Friday, January 3, 2014

Why do we need a value accounting system?

First published on 3 January 2014 and last modified on 23 February 2015

With the development of digital technologies and the advent of the Internet the economy is following a trend of decentralization. The most innovative environments are open source communities and peer production is on the rise. The crowd innovates and produces. But the crowd is organized in loose networks, it is geographically dispersed, and contributions to value creation follow a long tail distribution. What are the reward mechanisms in this new economy?

Our thesis is that in order to reward everyone who participates in value creation, in this context, we need to record individual contributions and distribute the revenue according to a preestablished algorithm. In other words, we need to do value accounting, or accounting of all contributions to value creation processes, and to crunch them all together, for all the participants, using a mathematical formula to calculate a % for every participant. This method for redistribution must be established at the beginning of the value creation process, in a transparent way. It constitutes a contract among participants, and it allows them to estimate their returns on their investments. We call this the value accounting system.

For the rest of this article we will try to explain why a value accounting system is needed in a more decentralized economy, and unavoidable in a p2p economy.

Value accounting and value exchange
First, we need to make a distinction between a value accounting system and a value exchange system.

Suppose that we have 3 individuals picking cherries in the same basket. The value accounting system keeps track of how many cherries everyone puts in the basket, so that when they sell it on the market they know how to distribute the money in proportion to everyone's contribution. It describes how value added by multiple contributors amalgamates during the co-production processes.

Once exchange value is created, i.e. once the basket is full and ready to go to market, it can be exchanged using a value exchange system: barter, currency, etc.

The value accounting system is not a currency. It doesn't refer to an exchange between our 3 individuals who are picking cherries, or between them and another entity like a company. They are not getting paid a salary in exchange of their work. They are collaborating by adding cherries into the same basket, which is their product. The exchange might come later, once their basket is full and ready to go to the market. Meanwhile, they all share the risk of having their cherries eaten by birds, or of not getting a good price for their basket.

Value creation processes

A value creation process that requires more than one individual can be based on the following 3 arrangements, or on a combination of them:
  • stigmergic coordination-  Participants don't have aligned goals, don't maintain a relationship other than being contributors. Ex. Wikipedia 
  • cooperation - The interests of participants are not necessarily aligned, as in a corporation between employees and the business owners. 
  • collaboration - Requires a large degree of alignment in goals, like a few individuals climbing a mountain together. 
The traditional capitalist economy is mostly about cooperation, which doesn't require an tight alignment of interests. Value creation is sustained through an exchange process, where workers exchange time spent on different tasks against wages. The exchange process transfers risk from workers to the owners of capital, but at the same time the workers are stripped of their rights to the output of their labor. Workers cooperate (despite some inconveniences and misalignment in interests and goals) with the owners of capital in value creation processes because there exists an economic dependency between the two groups. Workers need money, which are by far the predominant means to acquire basic necessities. On the other side, the owners of capital need labor to generate more wealth. The problem is that this economic dependency is not symmetrical and makes the system prone to abuse, which explains the existence of unions to counterbalance the tendency for exploitation. 

In peer production we have a blend of the 3 arrangements mentioned above, mostly coordination and some stigmergic collaboration. In general, no one works for anyone else. Commons sense tells us that the output should not be owned or controlled by anyone in particular, but shared. Immaterial products are usually released as commons or as a public good. In the case of material products, the corresponding designs are released like the other immaterial products and commons sense tells us that if revenue is generated from exchanging the product on the market the revenue generated should be shared among the participants in the creation/production process.

The normal and the long tail modes of production

normal mode of production
In the traditional capitalist economy wages should be regulated by the free labor market, if we make abstraction of all sorts of mechanisms through which this market can be biased (labor unions and governmental intervention included). The market is responsible for the difference in salary between an engineer and a clerk. The notion of job implies that a salary is determined and agreed upon before the employee starts working (with the possibility modify the salary based on performance). Since the amount of $ per hours of work is pre-established, the capital owner needs to make sure that the employee produces enough value during the work hours. Therefore, a new role is needed within the organization to guarantee this, the beloved project manager. Traditional organizations spend a lot of energy doing time management, because usually the interest of the worker is not perfectly aligned with the interest of the capital owner. Classical organizations operate on the normal mode of production (from the ''normal curve'' or ''bell curve''), where the number of workers is minimized, and the majority of employees in a category produce almost the same value. Very few workers produce a less than the norm, because they are eliminated (i.e. fired). Very few produce a lot more, because there are no incentives and because the association with the mission of the classical enterprise is weak, the sense of belonging is usually low (usually fabricated by the HR department), the sense of ownership is almost absent, etc.

