Coworking: A Disruptive Innovation

During the tedious parts of my work day, I have been listening to the HBR IdeaCast Podcast. One of the recent topics was Disruptive Innovation, a discussion lead by Scott Anthony, who writes the Innovation Insights Blog at HarvardBusiness.org.

Disruptive innovation is using simplicity, convenience, and accessibility to transform existing markets and create new ones. Unlike sustaining innovation, which takes an existing idea or product and makes it better, disruptive innovation is achieved by thinking outside the box and changing the game. The everyday improvements to the web’s standards and technologies are a collective sustaining innovation of the internet, while the coworking movement and its embrace of technology to create a virtual office anywhere in the world, is a disruptive innovation to corporate america. The coworking movement has hit its stride due to a myriad of dedicated technology “geeks” that were tired of working thankless jobs in America’s corporations. Coworkers are a niche group of writers, developers, and other independent contractors that pool together their resources and share a common office space. These spaces are non-traditional work spaces offering a fun and creative culture for coworkers. According to the coworking wiki, there are locations throughout the United States and the world, including Europe, Asia, and Africa.

And to coworkers, with technology making communication easier and less reliant on distance, there is no better time then now to go out on your own. According to an industry report on Computer Systems Design and Related Services in the US; otherwise known as IT Consulting, 65% of revenues are derived from the business sector. This is further broken down to the banking, finance, and insurance industries comprising 40% of revenues. These traditional businesses are employing outside consultants to build software solutions to fill industry specific and cross industry needs. Fortunately for opportunistic entrepreneurs, IT Consulting has a low barrier to entry with approximately 84% of the companies operating as “micro entities”; or companies with fewer than 10 employees. These micro entities are the model that many coworking hot spots and their individual members utilize. This business model allows for an efficient company with low overhead, and infinite scalability for any project. What sets one company apart from another are three things; the ability to identify customers’ needs, pricing your services competitively, and quickly scaling your workforce to complete the project.

I have already encountered one company which uses a similar business model to fill a niche market in the banking industry. Beth Hamlin; one of the instructors from my credit training, is the Executive Vice President of Caliber Commercial Corporation, which provides credit analysis and training services to commercial lending institutions. This service fills a position banks need, while eliminating the expense of hiring and training internal personnel.

But it is important to caution all current and future entrepreneurs, to be wary of the micro entity model. Trying too hard to build a firm that is light weight and easily scalable, may possibly burden the firm with core and overhead costs that surpass the savings from being a scalable firm. The Undercover Economist Tim Harford passed along a coherent essay by economist Michael Munger on the theory of the firm.

Then one day, in one firm, one manager, perhaps on a whim, outsources the computer services or janitorial services or the legal advice. Not to India or Ireland but simply to another company across town or across country. The boss signs a contract, after taking bids from several companies that provide similar services. These companies are forced by the scolding winds of market competition to provide excellent service at low cost. By looking at the different prices in the bids offered in this competition, the boss learns something. He learns how much the service costs to provide. And he learns how much money he saves by laying off the employees who used to provide the service in-house.

It’s hard to fire employees, particularly since most employees are smart enough to work hard enough to get acceptable performance reviews. The boss also has a hard time motivating the in-house staff, because watching each employee is expensive and tiresome. But it’s easy to fire contracted employees, because you just sign a new contract with a competitor. Why not let the market system do your motivation work? Let’s suppose that our outsourcing boss sees the company’s profits rise dramatically, and the stock price goes up 18% in six months. Life is good, for the boss.

Hypothetically speaking, lets assume that Generic Firm; a mid-sized corporation, decides to redevelop their enterprise IT framework and outsources a portion of the web development needs to their local coworking office via a three month contract. It’s a beneficial deal for both parties because Generic Firm will save money on its head count (the number of people they employ) by outsourcing part of the project to a local company, and the coworking office receives a solid contract that can help keep the lights on for an additional three months. But the pressure now lies on the coworking office. Can they scale quick enough to accept the contract and cheap enough so the contract can earn a profit? The difficulty with a coworking workforce is that independent contractors are traditionally working on their own projects, and may not be available to work on Generic Firm’s larger project. Additionally, coworkers may expect a certain level of compensation which may not be in line with the monetary value of Generic Firm’s three month contract. If these difficulties are not addressed by the coworking office’s leadership, they may lose Generic Firm’s contract and future referrals from Generic Firm’s customers and vendors.

But I digress. Coworking takes advantage of an identified need for independent contractors to work with like-minded individuals. The business model has made office space simpler, cheaper, more affordable, and easier for independent contractors to access.

.info: economist

Posted on March 8th, 2008 | By: bootstrap economist | Filed under Web Technologies

Leave a Reply

You must be logged in to post a comment.