The Wisdom of Crowds in business and Crowd-Sourcing in modern procurement
by Sterling Thoughts on April 21st, 2011

I am sure we all sit back at times and reflect how deeply the Internet (and technology in general) has irreversibly changed the way we do the ‘normal’ things in our lives these days – from the way we work, to the way we communicate & connect with people; from the way we entertain to the way we learn & develop ourselves and our businesses.
“The Wisdom of Crowds” and “Crowd-Sourcing” provide us with a glimpse of one particular direction where that trend is heading and how we can maximise the benefits to our business in an ethical manner by both knowing about them and how to make the best make use of them in improving both quality & bottom-line performances.

The recent fundamental shift in the way we learn & develop ourselves
Whilst for the past millennia, the efforts to comprehend the universe and everything else therein were once the preserve of a select few experts in religion, art, philosophy and science; with the recent explosion of the Internet, social networking, media content proliferation & accessibility, there has been a fundamental shift in the way we learn.

To “Google” something we want to know more about has become such a well-known and global phenomenon, the term “Google” now features in the English dictionaries as a proper verb! From the traditional ways of the past to learn, which most of us have been through, directly from experts (through established & renowned establishments like schools & universities and through books written by most of the same experts), these days more and more people are self-taught, easily researching and learning ‘online’ what they need specifically, to further enhance their personal & professional development. All the material, that traditionally were only available through taught courses or books, sometimes at substantial costs, are now out there, mostly for free, for people to disseminate and assimilate in their own times - We have the flexibility to pick exactly what we need, when we need it, in order to fulfil the exact purpose we need it for.

The 'Many' are smarter than the 'few'
“The Wisdom of Crowds”, which in fact is a concept that has existed since the 1840s, but only recently making a more substantial impact in societies and in businesses, refers to the reason why ‘the Many’ are smarter than ‘the Few’ and how collective wisdom, as opposed to traditional ‘few experts’, shapes businesses, economies, societies and nations more and more. It is well-explored in a book written by James Surowiecki about the aggregation of information in groups, resulting in decisions that, he argues, are often better than could have been made by any single member of the group. The book presents numerous case studies and anecdotes to illustrate its argument, and touches on several fields, primarily economics and psychology. Its central thesis, that a diverse collection of independently-deciding individuals is more likely to make certain types of decisions and predictions better than individuals or even experts, draws many parallels with statistical sampling, which is a standard & well-established business tool already (E.g.: market research, etc).

One example the book describes relates to Sir Francis Galton's (a Victorian scientist in Birmingham, UK, also a half-cousin to Charles Darwin) and his surprise that the crowd at a county fair in his local community more accurately guessed the weight of an ox when their individual guesses were averaged (the average was closer to the ox's true butchered weight than the estimates of most crowd members, and also closer than any of the separate estimates made by long-time cattle experts).

Getting 'the Wisdom of Crowds' right
To ensure we fully understand how it works and how to best apply it into our own business environments for maximum benefits, means getting the below elements right:

- Cognition (Thinking and information processing): Understanding that market judgment can sometimes be much faster, more reliable, and less subject to political forces than the deliberations of experts or expert committees.

- Coordination: Realising the natural coordination that exists within crowds (such as when we see pedestrians optimising the pavement flow or the extent of crowding in popular restaurants & bars, or in the London Underground if you have experienced it – in all cases, people naturally expand or contract their needs for “space” depending on how much they can have – automatically adjusting). It is also recognising that common understanding within a culture allows remarkably accurate judgments about specific reactions of other members of that same culture (for informed predictions & forecasting purposes as an example).

- Cooperation: How groups of people can form networks of trust without a central system controlling their behaviour or directly enforcing their compliance (E.g.: free market economy).

- Within the “Crowd”, there should be:
Diversity of opinion: Each person should have private information (to form their own opinions) even if it's just an eccentric interpretation of the known facts (which in most cases with people one tends to get! But it can be a good thing too!).
Independence: People's opinions aren't determined by the opinions of those around them.
Decentralisation: People are able to specialise and draw on their local knowledge.
Aggregation: Some mechanism exists for turning private judgments into a collective decision (like consensus).

If you have successfully performed brainstorming sessions, off-site planning meetings and market research (to name just a few) in your business in the past, you will know exactly what the above means, and also how valuable the output & results of these initiatives can be for you when you get the above elements right.

The impact of getting it wrong
The “Wisdom of Crowds” can also work negatively – we have all heard of the rise of the Nazis in Germany and Soviet Communism in the USSR; we have seen stock exchanges and financial institutions running amok causing global financial crises and recessions; and organisations doing their ‘planning in a vacuum’ and operating in a disconnected manner to their market, their customers & their staff, like Enron in the US and Arthur Andersen, Northern Rock in the UK; and in NZ, companies like South Canterbury Finance, Feltex, numerous property developers and many more.

The “wisdom” of those “crowds” although collectively they did generate a momentum, vision & direction towards particular objectives and was very successful for a time, they did not stand the test of time, nor did they align to the wider & greater good.

