Written in collaboration with Kevin Nguyen
Staying ahead of the many negative externalities impacting our business ecosystem can seem overwhelming. And it surely can be, once a business is in full operation, however, while it’s difficult to mitigate externalities once a corporation is operational, it is possible to anticipate and engage with them in the formation stage.
Getting Ahead of Negative Externalities—Ours and Others’
At FutureSight, one metric we use in the formation stage is an ‘Ethic and Impact’ score based on the following three questions:
- Does this venture profit from creating new problems?
- Does this venture create negative externalities which are unmitigated?
- Does this venture reduce negative externalities created by other parties?
What I like about these questions is the potential to score higher based on engaging others’ externalities, not just our own. This challenge helps us keep mutually beneficial targets in sight.
Much like with a market sizing, exercising these questions are best answered by imagining where and how the venture will fit into a future state of the world. Let’s dig a little deeper into these three questions..
Does this venture profit from creating new problems?
Luckily, the easiest question to answer in our ethics score also has the most impact. Using the framing from Economics of Mutuality on businesses building relationships of trust and trustworthiness to stakeholders, we can evaluate the people and entities connected to the new venture’s operations and outcome to see if it creates a new problem for them from which the venture will profit.
The simplest examples are those with obvious and universally negative impacts such as pollution by-product from manufacturing. However when we look at vertical software ventures the answer might require looking at the downstream effects of the venture.
Some techniques to understand the downstream effects of a new process/tool or product is to map out the value stream. A value stream map visualizes all the actors in a process, their inputs and outputs, to understand the impact changes will have on their activities.
Following is an example of a value stream map for patient turnaround time in a hospital:
Graphic credits to ISIXSIGMA
A close examination of this map shows potential negative externalities in Step F where time of patients is wasted and they are vulnerable to potential cross contamination from other ill patients.
Let’s take a look at Crewscope, a FutureSight venture that brings incentives and communication to construction crews working on job sites. At face value this seems like a win-win situation for the buyer (construction company owners who get more productivity) and the users (construction crews who will get paid more). But if we look at the value stream of an incentive platform on a jobsite by adding a monetary reward for doing more work quicker, we may be introducing safety issues. Safety is a priority on all construction sites and must not be compromised.
This doesn’t mean that the business model is suddenly unviable, but what it presents is an opportunity to explore mitigation of these problems in the business model itself.
Does this venture create negative externalities which are unmitigated?
Externalities are inevitable when conducting business and, when we explore the business boundaries, it is easy to attribute any small impact as a positive or negative consequence of our venture. So how can we continue to innovate and foster growth without being overwhelmed by cascading impacts?
At FutureSight we think about first-to-third order effects of our ventures. This restriction of scope allows us to explore innovation without worrying about negative externalities that are beyond our reasonable control. Using our Crewscope example above, we identified a potential negative externality with safety when there are incentives to be earned by achieving milestones.
Crewscope mitigates the potential for negative externalities around speed by making safety a core tenet of the product and organization. The organization embodies this value throughout, from the customer onboarding to best practices that are aligned with industry standards around safety and labour laws.
To identify externalities, one of our internal processes is to draw the value stream map of the product or venture to understand who, what, and when stakeholders are impacted by our venture. The next step is to create the value proposition for each of those stakeholders. A value proposition document will typically capture:
- the stakeholders’ wants
- how our product will change their work / lives
- what their current reality is
- what roadblocks are preventing them from achieving those wants
In our version of the exercise we spend time on the “how our product will change their work / lives” portion and map out both upsides and downsides of the changes. Questions we ask are:
- If this will reduce the time someone does a task, what will they spend their time doing?
- Will this reduce the number of people needed for a specific task?
- What behaviours, both good and bad, will result as a part of our change; i.e., work faster, less skill required etc.
- Is there an environmental impact to our solution?
A common saying in SaaS venture creation is to love the problem AND love the customers. The exercises above help our founders understand their stakeholders and ecosystem to provide both value and reduce negative externalities.
Does this venture reduce negative externalities created by other parties?
After using the value stream map and the value proposition canvas to answer if the venture has created negative externalities, we should have a good understanding of the ecosystem and stakeholders. This allows us to explore if the venture has the ability to reduce negative externalities imposed upon the stakeholders or ecosystem of the venture. This is a powerful tool that can unlock business model innovations.
Using again our Crewscope example: We know from mapping out the process of work planned, conducted, and reviewed on the job site that adding accountability to both the forepeople and workers will increase productivity. In fact, we see this validated with other field-worker applications currently in the market. However, as we explored the ecosystem we saw that the existing methods and processes created negative externalities: Field workers felt like they were being unfairly shadowed (big brother); experienced foremen wanted recognition for their service and experience; and both users wanted more communication channels in their work.
By adding an incentive structure to the business model for Crewscope, we are reducing the negative externalities created by the need to construct faster. Workers are not just told to do more, but are rewarded for it and given a platform to voice concerns or receive feedback. Foremen are an integral part of the reward creation structure, affording them the opportunity to manage the crew to the best of their experience.
Reducing the negative externalities gives Crewscope a unique competitive edge in the market as it is able to bring value to both the buyer and user of the product.
Reducing negative externalities created by other parties is also a process that can create or help identify net new opportunities wherein the new venture can create positive externalities for both buyer and users.
Externalities Assessment Playbook
Understanding the complete externalities and impact of a venture in the early days is extremely difficult. The reality is that new ventures are fluid. Learning about the market, customers, or any external factors will influence the direction of the company. That being said, here is a guideline on how you can use externality exploration today.
Awareness
- Find areas of waste—could be physical, productivity, economical etc.
- List them out and be open about the potential impacts of addressing them
- Brainstorm how those externalities came to be
Ideation
- Look for negative externalities created by other entities as a location for new venture creation.
- How can addressing those externalities be used today to make an impact on their stakeholders?
Validation
- While you are validating your ideas use negative externalities as a screen to filter out ideas
Scaling Up
- Continue to assess the venture and the impact it is having. You won’t have clarity on all the potential externalities from day one, so monitor for potential externalities and mitigate them.
Conclusion
Our exploration of mutual economics can lead us to view and create business ecosystems with generous boundaries, multiple impact goals in addition to profit maximization, and inclusion of stakeholders previously overlooked or ignored. Let’s use the powerful engine of business and enterprise to drive human flourishing as we live together on this planet with its myriad of financial, social, natural, and human capital.
If you would like to continue this conversation, our team at FutureSight would like to talk to you.
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