long tail mode of production
The situation is very different in a peer production environment, which is open to participation, is decentralized in terms of allocation of resources, and uses a horizontal governance system.
In peer production we see a log tail distribution of contributions, which means that a very large number of individuals are responsible of value creation, only a very small percentage of those create maximum value, the great majority of them create very little value, and most of the value is created by those who make small contributions. A prearrangement on revenue is impossible in this context. First, because the process of value creation is very dynamic and relations of production cannot be contract-based. Second, the process involves a great number of individuals that are distributed all over the planet, therefore it is impossible to do time management. Moreover, no one can force anyone else to work more. In this mode of production we need to evaluate rewards after the fact, based on deliverables or based on the type of activity and its potential to increase the probability of value creation. An algorithm is needed to account for contributions and to turn contributions into equity, as contributions are added to the project.We call that algorithm the value equation.

In some sense, the value equation is a distributed solution to time management, which can be applied to large scale and very dynamic peer production processes. The value equation embodies positive and negative incentives, and can contain parameters to influence how value is created, it can regulate behavior. For example, a reputation system can be tied to the value equation: a higher reputation results in higher equity, all other things being equal, and vice versa. Moreover, it can also contain parameters to incentivise periodic and frequent contributions, to prioritize important processes, to insure quality, etc.

Value accounting and network resource planning

The long tail mode of production needs a value accounting system in order to allow fair redistribution of revenue. It allows participants to record contributions of various types and it uses a value equation to turn them into equity. But this is only the first part of the story.

In the OVN model contributions are attributed to the creation of resources, which can be documents, designs, parts or full prototypes, etc. (some contributions go into infrastructure of community development and they lack clear resource or deliverables). From the resource level, contributions aggregate at the project level. The project is a venture, or a business unit. It is the smallest unit within the OVN that can generate revenue.

The fact that contributions can be attributed directly to resources (not projects) is very important for CBPP commons-based peer production, which builds on open source. On Github, pieces of software can be picked up by someone and remixed into something else. Open hardware (OSHW) development follows the same path, i.e. designs (mechanical, electronic, optical) are forked and remixed. This ability to fork and remix parts of more complex systems makes open source development a very efficient process. This explains why modularity and interoperability are very important properties of OSS and OSHW. If rewards are envisioned for the work done, CBPP needs to find a way to account for contributions at the resource level and to track the way resources are put together in different contexts (projects are considered contexts). If contributions are only recorded at the project level projects become silos of economic activity with reduced possibility of value flows between them.

Taking into consideration the structure of OS development, the solution to the reward redistribution problem is to attach some information to individual resources that allows their reevaluation later, when they get integrated in context. The metrics of evaluation can vary with context. This is the role of the network resource planning system NRP, which allows rewards to propagate upwards through value streams and the creation of a single resource can generate rewards from many different sources (many projects), depending on how many successful projects are using it.

This goes even further, because this same NRP-VAS also provides a growth mechanism for CBPP networks. To illustrate this, imagine that members of a CBPP community decide to attribute equity to resources that are created by other communities. (Example: SENSORICA decides to integrate a piece of open source hardware developed by another OSHW community). First, why would SENSORICA affiliates decide to diminish their revenue by giving equity to other groups when they can just copy the open source design? The economic rationale is to reduce efforts required to internalize new capacity (new knowledge and know how around that piece of open hardware) and to increase the speed of execution (a first to market advantage). CBPP networks grow by affiliation. By offering equity to other CBPP communities they are essentially building bridges for value exchange and co-creation, which is in essence the formation of networks-of-networks (see the Open Alliance).

We believe that in order to sustain the CBPP we need to create infrastructure that allows attribution of value-related properties to individual resources, to allow reevaluation of these individual resources in context, and to facilitate the formation of networks-of-networks that preserve the individuality of every community part of it, but at the same time brings them together on the same economic platform.

The transition models

As the economy transitions to a networked state, existing organizations are trying to adapt. We already see classical corporations going from inhouse R&D, to outsourcing R&D and more recently to crowdsourcing R&D. That movement is forced by the need to innovate fast, and by the fact that open source lowers the price to a point where classical high-tech corporations can be put out of business. Crowdsourcing R&D means utilizing all sorts of schemes to attract the participation of the crowd into innovation processes that are sponsored by these corporations. In early crowdsourcing practices corporations tried to control the innovation by signing non-disclosure agreements with the participants. Crowdsourcing platforms were created to match corporate projects with skilled individuals. The practice was competitive, i.e. the company would chose a winner among different proposals, and usually the winner was rewarded with money. This practice gradually became more open, since the first iteration of crowdsourcing platforms were not very successful in attracting the crowd. In order to attract innovation, in order to grow open innovation communities around them, corporations need to think seriously about reward mechanisms. It doesn't take much to understand why the early crowdfunding platforms were not very good attractors. I would not compete to a call by a company to design something for a few bucks, with a good probability of losing the race, knowing that the company will monopolize the work and probably make a lot of profits on it? The trend is to go from closed crowdsourcing to truly open source innovation, which must be accompanied by a broadening of the reward system. Since companies are going to deal with the crowd more and more, they need a value accounting system to account for contributions. 

