Friday, February 27, 2009

The challenges of getting from here to there

The Economist published an article today about prediction markets with the headline: "An uncertain future - A novel way of generating forecasts has yet to take off."

The article then goes on to discuss some corporate examples (some of whom are Inkling clients) and some challenges that companies have been facing in implementing prediction markets.

While we selfishly would love for the headline to one day read that prediction markets have now grown to be a multi-billion dollar business, in the macro view of the Economist, they indeed have yet to "take off." But I think the headline masks some promising examples within the article itself and what has been going on in the trenches day to day at numerous companies.

Like many evolutions of business management, prediction markets are a challenge to introduce. Especially because one of their byproducts is additional transparency, they are, by nature, a disruptor. Their advantages are many but most companies find they must crawl before they can walk and then run.

"Yet to take off," however, does not equate to "bad idea." The facts are that uptake among companies has been increasing year over year, more business schools are covering prediction markets in their curriculum, industry analysts have begun to track progress in the space, and an increasing number of management consulting firms, market research firms, and system integrators are adding prediction markets to their repertoire of services.

Practically speaking, there is a right way to introduce prediction markets to your organization that will greatly increase the likelihood of their continued growth and usefulness. What I often tell people is imagine yourself sitting in front of your boss after 3 months of piloting an Inkling marketplace. What are some of the steps you need to have taken so moving forward is a no-brainer?

  1. Communicate appropriate success factors at the beginning of the project.
    This may sound weird because they're called "prediction markets," but only focusing on accuracy of the markets is a recipe for failure when you have other benefits that are potentially more lucrative: risk mitigation, exposure of underlying pessimism or over-optimism, real-time ongoing feedback of business performance, increased collaboration between organizational stovepipes, external business partners and customers, and the list goes on.
  2. Identify business process "pain points" where organizational bureaucracy, politics, or even geography is keeping information from flowing as it should or where there are blind spots in what the company knows.
    You've got to prove there is value in doing this, otherwise all you're proving is that you can get a group of people together to use a tool, and there's little value in that.
  3. Utilize the data created by all the trading activity.
    What insights did you gain? Splicing the data demographically is always of interest, i.e. the marketing team was consistently optimistic about X, but the product development team was consistently pessimistic.
  4. Have buy-in from the participants themselves (along with as many executives as you can line up.)
    We just had a client survey traders asking them what they found useful about their marketplace, what they could do to improve, etc. They got lots of positive feedback. That's great ammo.
  5. Don't blow off having a communications and incentives strategy.
    What do people really care about? $25 gift certificates for ice cream or an opportunity to have lunch with the CEO? Prizes are people's first pass at incentives but not always the most appropriate. Getting people passionate about participating often means getting in to their brains, not padding their wallets.

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