Strategy & Leadership

Haydn Shaughnessy: understanding the shift to the new economy

Stephen Denning
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 Interview

Haydn Shaughnessy: understanding the

shift to the new economy
Stephen Denning

he fastest growing business segments are increasingly dominated by companies

T
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that operate nimbly with a single-minded focus on customer-focused innovation,

often through customized digital connectivity. As this approach takes hold in more
and more industries, the result is a tectonic shift in the business environment that, in effect,
opens up a new economic frontier. There are many segments in this emerging landscape:

 The experience economy: Consumer and B2B businesses that see the experience their
offering produces as an essential element of its value.

 The sharing economy: Businesses that employ digital connectivity to sell and deliver
physical assets as easily as virtual goods and offer them for temporary use at all
times.

 The everyone-to-everyone economy: Characterized by

hyper-connectedness and collaboration of ecosystems of
consumers and organizations across the gamut of value
chain activities: co-design, co-creation, co-production,
co-marketing, co-distribution and co-funding.

 The Internet-of-things economy: By connecting and linking

billions of digital devices the Internet of things unlocks the
excess capacity of physical assets, creates liquid,
transparent marketplaces, radically changes the
management of credit and risk and integrates value chains.

 The creative economy: Businesses that see creating a

customer and continuously adding value to their offering in
anticipation of the customer’s changing needs as their
primary goal.

Increasingly, ecosystems of companies linked together for mutual

gain are enabling interactions and promoting innovation in all the
new economy segments. To operate agilely in this evolving
environment, managers at all levels must learn new success
factors and acquire new skills. Failure to understand the rules of
the new economy represents a threat to corporate prosperity and
even survival. Yet those firms that master the new dynamic have a
Haydn Shaughnessy bright future indeed.

DOI 10.1108/SL-03-2015-0022 VOL. 43 NO. 3 2015, pp. 37-43, © Emerald Group Publishing Limited, ISSN 1087-8572 STRATEGY & LEADERSHIP PAGE 37
 In his article last year for Strategy & Leadership (Vol. 42 No. 3) author and founder of
London-based The Disruption House consultancy, Haydn Shaughnessy, explained that it is
increasingly the innovations and expertise of the ecosystem, not the just the talents and
resources of the firm, that are critical to future wealth generation. In this world, a firm must
be co-productive with the app developer community, the content community the advocacy
community and the co-creative customer ecosystem, not merely traditional product
development and marketing.
Shaughnessy’s new book, Shift: A User’s Guide to the New Economy (Tru Publishing,
January 2015) provides a comprehensive tour of this emerging new economy. In this
interview, he discusses the models and concepts that underlie it.
Shaughnessy was interviewed by Stephen Denning, whose latest book, The Leader’s
Guide to Radical Management (Jossey-Bass, 2010), describes management principles
and practices for reinventing management to promote continuous innovation and
adaptation ([email protected]). His essays appear at Forbes.com: http://blogs.
forbes.com/stevedenning/.[1]
Strategy & Leadership: What exactly is the shift that you talk about in your book?
Haydn Shaughnessy: It’s principally a shift from production through enterprises with
traditional management in vertically managed structures, towards production in horizontal
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ecosystems in which individuals and firms choose to cooperate. As in any big shift, this one
is also about changed social relationships in the workplace and changed roles.
In place of a single power asymmetry around the control over the means of production, the
ecosystem allocates power to the entity that facilitates and manages ecosystem processes
and interactions via a digital platform, to the innovators and among the participants. Clearly
large platform organizations have capital resources, but the intellectual property and risk
taking lies with this less well defined entity called the ecosystem.
These ecosystems are increasingly a new power center in the economy. And companies
that manage ecosystems through platforms are powerful new economic actors. So it’s a
shift in the power structures of society. It has huge implications for how people and
organizations operate, produce and distribute value.
S&L: What are the implications of the shift for senior managers?
Shaughnessy: One implication of the shift is a change in relationships in the workplace. For
the last 150 years, those relationships have been defined in a very specific vertical power
structure, which is now breaking apart and being replaced by horizontal arrangements.
Another is the dramatic change in velocity with which work is done. For instance in the
fashion industry, Zara and other “fast fashion” firms have reduced the cycle time from
design to customer from around a year to less than a month. You can also see that velocity
replicated in Dev-Ops, and “beyond agile” processes where updates are now measured in
hours or minutes, typified by Netflix and Facebook. These firms can rapidly adjust to
mercurial shifts in customer wants and needs with significantly higher profits.[2]
Openness, community and ecosystems are becoming dominant because they are more
productive from an enterprise standpoint. This culture of doing things in a more open way
is forcing change on enterprises.

