., which he founded in 1992, and Adjunct Professor of Management at the Joseph L. Rotman School of Management, University of Toronto. His tenth book, just released, is The Naked Corporation: How the Age of Transparency Will Revolutionize Business, coauthored with David Ticoll. The book is published by the Free Press in the U.S. and by Viking Canada, a division of Pearson Penguin Canada Inc.

Next Page: Undress for success.

Undress for Success


Undress for Success

What firms must do to get buff in an increasingly transparent business climate:

  • Abide by basic values in all operations. Tell the truth, abide by commitments, consider the interests of stakeholders, be candid about shortcomings and challenges. Make sure that business integrity drives every aspect of company operations.

  • Deliver the right value to each group of stakeholders. Build and deliver the best products, prices and relationships with customers.

  • Understand the promise and peril of transparency and manage it continuously. Dont just try to spin and execute public relations strategies when a problem occurs. Develop a proactive approach to communicating the ongoing values of the company in the face of its challenges.

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