Human Capital in the Business Web

And you thought handling your own employees was hard enough?

The digital age is turning companies like Amazon, UPS and Cisco into “business Webs” or “b-webs.” B-webs are networks of not just employees but vendors, third-parties, and others beyond the office walls. Human capital now extends beyond the firm; people resemble molecules moving across the firm’s porous membrane in ever-changing configurations. As a result, companies need internetworked human resource management.

In this excerpt from a new book called Digital Capital: Harnessing the Power of Business Webs, the authors talk about how this new world is affecting Human Resources. The book is Copyright 2000 by Don Tapscott, David Ticoll and Alex Lowy, reprinted with permission of Harvard Business School Press.

“Our people are our greatest asset.”

When Amazon.com CEO Jeff Bezos makes this statement, then to whom is he referring? Certainly his management team, the professionals maintaining the company’s Web site, and its administration and distribution staff are great assets.

But in Amazon.com’s book business alone, the human capital base includes innumerable others:

• Countless authors and readers who generate online book commentaries for the Web site and participate in online chats


• Publishers that provide sophisticated content for the b-web


• Tens of thousands of Amazon associates, from a youngster in a Cleveland Little League to a professor in Houston, who hotlink to the site and participate in its extended sales network


• Trained personnel at Ingram Distribution, FedEx, and UPS who fulfill customer orders


• Staff at Kirkus Reviews, the Library Journal, and countless other book-review publications

Amazon.com draws most of its human capital from its b-web.

We are in the midst of a historic change, as human capital forms internetworks and extends beyond the boundaries of the firm. Human capital comprises the capabilities of individuals in the organization. It includes the skills, knowledge, intellect, creativity, and know-how that they individually possess. It is the capability of individuals to create value for customers.

Peter Drucker pointed out in 1993 that such knowledge is not merely another factor of production like labor, money, and land—it is the only meaningful resource today.

Consequently, the knowledgeable worker is every organization’s greatest single asset.

The b-web changes this asset fundamentally. No longer are a company’s human resources restricted to traditional employees.

As Steven Behm, Cisco’s former vice president of global alliances, said, “We have 32,000 employees, but only 17,000 of them work at Cisco.” Indeed, Cisco works with a “human resource” that extends far beyond its own corporate boundaries. It treats its b-web as the central actor in value creation. The company does not outsource functions; itintegrates partners.

As integration tightens and focuses on customer value, the b-web grows faster. Cisco’s human capital includes microchip designers innovating new technologies in teams that include, but do not primarily consist of, Cisco employees. This partly explains how this fledgling company stole massive market share from Lucent—a company that owns Bell Labs, one of the world’s deepest reserves of human capital.

Rather than just human resource (HR) management, Cisco has IHR—management of the internetworked human resource.

In the past, smart managers deliberately fostered their firm’s culture: The values, norms, and mission of the firm that grow from, reflect, and influence the thinking and behavior of its people.

Outsiders see it as a modus operandi—ways of working and collaborating, strategic plan-ning, business processes, approaches to staff development, HR policies, and management styles.

Like all organizations, every b-web has a culture, implicit or explicit. In the best b-webs, culture is robust and provides a healthy environment for value creation. Managers design their b-web culture to shape the evolution of internetworked human capital. Managers need to take steps to foster a high-performance culture.

The best b-webs share direction and values, although roles and relationships within the partnership vary. Participants who share goals demonstrate commitment, efficiency, and adaptability.

Sun Microsystems CEO Scott McNealy uses imagery, symbols, and humor to champion Sun’s values and vision across its b-web. Sun presents itself as the open-systems company in contrast to an allegedly closed, autocratic Microsoft. Sun champions the values of customer power, vendor independence, and free enterprise.

It positions its partnership with the U.S. Department of Justice as a crusade against monopolies and for entrepreneurship. Sun frees its knowledge workers to create new ideas and technologies like Java. Yet the company is hierarchical, and everyone knows who is in charge. McNealy communicates corporate values regularly through vehicles like Sun Talk Radio. (He describes himself to us as the Rush Limbaugh of Sun.)

