Will Social Networking Disrupt the Recruiting Industry?

It may just happen if companies begin to fully exploit the power of Social Networking (SN) and gain the confidence to make important hiring decisions without middlemen.  SN sites like LinkedIn and Facebook now lay bare the key information asymmetry traditionally enjoyed by recruiters, namely access to a large and hard to access talent pool. Given the open and global nature of SN, any HR manager with a browser can now scan large, social & specialized networks for talent.  For example, Facebook has over 350M members worldwide. LinkedIn, more of a business networking site, boasts over 43M members.  These social networkers don’t just join, they also loiter and interact. According to Nielsen, a market research company, American SN users spend an average of 6 hrs per month socializing and networking, in fact more time than they spend on e-mail.  As a result, millions of  users can easily connect with employers and job opening through active and passive job searchs (via automated notifications). 

Moreover, many firms are beginning to realize that embracing SN could result in significant cost savings through the elimination or reduction of recruiter fees.  Recruiters typically charge between 20% and 30% of base salary for each placement, which for a Fortune 500 company could add up to a large amount of money per year.  According to The Economist magazine, some companies are already using SN to reap substantial savings and get superior results. For example, Intel claims to have saved millions of dollars in recruiting fees by using LinkedIn versus headhunters.  US Cellular reckons it saved over $1M in 2009 and got good candidates faster by using LinkedIn.  Even if firms continue to use recruiters, SN provides HR managers with a powerful weapon to reduce headhunter fees especially if they feel that the recruiter is accessing the same SN sites as they are – which in fact they do. 

Ubiquitous talent, easy access and lower cost are not the only advantages of SN.  Most users make available to corporate recruiters a rich trove of personal information, much of it regularly updated, templated for quick review and enabled by powerful search engines that makes it easy to find very specialized individuals. Finally, SN sites utilize sophisticated “add a contact” functionality to easily leverage a visible referral network and access prospects.  Clearly, SN represents a major opportunity for organizations to get more recruiting value at less cost.  

Of course, HR departments will have some issues with this new model.  For one thing, not every prospect, particularly of the mature vintage, is an active user or even a social networker.  Among those that are active in SN, many users (often the senior people one searches for) utilize strict privacy settings to prevent strangers from accessing their personal information.  Finally, there is always the concern that personal profiles are inaccurate, necessitating a certain amount of due diligence by the corporate recruiter.

For the reasons mentioned above, SN sites will never completely replace good recruiters.  Challenging hires (due to profile or risk) and over-burdened HR departments will still benefit from another layer of objective human screening.  And, humans being creatures of habit, will continue to employ recruiters who they perceive to be the best hiring resource.  However, given SN’s early success and medium-term potential, the recruiting industry will need to quickly adjust their strategies if they are to sustain market share and margin.

For more information on our services and work, please visit the Quanta Consulting Inc., web site.

Using Operational Innovation to Beat Competion

In today’s business environment, it is difficult to out build, out market, or out price your competition over the long term.  One reason is that all firms are bedeviled by the same situational factors including:  market maturity, overcapacity, tight credit,  globalization and rapid technology diffusion.

One area that can still help firms leapfrog competition is operational innovation (OI).  OI is the secret sauce that enables a company to out-operate its peers over the long term.  OI takes many forms but it is essentially a creative retooling of a firm’s operating model.  For example, how companies buy & use inputs, deliver & service products and enable & motivate operational staff.  On a going basis, a strong operating model minimizes costs, improves service levels and enhances customer satisfaction. Organizations with OI as a core competency have typically generated superior financial returns, created industry barriers to entry, and built leading market share positions.  (One caveat:  business success often has many fathers so it would be irresponsible to attribute all gains solely to operational improvements.)

OI is not limited to certain markets or types of firms.  It is found in both high growth, dynamic markets like IT and Life Sciences as well as mature, traditional industries like Manufacturing and Financial Services.  In my experience and research, OI occurs in 2 fundamental ways  i) through the launch of a disruptive and compelling new business model (think Dell, Nucor, Cisco) or ii) through continuous and impactful operational improvements that over time dramatically enhances capabilities and cuts costs (think Progressive Insurance, Walmart).   For more perspective on what some organizations have achieved with OI, check out this Harvard Business Review article on how OI is driving business results.

