From the June 2008 issue of Research Magazine • Subscribe!

How Will the Industry Transform Itself?

Here's a reality check for financial advisors. First, in 30 years there won't be anything called "financial services," let alone "financial advisors." Second, even though you may be a very nice person, most consumers don't trust you.

According to recent surveys, folks are more likely to trust a stranger on the street or on the Internet. That can't be much fun for you. Third, these first two facts are interrelated. Fourth, your skills and products are hours, days, weeks, or months away from becoming a "one click": a standardized commodity. Finally, this is not your fault. You are not alone. There is something you can do about it.

Maybe the silver lining in the current mayhem of the financial services industry is that you will want to take a hard look at "what has been" versus "what is becoming." If the subprime meltdown has taught us anything, it's that today's business models are on a dangerous collision course with the people they should be serving. A dramatic course correction is upon us.

Why It's Not Your FaultIn my book The Support Economy: Why Corporations Are Failing Individuals and the Next Episode of Capitalism, I explain this reality check. I'll provide some highlights here, and if you want to know more, it's all laid out in the book. The first thing you need to know is that you began your career at the tail end of what has been a long and successful chapter in the history of capitalism. As it turns out, capitalism is a book of many chapters. It survived all these centuries not because it's always been the same, but because it adapts to people's changing needs.

The most recent chapter -- called "managerial capitalism" -- took shape early in the 20th century. It was based on the discovery of a new commercial model called mass production, based on high volume and low unit cost -- perfectly suited to a rapidly growing population of mass consumers. These were ordinary folks who had few things and wanted more, but at a price they could afford. Most producers back then didn't see the economic potential in the pocketbooks of farmers and shopkeepers. It fell to outsiders like Henry Ford and his engineers to make the big breakthroughs. Soon they couldn't sell Model Ts fast enough. The rest of manufacturing, and later services, followed.

Deep in the DNA of that revolutionary business model were several essential elements that continue to define the way we do most business today, including financial services. First among them was the standardization of parts and products. Next, standardization required a firewall between the company and the customer. There was no way to maintain efficiency with customers sticking their noses into the production process asking for special twists and flourishes. Those older practices had to be extinguished. Finally, assets were concentrated so that they could be administered by the command-and-control hierarchy of a new professionalized management.

With managers and employees on the inside and customers on the outside, the only point of contact was an anonymous transaction tinged with an adversarial "take it or leave it" attitude. So sellers pushed the products they had, while buyers tried to remember to beware. In spite of this, most American consumers were grateful for the opportunity to improve their standard of living with a lot of great new stuff, and -- with some notable exceptions and setbacks -- they tended to regard business as a progressive and enabling force.

Fast forward to the 21st century. The first thing you notice is that people have changed a lot. Most people are no longer content to be nameless, faceless transactions. They experience themselves as unique individuals in search of what I call "psychological self-determination." They want their voices to be heard and to matter. They seek control over their lives. Because they already have a lot of stuff, and because their lives have grown more complex, these new consumers are in search of more than just commoditized goods and services. They seek the kind of support that will enable them to live their lives as they choose. Instead of an impersonal distant company and its iron rules of efficiency, they yearn to do business with people they can trust. They want understanding and advocacy expressed through transparency, accountability and integrity. Their unmet needs are the foundation for a new "support economy."

The second thing you notice is that while people have changed a lot, businesses haven't changed very much. Sure, our companies are larger, faster and more complex, but they are still fitted out for the old mass order. Products are made on the inside and sold to them on the outside. The relationship is adversarial and, all too often, zero-sum. Consumers are expected to conform to the efficiency rules established by the company. There is little transparency and less accountability. The result is a growing chasm between people and the organizations they depend upon as consumers and employees. The new consumers are frustrated. They don't trust business, and they don't trust business leaders. The more intimate and urgent their needs -- finance, insurance, health, travel -- the more frustrated they feel.

This chasm is the harbinger of a classic turning point in the history of capitalism, when changing social values and needs outrun the pace of institutional change. During such times, there is a downward spiral of conflict and diminished economic returns until breakthroughs occur that realign business with the people it should be serving. What's required for such breakthroughs? Historically, they have resulted from the convergence of three forces: new populations with unmet needs, the technological capability to meet those needs, and what I call a new "enterprise logic." That means a commercial framework that links producers and consumers together according to an entirely new pattern. As a result of figuring out the new enterprise logic of mass production a century ago, Henry Ford ignited the great realignment that produced the many prosperous decades of managerial capitalism.