“Crowd-Sourcing” – A glimpse into some modern, smart & very cost-effective business procurement

“The impact of “the Wisdom of Crowds” to modern business procurement
In addition to the above, “The Wisdom of Crowds” has also impacted the ‘procurement of products & services’ quite substantially over recent times, through initiatives like “Crowd-Sourcing” (a term combining the words “crowd” and “outsourcing”). Some of you may already be aware and even use these techniques already.

“Crowd-Sourcing” refers to the act of outsourcing tasks, traditionally performed by a paid employee or contractor of yours, to an undefined, large group of people or community (a "crowd"), through an open call. The Internet allows us to do this in an almost seamless manner, tapping in a much wider pool of talents, experience, expertise and points of view than the traditional models have allowed us to in the past.

What is “Crowd-Sourcing” and how does it works?
Jeff Howe, one of the first authors to employ the term in his June 2006 “Wired” magazine article "The Rise of Crowd-sourcing", established that the concept of “Crowd-Sourcing” depends essentially on the fact that because it is an open call to an undefined 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 explains that because technological advances have allowed for cheap consumer electronics (like computers) and cheap data connectivity and global access (the Internet), the gap between professionals and amateurs has been diminished. For example, the public may be invited to develop a new technology, carry out a design task (also known as community-based design and distributed participatory design), refine or carry out the steps of an algorithm (E.g.: human-based computation), or help capture, systematize or analyse large amounts of data (E.g.: citizen science). We see this more typically and locally when Local and Central Government organisations, as well as some large private companies, issue tenders to the public to seek qualified & experienced groups to provide a set of products or services. The term has become popular with businesses, authors, and journalists as shorthand for the trend of leveraging the mass collaboration enabled by Web 2.0 technologies to better achieve business goals.

“Crowd-Sourcing” has grown massively in popularity among the SME (Small & Medium Enterprise) sector globally over recent times as well as within some smart Large Enterprise organisations. In addition to the technological advances, greater global business community awareness, social & networking media advances and the reduction in data access costs, the recent GFC (Global Financial Crisis) has caused a massive economic impact to most OECD (Organisation for Economic Co-operation and Development) countries, known as developed countries. Many businesses have folded while others have been forced to consider drastic cost management strategies in order to survive the economic downturn. There has been a considerable amount of services outsourced to developing countries (like contact centre operations from NZ to the Philippines or from the UK to India or from the US to Bangladesh, etc). The cost of procuring some services through traditional methods in order to provide another set of products & services to a company’s end customers, proved quite prohibitive for some businesses. Of course, a number of organisations have jumped on the GFC bandwagon as a justification to make operational changes and deep cuts to improve their bottom line rather than to boldly grow the top / revenue line instead, but most businesses have started to look at smart alternatives to get some expertise, design, resourcing and manufacturing support at a cheaper cost but also using a hugely wider pool of skills, experience and outlooks.

Rather than the more traditional and normally fully ‘local’ business model, “Crowd-Sourcing” allows for a more distributed problem-solving and production model. “Problems” (or service requests) are broadcasted to an unknown group of solvers in the form of an open call for solutions. The “Users” or “the Crowd”, typically form into local or global online communities, and submit solutions for the “Initiator” of the call to evaluate, to accept or to reject. “The Crowd” also sorts through the solutions, finding the best ones. These best solutions are then owned by the “Initiator” who broadcasted the problem in the first place, the “crowd-sourcer”, and the winning individuals in the crowd are sometimes rewarded. In most cases, this labour is well compensated, either monetarily, or with prizes (if the “call” is run as a competition for example), or with recognition like testimonials. In other cases, the only rewards may be kudos or intellectual satisfaction. Crowd-sourcing may produce solutions from amateurs or volunteers working in their spare time, as well as from experts or small businesses which were unknown to the initiating organisation, hence tend to come in with impartiality and objectivity.

The key benefits of “Crowd-Sourcing” to your business
With Crowd-sourcing:
  • Your problems can be explored at comparatively little cost, and often very quickly.

  • Payment is by results only and sometimes quite cheap in comparison as the labour is provided by home-based rather than office-based people.

  • You can tap into a much wider range of talent than would typically not be present through the existing service providers you tend to use traditionally.

  • By listening to the crowd, you gain gain first-hand insight on your own customers' desires (if the “crowd” is within your market demography – like Vodafone NZ, as an example, “Crowd-souring” its logo design & tagline to everyone in NZ and offering a prize for the winning ideas).

  • The wider community may feel a brand-building kinship with your company, the crowd-sourcing organisation, which is the result of an earned sense of ownership through contribution and collaboration (Like in the Vodafone NZ example above).