In parallel to the adaptation of classical structures we also see the creation of new hybrid models. For example, in the realm or hardware, we have the emergence of ecosystems like Arduino and 3D Robotics/DIY Drones. They are composed of a classical for-profit organization surrounded by an open source community. This post describes the situation. The difference here is that in most cases the open source community pre-existed the classical for-profit, the later being created to manufacture and distribute the products created by the community. These hybrid models, the ones that are sustainable and successful, maintain an precarious equilibrium between the profit motive that can arise within the central classical organization the open and sharing culture within the open innovation community. In some cases, this equilibrium is not maintained and the synergy between the two entities disappears, destroying the ecosystem. This is the case of Makerbot and RepRap. 



  1. Hi, in the spirit of small contribution, please consider changing the three proposed modes of net-working. The names sound to similar and this is for me at least confusing. And I imagine it will be even more so for many people. Another thing is that the word cooperation for me has a good meaning, like in the cooperative movement. Work in the factory or in shops is just dreadful work. Cooperation is a willing process where you add your powers as much as possible. I propose:
    Stigmergic coordination (Wikipedia)
    Traditional work


  2. Thank you for your feedback! I fully agree with "stigmergic coordination", it is also an expression Michel Bauwens likes to use. I am less attracted by the term "traditional work". I implemented some changes based on your input.
    I've been struggling with "cooperation". I know that for a lot of people "cooperation" has a positive connotation. A different meaning arises from the following observation: "Totalitarian regimes don't work because they erode the cooperation of the population." This idea also implies that totalitarian regimes use different strategies to enhance cooperation, which further implies that behind what is generally perceived, there can be divergence of intentions and goals.
    In the end it's just a matter of terminology and I think we need a new term to distinguish between cooperation as in cooperatives and cooperation as in corporations. Cooperatives are more democratic by nature and their mission is to insure the well-being or at least the interests of the group. The corporation's main mission is to insure the interests of the owners of capital. These are two different settings and the relations of production within them are consequently also very different. The new term needed would make this distinction more explicit.
    Any other idea for a new term?

  3. Just do this: make it so no new money is released until a third party believes that they're contributing value. For example, in the United States, women should allow printing new money when the men are making valuable offers.

  4. Hi "average", your input tells me that you probably mix a "value accounting system" with a "value exchange system". I added an introduction to the text to eliminate that misunderstanding. I might be wrong in my interpretation of your input, and in that case I am sorry. But in my previous discussions with others this confusion came up many times, so your intervention reminded me to make this distinction right at the beginning. Thanks for your intervention.

  5. You might also be interested in this idea I was kicking around in 2008 (although it was sparked in the Enron crash)

    The capitalist measuring methods for value are still falsely typecast, as it were, from material and concrete, countable, discrete goods from accounting systems we inherit from an Italian friar tracking shipments and losses and loans against trade on dangerous roads, often for dangerous war supply routes.

    Generally accepted accounting methods shoehorn the value of intangibles at best. Now, intangibles are the lion's share of markets, and we can say that the market sets a default value for traded securities, but we can not assess the value of a company by its assets any longer -- pure fiction.

    What you describe here is a rather elegant phrasing of part of why, for some sectors.

  6. I believe This is the clearest elaboration I have read so far of the OVN and the VAS. I learned more about it. And considering the audience of a blog is varied, the text seems acessible for people who never heard about it and is organized and in enough depth for a more "experienced" reader. I do have some questions though:

    - Corporations (Taylorist ones, much less creativity-oriented ones) may spend money in time management, but don’t open organizations spend time in other things that corporations don`t (for example, logging contributions, evaluating reputations)? Doesn`t it even out in a way?

    - I agree that economic dependency is not asymmetrical in the corporate model, but are the really symmetrical in an OVN? For example, an individual can put a lot of money in a project, owning 60% of it, and the others do the work and share the rest.

    Don't corporate workers go beyond a mere economic dependency (e.g. Google)? Can't people be dependent economically of an OVN?

    Isn’t the VAS, in the end, regulated by the market? Wouldn’t a software engineer in demand check how much he could make at Microsoft (if he actually had chances to be employed there) before engaging in the OVN (perhaps using it to negotiate the parameters)? (I know there are other things beyond money in these decisions, but I suspect most people consider money as an important factor).


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