Outsourcing vs. Peer Production

Over the last two or three years, increased technological sophistication, which has amplified the cognitive and social capabilities of the population, and the architecture of the Internet, which has enabled networking of these capabilities, actively support group-forming networks, whose members can assemble and maintain persistent communicating groups. These technological shifts, in conjunction with the increasingly information-intensive nature of business processes and the growing importance of knowledge in the economy, have promoted the growth of digital networks to create economic value. Digital networks of productive collaboration coordinate distributed potential sources of effort and aggregate actual distributed effort into usable end products. A key feature of these collaborative networks is effort contribution to creation of a common good with the primary incentive to contribute following diverse social signals. Such “commons-based peer production” (the term was coined by Benkler in his seminal article) is giving rise to a new “contributory economy” characterized by various clusters of cooperation.

I think some business processes lend themselves to outsourcing to such clusters and may be more cost-effective than even offshoring. This is particularly true of business processes where the primary object of production is information and I am talking beyond Wikipedia and open-source. For example, P&G's CEO states that he'd like 50% of the firm's innovations to come from outside the company, a phenomenon known in the firm as "open innovation". Some of the firm's initiatives in this regard include e-R&D where the company posts its challenges online for solutions from around the world, the use of “matchmakers” such as 9Sigma and InnoCentive to find companies or individuals with potential problem-solving ideas, and moderation of diverse customer forums.

Although this may not be the most effective means to tap into growing, low-income markets in emerging countries, I think peer production represents a potent production medium that allows firms to tap into substantially underutilized reserves of creative effort. If utilized efficiently, it can pose a challenge to outsourcing of certain categories of information-intensive business processes including product development, design, and R&D. Clearly, it is the new outsourcing paradigm.