Given its proven, transformational track record, why don’t more firms prioritize OI?  For one thing, there are powerful strategic and cultural barriers.  Often, the operations group does not get the same prestige or resources as other departments like finance, sales & marketing and R&D.  In addition, many senior executives adopt a passive attitude around operations like “if it ain’t (really) broken, don’t fix it,” especially if client retention is a key metric.  As well, revamping an operating model requires considerable multi-functional collaboration, change management expertise and perseverance, all scarce qualities when coping with day-to-day business exigencies.  Finally, game-changing OI is especially difficult when there are major internal constraints like union resistance, management bias (CEOs in many companies rarely have strong operational backgrounds) and cultural challenges.

Despite the issues, every company can take some important steps to catalyze OI thinking.  For example,

1. Learn from others – Following and exploiting emerging technologies (e.g., Cloud Computing) and best practices from outside your industry is one of the best approaches to capturing potential innovations   
2. It’s the system stupid – All too often, timid and siloed executives default to improving specific elements of the operating model (e.g., manufacturing) versus taking a holistic, breakthrough-focused approach  
3. Create a fertile environment – OI germinates with the right internal conditions.  For example, successful innovators like 3M and Google cultivate a risk taking, innovation-centric culture, which includes a top-down mandate, sufficient resources and formalized incentives
4. Target the Medium Term – Many OI initiatives fail because the time horizon is unrealistic for total quality planning and execution.  Specifically, short term deployment goals rarely feature enough time for proper study and implementation.  Furthermore, long term goals often flounder due to a lack of business momentum, management changeover or insufficient resources.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Backshoring: Which Manufacturing Should Return to North America?

Do a few high-profile decisions to bring manufacturing back to North America, known as Backshoring, mark the beginning of a new trend?  It may be according to strategy+business, a Booz&Co. newsletter, and some savvy firms are leading the way. For example, NCR has decided to return production of its most sophisticated ATMs from Asia to Georgia, citing the need for production to be closer to its innovation center and customers.  In another decision, GE CEO Jeffrey Immelt recently announced that his firm will be repatriating production of hybrid batteries and advanced water heaters from China back to the US. 

Some modest corporate moves do not herald a reversal of offshoring, one of the most popular corporate strategies of the last 20 years. However, the business case for offshoring has changed and recent developments should catalyze executives to consider backshoring for high value products.  Here’s why.

Labor cost is not as critical as it used to be.   In many capital & innovation intensive industries like cars, healthcare and aerospace, the proportion of labor to total costs has been steadily decreasing to, in some cases, no more than 10% of total delivered cost.  As a result, the need to produce in the least expensive labor market has ebbed. 

Asia is not as inexpensive as it once was.  Due to rising compensation rates and exchange rate changes, many regions of China and India now feature similar labor rates to what you would find in many parts of North America.  Moreover, skilled worker turnover rates and labor productivity in many Asian regions are often worse than what you will find in North America.

North American manufacturing continues to maintain some natural advantages versus Asia.  Backshoring allows manufacturers to improve product delivery times (by shrinking transit distance), minimize management costs (by reducing travel expenses) and cut transportation charges (by eliminating oceanic transit).  

Other Asia-related costs have risen dramatically.  Key input costs like transportation, office and insurance have increased substantially due to oil price increases, soaring real estate and piracy risks.  Furthermore, key raw material costs (e.g., plastic, steel) have risen precipitously over the past couple of years.  Finally, the reliance on a few Asian and North American transport hubs has multiplied supply chain vulnerability due to potential security concerns, union problems and capacity constraints.

Tight links between customers, R&D and production is more crucial today.  As was the case with NCR, designers and customers in industries such as medical diagnostics, telecom and IT want manufacturing close by so they can more easily collaborate on product design, testing and integration. For perspective, leading Japanese manufacturers learned this lesson early in the 1990s and now rarely offshore anything but commodity products.  

Offshoring remains difficult.  After many years of offshoring, savvy executives have discovered that for many products, the drawbacks of outsourcing outweigh the benefits.  For example, certain issues like IP protection, management control and organizational integration are often too problematic with offshore production.  For low revenue products or with smaller firms, it may simply be less hassle in the long term to backshore.