‘‘Ecosystems of companies linked together for mutual gain are

enabling interactions and promoting innovation in all the
new economy segments.’’

PAGE 38 STRATEGY & LEADERSHIP VOL. 43 NO. 3 2015

 ‘‘It is increasingly the innovations and expertise of the
ecosystem, not the just the talents and resources of the firm,
that are critical to future wealth generation.’’

The reality is that the Creative Economy is here and concepts like velocity are what define
it. A decade ago we were wondering what the Creative Economy might actually mean. Now
we can see it: it takes the form of delegation of responsibility to individuals and firms in
ecosystems that find ways to cooperate and innovate while taking risks with their time and
income. In a micro economic sense, it’s far more effective for a company to delegate the
risk of innovation to individuals or micro-enterprises, rather than taking on the risk
themselves.
Like all the big shifts in history, like the Industrial Revolution, this is about the changes in
social relationships in regard to wealth. That’s why it’s a bigger shift than just technology or
digitization. It has to do with the totality of social relationships. It’s about empowering
organizations and people for this new economy.
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S&L: Why has the shift come about?

Shaughnessy: The values of delegated innovation and risk have arisen because it is more
efficient and scalable for the firm. Most companies face a growth crisis because it is no
longer so easy to buy growth through acquisition or by increasing scale in traditional ways.
As a result, many big industrial companies have been running out of steam.
The change is also being driven from below. It is increasingly difficult for people to see a
future that doesn’t involve taking risk and becoming more entrepreneurial. Over the last few
decades, people have started learning how to take risk within communities of peers. It
began in the open source movement and it helped the start-up scene flourish twenty years
ago.
The reality is that the traditional economy is facing an enduring crisis with declining rates
of return on assets, dispirited employees, negative job growth and failing innovation.[3] In
this situation people are turning to ecosystems of all kinds – AirBnB, Uber, games
performance, car sharing, open source, open design, open engineering, even open
biology, all in an attempt to piece together viable personal incomes. Collectively, this is a
powerful force, supported by network technology.
Technology is an enabler, not the driver. Technology is often still busy catching up with the
change that people already want. Thus people wanted more mobile long before network
providers created the bandwidth.
One interesting feature of the change is that in the past disruptive change was often driven
by lower-cost centers of production in Asia that were able to copy Western or Japanese
production techniques and then improve on them. Today’s shift is not about huge cost
pressure from outside. There is no outside. It is about change from within the very heart of
our own organizations.
S&L: Which firms best exemplify the new economy?
Shaughnessy: If you want to see the total package, the move to a delegated form of risk,
the move to downstream revenues away from product, the move to co-dependency on
external actors like open source, a company with a very strong narrative around change,
you should look to Autodesk.
Autodesk, a leader in CAD/CAM software and building system modeling, has created a
platform where companies in construction and civil engineering can draw on a growing

VOL. 43 NO. 3 2015 STRATEGY & LEADERSHIP PAGE 39

 number of apps created by an independent community. One aim is to help construction
companies simulate all aspects of a giant building project before breaking ground so they
can anticipate problems and better coordinate suppliers.
In 2012, Autodesk moved away from selling software to leasing or renting it out. That was
a good decision even from a conventional point of view, but a brilliant decision from a
platform standpoint.
On a conventional analysis, it now has recurring revenues tipping into its bank accounts
each month without requiring the usual effort involved in making new sales. But more
importantly, it now has continuous insight into how its products are used – by providing
its software as a service in the Cloud, it logs all instances of use. That means it has
instant feedback on the parts of its software that work well and those that work badly.
With this feedback, it can plan its updates more effectively and also deliver them
instantly. Amar Hanspal, the senior vice president of Autodesk responsible for platform
development, summarizes the advantages of this continuous connection:
How you connect is transformed. You know how customers are succeeding with your
product. You don’t go out every six months and interview them . . . . You have direct privacy,
security, and success insight every morning and that goes well beyond what CRM
gave us. How customers interact with us is becoming much more immediate and more
continuous.[4]
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Autodesk now also has 120 million consumer users, in contrast to its 12 million business
users. Impressively, that consumer audience has grown over the span of only three years.
According to Hanspal, the growth has come in part through acquiring companies or
networks like the MIT spin-off Instructables and Tinkercad. The company has partnered
with LEGO to provide consumers with software for LEGO robot design. And they have a
community of 6.5 million students and teachers. These all represent a concerted effort to
build on and with the maker community.
By having continuous connection and securing continuous feedback, companies like
Autodesk are able to provide continuous delivery or continuous updates of their products.
In the old days of IT, a product like SharePoint from Microsoft was updated once every
three years in a major release that would bring IT departments to a grinding halt. Today,
companies like Autodesk and Netflix can update their software as often as every two
minutes.
S&L: Other examples?
Shaughnessy: The giant manufacturing company Bombardier makes trains. Typically, in
the past, it took total responsibility for the design, building, delivery, and after-sales care of
its products. Now it is looking at how it can offload some of that burden to its suppliers. Its
brake partner Drakes Knorr Farley, for example, is responsible for ensuring that the brakes
work as specified. By delegating responsibility to its suppliers, Bombardier can grow
without an excessive risk management burden.
Open source software is another successful example of the shift. Open source code is
doubling every year. It is now key to growth in a broadening range of industries. Even