  • You can tap into the global world of ideas, helping your company work through a rapid design process. The surprising part at times is that this is usually available at relatively no cost, as people are always willing to share their ideas on a global scale for free as part of an intellectual challenge. This applies to cases where there is a much wider pool of experts and skills who also may have “solved” similar “problems” many times before. A broad example might be a NZ NPO (Non-Profit Organisation) supporting problem gamblers within Auckland & Wellington cities looking at how similar services are better provided in more complex socio-economic conditions within larger population groups like in London, Las Vegas & Reno in Nevada, Atlantic City in New Jersey, etc.

Some known issues with “Crowd-Sourcing
The ethical, social, and economic implications of crowd-sourcing have been subject to continuous & wide debate. For example, author and media critic Douglas Rushkoff, in an interview published in Wired News, expressed ambivalence about the term and its implications, with Wikipedia co-founder Jimmy Wales also a vocal critic of the term. Some reports have focused on the negative effects of crowd-sourcing on business owners, particularly in regard to how a crowd-sourced project can sometimes end up costing a business more than a traditionally outsourced project because the Quality Assurance, Governance and some compliance issues might be missed. With regards to those, I feel it is the responsibility of the “Initiator” or “Crowd-Sourcer” to ensure which components are “crowd-sourced” and to have the end-product properly reviewed and managed throughout the process. The output or end product of a “Crowd-sourced” initiative or project is only as good as the brief the “Initiator” provides, with the quality standards & feedback review periods it ensures the project has, etc.

Some other possible pitfalls of crowd-sourcing and how to avoid them:
Added costs to bring a project to an acceptable conclusion as the “initiatior” sometimes falls in the trap of not adequately briefing or reviewing the outputs properly or simply assumes that the “crowd” will read his or her mind!

  • Increased likelihood that a crowd-sourced project will fail due to lack of monetary motivation, too few participants, lower quality of work, lack of personal interest in the project, global language barriers, or difficulty managing a large-scale, crowd- sourced project. Again, this is up to the “initiator’ to ensure the right disciplines are in place from the very start to ensure a quality output or deliverable from the “crowd”, and the right “crowd” is sourced in the first place, as well as adequate remuneration or incentives being in place.

  • Below-market wages or no wages at all. Barter agreements are often associated with crowd-sourcing. This is slowly being resolved through open expectation settings from the outset, and more and more fairness being introduced into the process. Just because someone provides a great quality deliverable from Uzbekistan (just picking a completely random country) does not necessarily mean a remuneration should be set in “peanuts” because the country has a much lower GDP than ours. It is advisable for the “initiator” to set the expectations of end product(s) right from the start, together with the incentive or remuneration component. A guide would be to ascertain how much that would have costed locally or by using traditional methods, then depending on the nature of the project, make the incentive a decent and fair fraction of that cost.

  • No written contracts, non-disclosure agreements, or employee agreements or agreeable terms with crowd-sourced employees. This needs to be properly mitigated, and sometimes avoided altogether by the “initiator” for highly commercially-sensitive and competitive initiatives. There is a very real risk of leaks with “Crowd-Sourcing” due to its very nature of openness.

  • Difficulties maintaining a working relationship with crowd-sourced workers throughout the duration of a project. Again this is a parameter for the “initiator” to evaluate in terms of the size of the set task. It is sometimes more advisable to break a “project” into different work-streams that can be individually “crowd-sourced”. This keeps the QA, control & governance firmly in the hands of the “initiator” who will also need some basic project and programme management skills.

  • Susceptibility to faulty results caused by targeted, malicious work efforts. It is advisable for the initial brief to be as comprehensive as possible, with the expectations & quality standards clearly defined from the start, as well as regular review periods throughout to ensure the effort is being put on the right areas. The “project” can be discontinued at any time if the results and expected quality are not obtained.

Some well-known “Crowd-Sourcing” websites as examples:

There are loads of others out there. If you do decide to give “crowd-sourcing” a try, please ensure:

  • You define your brief comprehensively

  • You research the site you will use well

  • You set the appropriate Quality Assurance standards & review periods

  • You offer fair remuneration or incentives

  • You maximise on the benefit of drawing from a much wider pool of talents, ideas and experience

  • You provide regular and useful feedback to the “crowd” to help fine-tune your own product through its development lifecycle. Do please also note that when using a wide pool, you may well get some really creative & innovation ideas that you may not have considered before. This is one great ancillary benefit of “crowd-sourcing”, the wide range of different perspectives from the “crowd” normally throws both some fantastic ideas (as well as some really rubbish ones which you can ignore straight away).

  • You have no obligations to accept any product so make sure that when you do, the product actually meets with all your requirements (as set out in your original brief)

  • If things do change in the process and you want to alter the brief, make sure you communicate the expectations & changes properly to give the “crowd” a fair chance to understand, then respond to your new needs properly.

I personally know of a lot of people who use “crowd-sourcing” successfully and on a regular basis, with very good results for their businesses. I hope this provides you with another “string” for your bow of existing business skills and gives you a different dimension of expertise & talents to draw from to add more value into your business, cost-effectively, and innovatively.

Sterling Results Ltd.

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