Bringing the Market Inside
IT-enabled internal markets can speed up and improve decision-making.
April 12, 2004 (Computerworld) --
Can the same laws of supply and demand that fuel world economies work within a company to help it staff projects, share information and even schedule manufacturing? In April's Harvard Business Review, Thomas W. Malone, the Patrick J. McGovern Professor of Management at MIT's Sloan School of Management, tells how a team at MIT has been experimenting with the use of internal markets to demonstrate that what works in the global economy may work inside your business as well. In an interview with Computerworld's Kathleen Melymuka, he explains what internal markets are all about.
What is an internal market? An arrangement where people inside a single company buy and sell things to each other for money or some kind of internal points or "funny money."
What are the broader implications of internal markets for the way we work? Internal markets are one intriguing way that people throughout a company can exchange information much more rapidly and widely in a way that lets lots more people make decisions for themselves instead of just relying on people above them to tell them what to do.
What role does IT play in the internal-market scenario? IT greatly reduces the cost and difficulties of having broad internal markets and therefore makes them more feasible in many more situations than they would have been in the past.
Talk about the way Hewlett-Packard uses internal markets to fund and staff projects. HP used a "VC cafe," inspired by how venture capitalist funding works. Anyone in the division could propose a project, and that proposal would be reviewed by a board of senior managers. If those managers thought the project worth doing, they would fund it, and then a description of the project would be posted in an internal system where everyone could see it. People could indicate interest to the project manager. In this way, projects could be proposed and individuals could find projects they wanted to do even if their managers didn't know about their interests.
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Thomas W. Malone of MIT's Sloan School of Management |
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How else has HP used internal markets? In one case, they let marketing and sales people in one part of the company buy and sell "futures" contracts for predictions about what the sales of a particular product would be. For instance, people who believed sales would be 10,000 to 20,000 units would buy a contract for that prediction. If the prediction was correct, their contract would be worth a dollar; if incorrect, worth nothing. So over time, people bought and sold their futures contracts on sales predictions, and prices varied according to the collective opinions of everyone participating in the market. It turned out that this market made more accurate predictions of actual sales than HP's own market research.
Why do you think that happened? Because the people participating in the market had a clear incentive to bet on the things they actually believed would happen rather than the things they hoped would happen or would make them look good. Another reason is they were able to combine the opinions of everyone participating more efficiently than a single survey or forecast would usually be able to do.
Can you briefly explain the internal market experiment MIT is doing with Intel? We've worked on a project with Intel to develop a scenario for how they could use an internal market to allocate their manufacturing capacity. Plant managers would sell futures contracts for a certain number of products to be delivered at a certain time in the future, and salespeople would buy those contracts in order to resell those products to their own external customers.
Through the process of supply and demand, prices for different products at different times would vary, and at the last moment before manufacturing needed to begin, the most highly valued products would actually be scheduled in the factories. In this way, the collective knowledge of all the plant managers and all the salesmen about manufacturing costs, customer demand and other factors could be efficiently taken into account in deciding exactly which products to make when.
How well do internal markets respond to change? They can respond very rapidly to changing conditions. Imagine that an earthquake disrupted an Intel factory in Singapore. If they were using an internal market, the response would be determined by rapid exchanges throughout the whole company. Other plant managers who had available capacity could quickly bid on performing the highest-value jobs that had been previously scheduled for the disrupted plant. Salespeople could negotiate to be sure the most important customer needs were met, and hundreds of people throughout the company could be simultaneously working on different parts of the problem without any bottleneck in the process.
Are there situations in which internal markets wouldn't work well? Certainly. In some cases, the best decision for the company is something that internal buyers and sellers would never agree on because it would never be in their own individual interests. In other cases, like when a company is shrinking, it might be possible to make decisions with internal markets, but it's likely to be faster and more effective to do so with centralized managers.
Why haven't internal markets been used much up to now? The most important reason they haven't been used is that the cost of communications and information processing needed for them to work has been prohibitive. Now those costs are falling dramatically with new information technologies.
How do internal markets facilitate individualized service? Internal markets let individual salespeople bid as much as they think it's worth to provide expedited delivery or other kinds of specialized service for their own individual customers instead of having to do this by calling in favors or pulling strings throughout the company. The individual salespeople can see immediately what the actual cost would be and decide whether it's worth it in each case.
And internal markets tend to keep people honest, right? Internal markets provide the right incentives for people to buy and sell according to what they actually think will happen. It is, of course, possible that people might try to manipulate the market, [but] I think it will be easier to enforce trading rules because the senior managers will still have the power to punish those who abuse the internal market.
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Some Advantages of An Internal Market
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Bringing the Market Inside
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