‘‘The Creative Economy . . . takes the form of delegation of

responsibility to individuals and firms in ecosystems that
find ways to cooperate and innovate while taking risks with
their time and income.’’

PAGE 40 STRATEGY & LEADERSHIP VOL. 43 NO. 3 2015

 ‘‘Autodesk, a leader in CAD/CAM software and building
system modeling, has created a platform where companies
in construction and civil engineering can draw on a growing
number of apps created by an independent community.’’

telecommunications and finance, two highly regulated and standards-based industries, are
heading towards open source software.
Another interesting exemplar is Bango PLC. It facilitates carrier billing. To do carrier billing
in the App store, you have to be able to turn something like Google’s App store on in nearly
100 countries, with eventually several hundred telecom carriers. Carrier billing can be a lot
less frictional as a means of buying things online than say credit cards. When Bango turns
on carrier billing for Google, you see an increase in sales, anything from threefold to tenfold.
Suddenly shopping is a whole lot easier. People get their transaction on their mobile phone
bill.
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S&L: Will the old brownfield companies be able to make the shift?
Shaughnessy: Some big companies like GE are well into the shift. GE has a ten-year history
now of changing the culture of its various divisions and of adopting ecosystem-led
business. Look at their efforts in industrial data (using the ecosystem to provide data
solutions for global turbine usage). Look at GE’s healthymagination initiative – an attempt
to generate data ecosystems in health diagnostics – and at their work with Quirky –
donating patents to an open community. GE is a company that sees the future.
Intel is another good example. They have a 21st Century robotics project. They are trying
to engage consumers to imagine what they would like to see robots do. The process is
about connection with the ultimate customer. They need to understand what the customer
might or might not want. They need to project things into the customer space in order to
understand their B2B business.
Many people inside these big firms know about the new economy, but they often have to
work against entrenched systems, procedures and attitudes. They go to a CFO and say, “I
want to do a connected kitchen project, but it means we are going to be looking for our
revenues far downstream.” And the CFO is saying: “What about the $20 million you will
spend developing that? Where’s my margin in the short term?” We need a CFO dialog
around how you change these techno-metrics. How do you report and assess risk as a
CFO? It has to change because what the CFO uses now, the business plan based on
discounted cash flow, is out of date.
S&L: What are the implications for existing large companies?
Shaughnessy: Many large companies will have to get smaller. One of the reasons why the
large firms aren’t usually good exemplars is that they shouldn’t be large firms. When will the
big banks and industrial companies lay off half their work force? That’s what is coming. It’s
a big social and economic fallout of which we just see the beginning.
Twenty years ago, we said the next banks would be telecommunications firms, typically
mobile carriers. In Africa, the next banks are already the telecommunications firms. In
China, the next banks are Alibaba and TenCent Holdings.
The reality is that communication devices can replace banking systems and they are
already doing so. Bango takes friction out of the whole process of turning on carrier billing.
They employ around 70 people, yet they service 100 carriers around the world.