At one internal meeting, he was introduced as “Mr. Command and Control.” No management jargon about learning organizations here. This CEO speaks and learns on behalf of the entire corporation and beyond to the b-web as a whole.

Communication of vision and values varies according to b-web and business conditions. Priceline poses a threat to anyone who sells anything, while positioning itself as an ally in liquidating unsold inventory—a mere bottom feeder. It tells sellers that it will help them realize opportunities online.

Cisco’s suppliers report that marketing hype permeates the company’s b-web story.

But they don t really mind. Cisco’s vision helps hold this profitable b-web together. Preaching customer empowerment, E*Trade mocks stockbrokers in its marketing campaigns: “If your broker is so smart, why is he still working?” Michael Dell spends considerable time telling his direct-sales story to media and opinion leaders. His goal is not only to increase the stock price, but to invigorate a culture across his b-web.

To define and shape your b-web strategy and values, several steps are important:

Align interests within the b-web wherever possible. Independent contractors and employees act in their own self-interest. Priceline must consider its suppliers, or it loses product flow. Everyone in the Nortel Networks b-web benefits from the company’s growth and success.

Decide the extent to which you want to involve b-web participants in business planning and formulating strategy. Some b-webs are highly consensual. Some are more hierarchical, passing down vision and strategy. Performance-oriented b-web leaders behave as first among leaders rather than supply-chain bosses.

Communicate, communicate, communicate. In the past, companies controlled their own cultures. Today, many employees use another company’s Web communications system for large parts of their day, becoming immersed in someone else’s culture through a very powerful medium. Some Solectron employees spend many hours on the Hewlett-Packard supplier site. As communication extends across the b-web, will you as context provider enhance the cultural context?

Take into account national, social, and ethnic differences. Based as they are on the Net, many b-webs are global by definition. Internet-worked human capital speaks many tongues and appears in many colors. Sensitivity to language and cultural norms enhances collaboration. If you are creating a b-web for cosmetics consumers, how will your environments reflect the tastes and values of various customer nationalities?

Information transparency enables partnering and trust. In the old economy, suppliers were treated as external to the firm and relationships were combative. Company edicts told suppliers to reduce prices or lose their business.

Digital economy suppliers participate in the b-web. Competition is often b-web versus b-web rather than firm versus firm, and suppliers function as partners rather than adversaries. Suppliers have newfound power.

Every b-web is a system with unique culture and dynamics. When the context provider is a juggernaut like Cisco, it exerts great power over suppliers. Sometimes Cisco pays a supplier more than market price, because it wants to develop a strategic partner. Other times it unilaterally tells its suppliers to cut costs or go elsewhere. It defines the b-web culture and determines its standards. It fosters discussion but rarely dissent.

This situation, however, differs from the old world, where Wal-Mart would dictate to its powerless suppliers. Cisco knows what its suppliers pay for components, labor, and facilities. It decides what margins are appropriate for its partners, and balances its short-term interest in minimizing costs against its long-term interest in enhancing the robustness of its b-web.

Like consumers, suppliers have a new kind of power derived, ironically, from their vulnerability. Transparency of information liberates them to detail the costs of their operation so that they get fair treatment on strategic grounds.

The consequences of losing a b-web partner can exceed the consequences of Wal-Mart’s losing the supplier of a hot toy or cool line of jeans. The loss of a strategic partner can cripple a b-web and its business. “We are removing the boundaries of the firm. Everyone’s business is everyone’s business,” says Celestica CEO Eugene Polistuk, describing how b-webs derive their power from openness and information sharing among participants.

“Before, we had networks of data; now we have intelligent systems based on standards. The openness, the pervasiveness, the speed, and the sheer volume of information is redefining the way people work together.”

The faster information moves, the better. Undue secrecy between partners, win-lose negotiating, and an insistence on exclusive supplier/partner relationships characterize outmoded industrial-economy thinking. Cisco insists on open financial results with its supply-chain partners. The open sharing of information, combined with a single information system for all its supply partners, ensures that all b-web participants draw on the same data at the same time. This minimizes unnecessary inventory.