There is no doubt that overseas production will continue to deliver superior savings for many labor intensive, low value-add products, especially when companies are manufacturing for the local market.  However, when considering where to manufacture high-value, innovation-driven products, the business case for backshoring is looking increasingly more compelling.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

How Can You Improve Internal Information Flows?

Communications within large organizations is interesting to theorize about, but hard to measure and promote.  Rich information flows of critical data, learnings etc is akin to having healthy blood circulation in your body.  Without regular and nutrient-rich blood circulation, a body will quickly lose vitality.  For many companies, having timely information is the lifeblood of customer service, operations, and financial management. 

I was recently asked by a client: “What can we do to improve the flow of information between individuals and groups?”  This firm had been challenged to sustain regular information flows.  Some of their issues included: 

• Lack of ownership around who collects and disseminates information
• Ambiguous data access rights, which hinders sharing
• Competing data types and integrity, which reduces the value of the information

A comprehensive organizational redesign was recommended.  However, the CEO wanted some relatively simple, inexpensive and easily implementable measures that could have an immediate impact.  To uncover these, I used a study of information flows at Google.  The  authors, Justin Wolfers, Eric Zitzewitz and Bo Cowgil used prediction markets (a speculative, market-based tool used for forecasting) made up of Google employees to understand how information circulated within the company.   

The study concluded that physical proximity, as opposed to other factors like IT-based communication tools, played the primary role in facilitating information transfer.  Below are some of the study’s findings about what helps foster rich communication between people: 

Factors that play an important role

1. Having colleagues situated very close (i.e. right beside) to each other
2. Maintaining close organizational proximity, such as working for the same manager
3. Sharing professional or social relationship including common backgrounds, friendships and roles. Importantly, previous sharing relationships tend to overcome changes in proximity and physical distance. 

 Factors that play a minor role

1. Locating colleagues farther away from each other, even if on the same floor
2. Being assigned to the same cross-departmental project
3. Having similar demographics except where two workers shared a native non-English language
4. Deploying IT-based communication and social networking tools such as instant messaging, Twitter, chat rooms and portals

The above conclusions will seem like old hat to many dynamic, knowledge-based companies.  However, these findings still have important implications for more traditional types of organizations.  For example:

• Regularly rotating employee seating could cultivate professional and social relationships
• Dense, open plan seating schemes may encourage the cross pollination of information
• Old fashion community areas like kitchens and cafeterias can stimulate the sharing of information and relationship-building
• Despite conventional wisdom, using cross functional teams or matrix structures do not necessarily increase information flows
• Electronic communications are a tool not a catalyst of  rich communications

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.

What is the Best Way to Grow in 2010?

We are tentatively emerging from the recession as corporate profits, consumer demand and business confidence begin to trend upwards.  As a result, companies are starting to consider new investments in capacity, marketing and R&D.  Despite these encouraging signs, the economy remains vulnerable to credit scarcity, record levels of consumer debt and higher interest rates.

Given macroeconomic uncertainty, companies can not afford to be reckless with their 2010 growth strategies.  How can firms reignite their growth engines yet minimize business risk?  A systematic 3-step approach would help.

Know your growth profile…

Surprising as it sounds, many companies don’t understand the basic sources and drivers of their growth.  There are many legitimate reasons for this including employee turnover, lack of data and management bias which favors some strategies over others.  To understand how your firm grows, it helps to consider some key questions such as: what markets/segments are growing?  Where are the profit pools (e.g., products or services)? And, what is your competitive position in these markets?  Understanding your growth profile is crucial to knowing which markets and consumers to focus your efforts and resources against.  

Stick to your knitting…

Understanding how to grow is the next big question.  In general, firms that concentrate on a single, proven growth strategy-and move down the experience curve-will usually outperform those that flip-flop. Most companies will employ one of two growth themes at any given time.  The “Business Builder” seeks to beat the competition with ongoing investments in products, marketing and services.  Successful practitioners of this strategy (e.g., P&G, Apple, and Nike) usually take a deliberate approach to building competitive advantage by continuously improving their value proposition and brand.  On the other hand, serial “Acquirers” like Cisco, Oracle and Arcelor Mittal use M&A deals to build scale, add capabilities and enter new markets, preferably on favorable economic terms.  Acquirers typically expend significant effort and capital to seek out, acquire and integrate the “right” businesses.   However, given the different capabilities and balance sheets required, few companies can regularly and successfully employ both strategies to grow.  

