Leveraging the Crowd For Innovation and Growth
Subscribe today for Free Enterprise Updates
- Latest business trends and best practices
- News about legislation and regulation impacting business
- Business how-to articles from industry experts
- Commentary and interviews with newsmakers in business and politics
The difficult economy is pushing businesses to leverage new Internet capabilities and the millions of people who use them to develop, improve, and finance their products and operations.
Crowdsourcing is a growing trend in the private sector. Akin to outsourcing, where specialized labor forces and lower costs help businesses, crowdsourcing is the act of tapping the intelligence of the digital crowd to give companies faster, cheaper and more creative ways to improve their products and operations.
"As more companies have started using crowdsourcing offerings, like Amazon Mechanical Turk, it's no longer a competitive advantage," says Sharon Chiarella a vice president at Amazon. "Crowdsourcing has become a competitive necessity. The access to on-demand, scalable workforces are changing how work is getting done."
To be sure, the concept of crowdsourcing predates the Internet. For example, many business vehicles bear a bumper sticker with a phone number that asks, “How’s my driving?” This solicits broad public response that can help improve driver performance. The same concept is being used online across myriad industries.
Through numerous digital platforms, including social media accounts, companies can submit a specific challenge or need with defined criteria for the ideal solution. In gathering and selectively following the responses, businesses can gain critical insights on product innovation, business improvement, and consumer demand.
“Crowdsourcing, simply put, is pitching your problem out there and having groups of people propose solutions,” says Matt Barrie, Chief Executive at Freelancer.com. “It creates a competitive social interaction between diverse sets of crowds who you would probably overlook, simply because they are not the usual people you run to.”
Adds Narinder Singh, co-Founder of the cloud computing firm Appirio, “We have seen technology-based crowdsourcing, where the ubiquitous connectivity of the Internet, new cloud technologies, and intertwined social networks have supercharged how people collaborate. For the first time in human history, a simple Internet connection can allow you to participate in a world of problems related to design and development anywhere on the planet.”
Cost savings is another crowdsourcing advantage. A small fee or award is sometimes offered on the crowdsourcing platform, but the amount to significantly less than the cost of a full-time employee, including wages, benefits, and overhead, recruiting, and training costs. According to a study from Everest Group, crowdsourcing is even 70% cheaper than outsourcing, which has its own cost advantages over direct employment.
While crowdsourcing has been an attractive tactic for small businesses and start-ups, the Everest Group study reveals it is becoming increasingly important for large businesses as well.
"Our study finds that crowdsourcing utilization has evolved from small- to medium-sized businesses to an increasingly accepted business practice for large corporations,” says Sarthak Brahma, the practice director for pricing assurance at Everest Group. “As cost advantages are progressively augmented by greater accountability, quality assurance and timeliness assurances, the 'on-demand' talent model will continue to gain a greater foothold."
Indeed, major corporations like Coca-Cola, Microsoft and GE are turning to crowdsourcing platforms to generate innovative ideas and products and services that resonate with their consumers. Speakers from many large companies attended and spoke at the recent crowdsourcing event Crowdopolis, revealing the growing trend of crowdsourcing across the private sector.
Some critics contend that crowdsourcing limits job growth, as companies turn to Internet users over paid employees. But in the long run, crowdsourcing can lead to job growth as successful businesses hire employees to manufacture, market, and sell the products they develop and enhance through the crowd.
The Digital Crowd As a Source of Capital
The digital crowd is also a source of direct funding. Some companies offer various rewards for online users who provide funding in small amounts. In the aggregate, this can become a large source of capital for growing companies.
The recently passed JOBS Act makes it legal for businesses to avoid registering with the Securities and Exchange Commission (SEC) to offer debt or equity in return for funding from the digital crowd. Companies can sell up to $1 million in stock every year; investors earning less than $100,000 annually can invest up to $2,000 in a company each year. Before this kind of investment was made legal in the United States, there were about 450 crowdfunding platforms worldwide in 2011, raising some $1.5 billion, according to a study from Crowdsourcing.org. Crowdfunding could reach $2.6 billion in 2012.
Congress made clear in the new law that investor protection is paramount. Investors – particularly those who have not previously invested in a start-up – need to understand there is a risk to losing their investment. They also need protection against illegitimate organizations seeking to defraud them. The SEC is developing rules to address this.
“Once the rules are complete, accredited or unaccredited investors can invest directly into these businesses,” says Sam Houghton, a crowdfunding expert and finance attorney. “What this means is that the average American can now invest in a market that was previously unavailable. Private equity investment is no longer limited to the extremely wealthy.”
Crowdfunding is on hold until the SEC rules are released, but when they are, a new world of opportunities will open up to both growing businesses and investors.