Internalizing Positive Externalities

In my last blog post, He just up and did it, I speculated about the potential to use employee education as a means to overcome the resistance of ingrained habits and a fixed mindset that have conspired to prevent potential users of social business collaboration (SBC) tools from investing the time needed to master the new technologies, change the way that they do business and share their valuable content.

A comment about that post from one of my colleagues, Mark Masterson, raised a good point:  

Because one thing you're overlooking here is that there is a cost/benefit analysis implicit in every single worker exposed to the potential change. For some, the cost (amount of effort, degree of education, psychology, whatever) will exceed any imaginable benefit. Every time.

I think that it is worth exploring the economic concept of Externality to see if it can help us to crack the cost/benefit nut.

In standard economic theory an externality occurs when a third-party is affected by a transaction between a buyer and a seller. As a result, the price of exchange does not reflect the full cost of producing or consuming the good or service. The classic example used to illustrate this concept is that the price of goods produced in a factory that emits air pollutants as a by-product of the production process does not reflect the costs to society of the negative effects from that pollution. As a result the prices of the goods are set too low and the goods are over-consumed.

In order to address the problem of the failure of the pricing mechanism there are public policy remedies that can be applied, such as a pollution tax. In theory, the funds collected from the tax could be used to mitigate the effects of the pollution, thus reducing the harm to society. An alternative approach is to establish regulations that require the producer to “internalize” the third-party costs by either paying for remediation or prevention, such as installing pollution control devices. As you can imagine establishing a fair remedy can be very challenging – it is not possible to precisely determine the actual external costs.

Externalities need not always be negative, they can be positive too – the third-party benefits instead of being harmed. However, when positive externalities exist the goods or services will be relatively under-consumed rather than over-consumed.  It has been said that public funding of education is justified by the positive externalities generated by education - the benefit to society of a more productive and innovative workforce.

At this point you may be wondering what all this economic theory has to do with the choices being made by employees and their cost/benefit calculations.

One of the key benefits that can be enabled by deploying SBC tools is access to the Network Effect. As the number of users of the network increases the value to its members, and the enterprise as a whole, increases at an accelerated rate. The network effect is an example of a positive externality scenario.

It is reasonable then to consider what policies can be employed to internalize the positive externalities – to make them part of the employee’s cost/benefit calculation. Should an organization create an incentive for individuals to share content with the network, such as rewards or recognition programs? At the very least, shouldn’t the organization incorporate a discussion of externalities and the network effect into their education curriculum? Can we use these or other approaches to bring the employee cost/benefit calculations into alignment? There may not be a perfect solution to the cost/benefit problem but there are things that can be done.

Before you say “not so fast Henry”, I am aware that there are challenges and potential side effects of creating incentives for sharing. Since it is not possible to determine the actual value of sharing content, then how do you determine the correct level of incentive? Additionally, some employees may game the system for their own benefit, sharing more content just to qualify for incentives. This behavior would degrade the average quality of content and effectively impose a tax on their colleagues. 

It is my experience that social networks have evolved cultural responses to the “over-share” problem, with active policing by the members of those that violate the group norms. Failing that there are means to “turn down the volume” on repeat offenders. I have also found that SBC tools, such as content ratings and “likes”, can be used to highlight the valuable content, allowing it to “bubble up” and separate it from the mundane. The usage pattern for SBC tools is different from earlier collaboration tools. While the norm for reviewing your email inbox may require reading each message, this is not true for an SBC activity stream. I rely on keyword tags and “top liked” widgets to keep me informed of valuable content. I certainly don’t review every document, discussion or blog that passes by in my activity stream.

What is your organization doing to address the challenges of motivating employees to share their valuable content with the enterprise? Have you tried any of the approaches mentioned or perhaps something else? 

I would be pleased to hear what you think.