The time for the next great realignment is upon us. We've got the unmet needs. We've got vast digital platforms capable of individualization on a global scale. What is just starting to emerge is the new enterprise logic that will bring it all together in a new way, and transform your business forever.

What You Can Do About ItThe bad news about today is, paradoxically, the good news about tomorrow. All that mistrust, frustration and stress is layered with unrealized economic value, just as farmers' frustrated desires for an affordable automobile made Henry Ford rich and created the modern automobile industry. We are facing the opportunity for the next leap forward in our economy. All it takes is a willingness to look beyond the status quo.

What will the next "new enterprise logic" look like? What will be the DNA of the new business model? How will it translate into financial services? Here are some headlines for you to consider. The first thing we know is that the new model must connect with individuals on their terms in their space. It means getting out of the insulated perspective of "organization space" in which one thinks: "Here's my product. How do I sell it to them?" It means entering instead into the world of the individuals you want to serve -- what I call "I-space." There the questions are different: "Who are the individuals I want to serve? What kind of support do they need? What collaborators will I want in my network in order to provide my constituents with the support they seek?"

One of the most stunning recent examples of this kind of breakthrough came from Steve Jobs and his team at Apple. Between 1999 and 2003, sales of recorded music fell 25 percent as people shifted to peer-to-peer networks like Napster and Kazaa. By 2003 five billion tracks traded on these networks monthly. Despite the vast numbers of consumers clearly wanting to have music their way, music industry execs fought ferociously to maintain the status quo. They tried to restrict CD usage with a variety of doomed approaches, and then launched a legal juggernaut against Napster and hundreds of their own most ardent customers.

But instead of seeing a nation of criminal mass consumers, Jobs perceived a new kind of individual with unique desires. He launched the twin lifeboats of the iPod in 2001 and iTunes in 2003 which bypassed the old mass consumption industry structures and reunited music with each listener. Apple's expedition into I-space was rewarded with loyalty and cash as the iPod became the Model T of a new age of individualized consumption. Sales reached 100 million in 2007 with a market share of around 80 percent. Notice what's most elegant about the institutional bypass. Valuable assets now trapped inside the old enterprise logic need not go down with the ship. They migrate and are reconfigured in the new space, where they once again can realize value and drive growth.

Today's individual consumers are in search of that same kind of institutional bypass in every aspect of their lives as they endeavor to care for themselves and their families: health care, education, insurance, financial services, travel, housing, product acquisition, etc. Apple's innovations foreshadow a new enterprise logic, but they are only the beginning. In this new support economy, competitors won't be individual companies stuck in industry silos offering merely products and services. Instead the new competitors will be federated networks that are dynamic constellations of enterprises, individuals and communities. They will orbit around individuals in I-space.

Federated support networks will vary not only in terms of what kinds of support they offer, but what qualities, values and experiences they bring to the support proposition. There will be as many kinds of networks as there are constituents to join them. Think of networks united in the "brand" values of Apple, Amazon, Craig's List, Vanguard, Facebook, Canyon Ranch, WalMart, Tiffany, Brooks Brothers, Versace or my Grandma Sophie. Some will provide enduring relationships with plenty of dialogue and intimacy. Others will use transparency, strict rules of engagement and high degrees of automation. They may be cool, funky, chic or Jeffersonian. Individuals will opt in and out of multiple support networks depending on their needs, values, communities, income, life stage, etc. Each network will provide some cross section of the products and services its constituents want, at the prices they want to pay, in the context of the values and qualities of relationship that are most meaningful to them.

A final reality check: Consumers aren't waiting for you to figure out how to perform this bypass. They are doing it themselves. People are giving up on trying to get their voices heard across the chasm. Instead, they are turning to one another for solutions, just as they did with music. For example, most Americans say that while they prefer to get health information from their doctors, they actually get most of it from online communities and websites. Most Americans do not trust product or service information provided by sellers. Instead, they turn to online community chat and customer reviews.

Fed up with models of education frozen inside organization space, people are teaching each other across a variety of subjects, like LiveMocha's online community for learning languages. This kind of social computing is now moving into even more intimate zones of I-space like financial services. Peer-to-peer lending is now available from websites like Prosper, Zopa, CircleLending and The Lending Club. According to BusinessWeek magazine, this opportunity was created by "consumers' mistrust of financial institutions." That same mistrust contains all the raw material you need to build a lifeboat that can take you to tomorrow.

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Shoshana Zuboff is a Harvard social scientist, BusinessWeek columnist and co-author of The Support Economy: Why Corporations Are Failing Individuals and the Next Episode of Capitalism. She spent 25 years on the Harvard Business School faculty, where she was the Charles Edward Wilson Professor of Business Administration.

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