A McKinsey study of the European Telco industry supports the notion that sticking to your knitting yields the highest growth rates.  The research showed that firms which understood their sources of growth and followed proven strategies that targeted those areas tended to outgrow their peers.  However, to realize this potential, the firms must understand:  1) the historical impact of each strategy on growth; 2)  how core competencies link to the best growth strategies and; 3) when not to follow the strategic moves (or folly) of target competitors. 

Should circumstances change, companies should be prepared to change their strategies to exploit unique opportunities.  For example, business builders could pursue M&A deals when the price is right or competition is weak.  According to McKinsey, firms that adjusted their growth strategies to exploit exceptional opportunities and market conditions tended to outperform their peers.

Execute with Excellence

A great strategy marred by poor execution will usually result in wasted capital, failed careers and market setbacks.  A wealth of research confirms that execution excellence correlates with higher market share along with lower costs, higher customer satisfaction and improved morale.  Some proven measures to improve execution include having: clear and articulated goals & strategies, sufficient resources on hand, empowered & skilled employees, timely initiative tracking and effective project management.

 For more information on our work and services, please visit the Quanta Consulting Inc. web site.

Teaching Strategy to Managers

Strategy education is big business.  A cottage industry of training programs and thought leadership is devoted to improving management’s strategic thinking, and for good reason.  A lack of strategic talent within management has become a significant organizational issue that negatively impacts competitiveness, increases employee turnover and hampers morale. This deficit has many causes including extensive downsizing and restructuring, a reduced emphasis on training & mentoring and the accelerated pace of business which limits strategic deliberations. 

My assertion is not that firms don’t have talented strategists or the right tools.  The typical Fortune 500 firm has a number of them.  However, many of these individuals are often in non-strategic roles, are under resourced or are too busy to undertake proper strategy development. As well, available strategic competencies are regularly underutilized due to a shortage of relevant data and tools as well as the lack of a regular strategic planning framework.  Going forward, many factors such as organizational flux, headcount limitations and recruiting challenges will bedevil efforts of cultivating and unleashing strategic talent. Organizations will not prosper unless they have enough managers who can think and act strategically. 

The presence of a strategy skills gap impacts my consulting work directly.  My clients will often require strategy knowledge transfer to their managers in the statement of work. Why?    The executive sponsors will acknowledge that their teams are hampered by strategy skill gaps that prevent them from identifying, analyzing and exploiting business opportunities.

Much of my thinking has been influenced by how the Military teaches strategy to its officers.  Corporations in dynamic, high risk and complex environments can learn much from the way the Military cultivates strategic competencies including continuous learning, situational adaptation and breakthrough innovation.  One monograph in particular, Professor Colin Gray’s Schools for Strategy: Teaching Strategy for 21^st Century Conflict (published in the U.S. Army’s Strategic Studies Institute), could be helpful for those looking for a first class overview on strategy education in the Military. 

As such, I regularly facilitate and coach senior & middle managers in ‘applied strategy learning’ that encompass areas such as analysis, strategy development and planning. My general approach is to deliver strategy education that is one part proven strategy theory (business, sports and military) and one part “best in class” tools, simulations and sector knowledge, all customized for their real life business challenges.  

My applied strategy learning methodology follows 8 key maxims, which I summarize below-

1.  Education is not a one-off event.   Managers must be encouraged and incentivized to use their new skills and knowledge within their day-to-day jobs;  

2.  The use of time-tested business theory is essential to thinking ’strategically;’

3.  Although theory is important, strategy development is ultimately a practical exercise and should be tailored to the realities of the organization and market;

4.  To be considered relevant and credible by the student, strategy education should not be left to over-intellectualized educators or those separated from the “trenches;” 

5.  Strategy education that does not emphasize the centrality of the customer and the impact of competition will probably be inadequate;

6.  Strategy education that ignores the importance of internal considerations such as culture and resource limitations will be ineffectual;

7.  A skeptical, though not cynical, mindset of the participants is crucial to imparting wisdom and understanding the value and usage of tools;

8.  Strategy is vital but not the sine non qua of leadership.  Other management responsibilities such as execution and leadership are just as important. 