Successful corporations focus on customers. But who is the customer? Your immediate customer may be the next link in the supply chain—but focusing exclusively on this customer can be a big mistake. B-webs should not be collections of partners delivering value to one another, based on the specifications of the next in line.

Consider the industrial-age auto industry in the United States. A simplistic, but more or less accurate view of its structure is as follows. The industry had a three-tier supply model. Tier-three companies (like U.S. Steel) made raw materials, which they delivered to tier-two companies. Tier-two companies converted raw materials into usable components, like seat frames, which they sent to tier-one companies (like Magna International).

Tier-one companies built major subassemblies (like seats); they typically were the only ones who dealt directly with major manufacturers (like GM and Chrysler). Most supply-chain improvements happened initially with the largest tier-one suppliers. By the middle of the 1990s, only the biggest tier-one companies had begun to work with their tier-two suppliers to replicate programs like pre-sourcing, target costing, structured supplier ratings, and motivational communications.

So although improvements for the Big Three were significant, they were a far cry from reinvention of their broad networks of relationships. And in this model, the participants in each tier tended to think of the customer as their buyer in the next tier. This helps explain the slow pace of innovation and the high costs that remain endemic in the auto industry.

Instead, an effective b-web keeps everyone focused—and fully informed in real time—on the needs of end-customers. Every-one must be accountable for contributing to end-customer value. A b-web must organize work processes to ensure customer satisfaction at each stage—from product design to post-sales services and support.

The customer’s role is important in value creation in all types of b-webs. Customers become economic units creating and depleting value, exchanging value and setting value goals, which are met by value propositions. eBay is the context provider for customers who define the content—the goods at the digital table. Customers are part of the Dell b-web, using the Premier Page to configure the product and initiate the manufacturing process. PalmPilot customers are active innovators and content providers.

The old corporation compensated knowledge workers with salaries and bonuses and measured labor on balance sheets as a variable cost. Only senior managers received stock options. Today, we must think of people as investors of digital capital. This shift in perception changes how you reward and compensate people and how you behave toward them—both in your firm and in your b-web.

Throughout the 1990s, managers debated the wisdom of including intellectual capital measures on balance sheets. Stephen Wallman of the U.S. Securities and Exchange Commission has said that companies and lawmakers need to develop new measures of intellectual capital for this purpose. A firm’s market value minus its capital assets is one of many possible measures.

Others believe that such measures are impossible and misleading. Setting aside the debate, we know that humans, their brain power, and their know-how constitute a form of capital that in many ways surpasses the value of cash and other traditional capital assets. Regardless of whether we measure it on balance sheets, managers should rethink how to attract and retain human capital, especially in its internetworked form.

Some recoil at the notion of treating humans as capital. Isn t it a bit Orwellian, they say? Riel Miller, who wrote an Organization for Economic Cooperation and Development (OECD) study on human capital, disagrees: “What would you rather be, a cost or an asset?” He argues for “turning [people] costs into assets—something valuable, rather than a drag on the bottom line.” Giving people the high status of capital doesn’t dehumanize them—it implies that knowledge workers, more than money or factories, drive wealth creation and prosperity.

Factor in demographics, and the case strengthens. As Internet-experienced youngsters—the Net Generation—enter the workforce, they have a high desire to participate in the wealth they create. They have grown up innovating and in many cases creating real value in the interactive world—building Web sites, contributing to online discussions, games, products, and services. The evidence suggests that they will not be satisfied with fat paychecks, but will want to participate in the wealth that they help build.

People bring digital capital to your firm and invest it. They bring their brains, know-how, energy, and capacity for innovation—human capital. They bring relationship capital as well—connections with customers, suppliers, and other partners. Many employees also have their own relationship capital in the form of a brand—”Did you hear who Webvan just hired?” They may also bring a strong experience with new business models. Rather than treating employees as a variable cost, we should think of them as investors of digital capital.

In a typical publicly traded internetworked enterprise—and some not-so-typical ones like Microsoft—less than half of their stock was sold to investors. Digital capital bought the stock. Employees contribute digital capital in exchange for a share of the wealth that they create. Investors take risks and expect return on investment.