VOL. 43 NO. 3 2015 STRATEGY & LEADERSHIP PAGE 41

 Similarly WordPress has around 200 people, yet 23 percent of all websites around the
world are based on WordPress. It’s these kinds of organizations that have the staffing
ratios right, to put it bluntly. You don’t need many people to do ecosystem platform
business.
S&L: How do firms achieve such scale with so few people?
Shaughnessy: One reason is the use of platforms that constitute a new form of externalized
organizational structure. Apple externalizes the production of the apps that makes its
phones so attractive to users. The developers of those apps, the primary instigators of
broad-based innovation for Apple, operate as an externalized community that is as integral
to Apple as an entity. The developers take on much of the consumer-centric application
innovation that makes Apple’s products world beaters. They are outside the walls but they
are a part of the business process. They are not an outsourced service provider though –
they are an external community.
Another reason such firms achieve scale with so few people is that they have mastered
the social arena. For instance, TED the lecture forum of experts who share their insights
on emerging societal issues, with its online TEDx platform, has achieved high social
affinity at very low cost. Such firms thrive by channeling something that people love
dearly or feel close to. TED spends next to nothing on winning affinity. It is born social.
An increasing number of companies like WordPress have a social purpose as a facilitator.
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They are not going to appear on next year’s Interbrand 100. But they have all the intellectual
asset base of a global brand leader, in terms of goodwill – for nothing. It’s worth billions. The
old economy burns billions of dollars on buying goodwill whereas social companies have
it as a right.
S&L: Will any sectors not be affected by the shift?
Shaughnessy: You see some sectors where the business model is anchored in huge
investments in stable activity over long periods, such as plant and machinery, oil and gas
supply and rail transportation. They will be affected, though they can delay the inevitable,
because they can construct, and hide behind, impressive barriers to entry.
But how much longer for example, can rail transport delay introducing a more “app-based”
experience on the train? The delay persists because railroad bureaucracies cannot cope
with the change and their customers, in many cases, have few viable alternatives to rail
travel.
Just think what more these firms could accomplish, though, if they opened up to the
ecosystem. They could recruit more talented employees and attract more innovative
partners. They and other firms that originated in the early 20th Century need to start thinking
that way – to prioritize the inventive and productive elements of communities or ecosystems
rather than the historic systems of the firm.
Many firms reacting to new competitive forces put too much emphasis on their mythical
“core competencies.” A recent study of companies going through transformation showed
almost all of them were investing in their core competencies and using a strict definition of
ROI. It’s ironic to think that they are trying to transform themselves by sticking to their core

‘‘By having continuous connection and securing continuous

feedback, companies like Autodesk are able to provide
continuous delivery or continuous updates of their products.
You don’t need many people to do ecosystem platform
business.’’

PAGE 42 STRATEGY & LEADERSHIP VOL. 43 NO. 3 2015

 ‘‘Banks, manufacturing companies, and even retail need to be
disaggregating, taking on new partners and being more
systematic in how they externalize risk.’’

competencies. By contrast, Amazon and Apple have shown that they were able to move to
radical adjacencies, once they mastered big data.
S&L: What does the shift mean for the way companies are managed?
Shaughnessy: It depends on which companies we are talking about. We see companies
now that have huge valuations and yet have less than 100 employees and which function
like start-ups. We shouldn’t dismiss the fact that there is less and less need to grow a huge
employee base in order to grow revenues and operate globally.
In financial services, and many industries, there will be huge externalization of risk and
innovation, and that means they are going to shrink their workforces and transition to more
partnerships and ecosystems. Whereas we now have a few hundred new software
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companies in London, we need tens of thousands of new tech companies and when that
happens we will see financial services changing several times a year and not just one an
epoch.
Banks, manufacturing companies, and even retail need to be disaggregating, taking on
new partners and being more systematic in how they externalize risk. If they don’t do that,
they will be unable to innovate and operate fast enough in the new economy and they will
be disrupted by other companies.
S&L: What does the shift mean for leadership?
Shaughnessy: Leadership has been like a club for a long time. There is too much elitism
around it and too much sense that the journey ends at the C suite. Leaders need to go back
to school and learn about the new economy, new work relationships, new ways to scale,
new enterprise structures, new ways of framing strategy, new ways of structuring
investment risk, new forms of incentives, and the need for humility.

Notes
1. This article draws on another version of this interview at Dennning, S. “The Most Wasteful
Economic System Ever Invented,” Forbes, February, 4, 2015, www.forbes.com/sites/
stevedenning/2015/02/
04/the-most-wasteful-economic-system-ever-invented/

2. Denning, S. “How Agile And Zara Are Transforming the US Fashion Industry, Forbes, March 13,
2015, www.forbes.com/sites/stevedenning/2015/03/13/how-agile-and-zara-are-transforming-the-
us-fashion-industry/

3. See for example: Denning, S. “Is There An Innovation Crisis At US Firms, Forbes, February 26,
2015, www.forbes.com/sites/stevedenning/2015/02/27/is-there-an-innovation-crisis-at-us-firms/

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