But unlike traditional capital, there are risks other than financial ones. Investors of digital capital take personal risks when they throw their lot in with your firm or b-web. They give away their insights and ideas regarding how to create customer value and wealth. They risk their personal reputations, brands, and relationships, sometimes severing ties.

Stock-option and share-purchase programs and profit-sharing will dominate companies with lots of digital capital. Smart companies in b-webs expect the same of their alliance partners. Who makes the rules and how? Who enforces them? How do you deal with people who break the rules? Within the old corporation, the bosses made and enforced the rules. Governments set minimum standards regarding relationships with external entities: “If you defraud customers, we will prosecute.”

The world of b-webs needs new mechanisms. In a b-web, the context provider leads in defining governance mechanisms.

Participants either comply or do not, based on their perceived self-interest. If you defraud someone on eBay, the user community banishes you by ruining your reputation and refusing to do business with you. To participate in the Linux and MP3 communities, participants must embrace the spirit of benefiting the Alliance or they become irrelevant.

Participants in the volatile Java Alliance had considerable difficulty defining their self-interest, other than opposition to Microsoft. The ANX (Automotive Network Exchange) floundered because the competitive interests of the major automakers exceeded their shared interest in an industry-wide b-web.

The European-led wireless GSM telecom standard is an example of self-interests remaining aligned to help raise the standard to everyone’s benefit—resulting in Europe’s leapfrogging the United States.

In the old corporation, managers negotiated or assigned objectives for quality, delivery of projects, increasing outputs, and achieving sales targets. Consultants, subcontractors, and external partners were judged on the ability to meet project or other goals. In the world of b-webs, you must manage the performance of external entities as never before.

Real-time capability depends on quick, effective decision making, problem solving, and collaboration at all points in the system. Managing a contingent workforce presents unique challenges. For example, an employee on contract from an agency has special legal status.

When one company we know learned that a contract employee had engaged in misconduct, it found it could not take corrective action, because, technically, she worked for another company. They had no choice but to have the agency replace—essentially terminate—her. A company HR manager told us, “We were forced to apply a blunt instrument because of the structure of the relationship.” The corporation was only as strong as its weakest link.

Mirroring the multi-path architecture of the Internet itself, b-webs are highly interdependent. They gain flexibility through redundant supplier relationships, while using only what is absolutely needed at any point in time. E*Trade has various partners who gather news and provide analytic modeling, ensuring that customers can choose whatever works for them.

Cisco regularly assesses its partners performance to make sure they can keep up with the company’s growth plans. In 1998, concerned that parts-supply distributors would fall behind Cisco’s growth, Carl Redfield, vice president of manufacturing, investigated partner inventory turnovers, cash flow, and other indicators of future capacity.

He found the partners financial health to be so robust that Cisco actually trimmed from three main suppliers to two, deepening long-term partnerships and driving efficiency to higher levels.

HR and organizational effectiveness professionals require new tools to manage the creation of customer value between and among semi-independent work entities, enable interorganizational learning, and deliver real-time performance feedback to actors throughout the partnership universe.

Knowledge management for internetworked enterprises means managing knowledge not just internally, but within your b-web. This is a new challenge. As explained earlier, structural capital is the organizational capability of a firm or b-web to meet market requirements.

It includes knowledge captured by the enterprise itself, institutionalized, managed, and at the service of the organization. How do you translate human capital into structural capital when you do not own it?

Managers with titles like Chief Knowledge Officer know that knowledge management, while a good idea, has been slow to get off the ground. One impediment is that many people see knowledge as the basis of power and withhold it from colleagues. In b-webs, trust can be even harder to achieve.

A b-web achieves effective knowledge management when the context provider creates a culture in which the common self-interest of all participants is clear to everyone. A culture of authentication and trust—the sine qua non of digital capital—enables participants to share knowledge, to collaborate effectively, and to apply their human capital to value creation.

Another victim of this new environment is the not-invented-here syndrome, in which people and individuals reject new ideas unless they invented them. In many cases, Cisco prefers not to invent it. The Cisco culture favors acquiring technology and skillfully integrating it into existing product families.

Cisco works on a number of customer-funded projects, evidence of their openness to outside input. If a customer will pay co-development costs, then Cisco assumes that this research probably matters more than Cisco’s internal projects.

If you have long-term plans for your b-web, then consider a knowledge management program. Work with partners to develop systems that enable the b-web to marshal its collective resources to create and deliver customer value. Decide to what extent your company should expand its staff development, training, and educational programs to the b-web.

Consider assigning human resources to manage knowledge across the b-web. Strategists should get their staffs working to build a b-web culture that shares knowledge.

Business processes contain implicit norms, values, and business practices that govern the deployment of human capital. Such processes—comparable to Lego-like software “objects”—are increasingly standardized and reusable in different situations.

This standardization and reusability can now be applied to business processes that extend beyond the firm. In the industrial economy, business processes were generally considered to be contained within the enterprise. The popular management book Reengineering the Corporation discusses how companies can cut costs and improve effectiveness by redesigning their core processes. However, as the focus shifts from the enterprise to the b-web, companies need to develop new competencies in redesigning their inter-enterprise business processes.

Consider the shift away from EDI (electronic data interchange). In the past, companies used EDI to develop highly specialized and customized interfaces for data exchange. Based on EDI, technology firms also needed to cooperate to create customized business processes governing the exchange of data, money, and work activities. The Net is standardizing such technical hookups. Companies will soon organize the interchange of critical data in days and hours rather than years.

Similarly, standardized business processes are emerging. Firms and b-webs will soon draw from a repository of such business process “chunks.” The focus on business process reengineering changes to inter-enterprise business process assembly.

When companies “assemble” inter-enterprise business processes from standardized parts, they implement new business models more rapidly. But they can also rapidly deploy an implicit b-web culture. For example, many business processes govern both customer and supplier use of the Dell Premier Page. Process objects embody the Dell customer-centric culture and enable its adoption by the b-web.

The revolution in Net-enabled business models is intersecting with a demographic revolution, which is changing the culture of work. The biggest generation ever, the baby boom echo, is entering the workforce.

The 88 million offspring of the North American baby boom, kids who in the year 2000 are aged two to twenty-two, now outnumber their parents by a healthy margin. The population is not aging but becoming bimodal. This demographic tsunami will profoundly change the workforce and the challenges of HR management in the firm and in the b-web.

Call them the Net Generation, the first generation to be bathed in bits—the first to grow up in a multimedia, multitasking, interrupt-driven world and with a different psychology from their boomer parents. Your teenage daughter probably surfs the Net while responding to e-mail, talking on the telephone, watching TV, and reading a magazine.

Now imagine the impact of millions of these fresh-thinking, energized kids, armed with the most powerful human capital in history, hitting the workforce. This wave has just begun. The Net Generation (“N-Gen”) will transform the nature of the enterprise and how wealth is created, as their culture becomes the new culture of work. This generation is exceptionally curious, self-reliant, contrarian, smart, focused, able to adapt, high in self-esteem, and globally oriented.

These attributes, combined with the Net Generation’s ease with digital tools, should threaten and challenge the traditional manager and traditional approaches to strategy.

This generation will create a push for radical changes in existing companies and established institutions.

Unlike their parents, the young people in this generation thrive on collaboration and abhor the notion of a boss. Their first point of reference is the Net. They strive to innovate and require fast results. They love hard work because work, learning, and play coincide. They are creative in unimaginable ways. A bigger proportion than of any other generation will seek to be entrepreneurs.

Smart organizations can learn from them. Finland has hired thousands of children to teach the teachers how to use computers and the Net. One Procter & Gamble manager implemented a reverse mentoring program in which young hires mentor P&G managers in the new media and the new youth culture.

When P&G decided to spin out its “Reflect” line of cosmetics and skin care into a separate company with its own b-web and dot-com structure, it searched the firm for young people who were fluent with the Net and comfortable with b-web thinking.

Says Alan Lafley, the venture’s interim president, “We decided to let the kids drive this, and it worked.”