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Can You Increase Revenues by Eliminating Sales Quotas?

Conventional wisdom in most industries says the best way to maximize revenue is to link a sales rep’s compensation to them reaching aggressive sales quotas.  A new study from the Stanford Graduate School of Business challenges this notion.

The research found that sales quotas could hurt revenues by encouraging sales reps to manipulate or “game” the system to their benefit.   While the amount and type of gaming varies by company, two pernicious examples are common:  pushing and sandbagging.  Pushing occurs when a sales rep postpones recording new sales until the next quota period once they achieve their current period target.  Alternatively, if a rep perceives they have no chance of making the quota in the current period they could have a perverse incentive to postpone their effort to the next period. Sandbagging happens when the rep convinces management to set overly conservative sales targets.  Since these targets are easily achieved, the sales rep has little incentive to sell more especially if they are not compensated for “stretch” results.  Overall, gaming behaviors may hinder revenue generation, complicate forecasting and potentially result in higher than necessary bonus payouts.

Gaming occurs when management lacks important information on the sales process, customer needs and value proposition.  In particular-

• The level of each rep’s effort (time and skill) during the sales cycle
• The product or service’s value proposition
• The client’s buying behavior and requirements

In the absence of such knowledge, managers can only base targets and compensation on a rep’s results, not their input.  Whether by design or sales culture, a rep will often use their asymmetric information to maximize their effort/compensation payoff though not necessarily the firms’.

To test the impact of changing quotas on revenue, the researchers built a mathematical model using actual company data to measure the impact on sales performance under different quotas and gaming scenarios.  The model showed that total revenues actually increased when quotas were removed.  The authors then applied the learning to a real world setting; they tested a quota-less sales plan at a Fortune 500 company. The results were impressive; the new plan saw revenues rise 9%, or $1M per month.  Contrary to what you might think, the sales group embraced the quota-less sales system and the level of gaming fell dramatically.

Removing quotas is not for every firm. In fact, changing rep compensation is often a “third-rail” conversation.  However, better understanding the link between compensation, behavior and results could help managers optimize sales planning, target setting and staffing.  One good place to start would be for sales leaders to comprehend how their sales processes and incentives are related to clients needs and product value.  As well, sales managers could also review historical data – by firm or individual – to explore the impact on revenues by changes in quota targets and compensation. 

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Where is Social Media Headed in 2010?

Recently, I’ve been asked by a number of executives a direct but complicated question: is it time to jump into social media?  Most pundits generally agree that this year, social media will get even more popular, more mobile, and more exclusive.  I believe 2010 will be the year social media goes mainstream but not necessarily driven purely by marketing considerations.  I weigh in with the following predictions, in no particular order:

Niche sites are where it’s at

The bane of most social media users is information overload and clutter.  To cope with this, many users will increasingly gravitate to sites that have the people, content and applications they really want to engage with.  As a result, a lot of the early money (and profit) will be generated in the more focused sites (for example Club Penguin for children), as opposed to generic sites like Facebook, Twitter and MySpace. Look for social networking sites to boost their relevancy by restricting access to “qualified” users and to deploy better filtering and alert capabilities to improve the user experience.

Cost savings & support drive adoption

Leading companies have begun to recognize the potential for using internal and open social networks to more cost effectively deliver support, content and special offers in real-time.  For example, Best Buy’s Twelpforce leverages Twitter and the skills of hundreds of employees to provide rapid customer troubleshooting.

Regional networks challenge global networks

Regionally-focused social networking sites like Xing (Germany) and Viadeo (France) will emerge as strong competitors to globally-oriented sites like Linkedin and Facebook.  The reason, according to Dan Serfaty of Viadeo (France’s largest business network site) is that focusing on local depth will deliver advertisers and partners more compelling value than offering a narrow slice of the highest-powered people around the world.    Furthermore, unique and under-developed markets like China and India will naturally germinate their own regional networks, which will be able to leverage large scale economies and inexpensive resources.  

Mobile social networking is THE killer app

The next wave of social media penetration and usage will be mobile thanks to the convergence of 3 important developments:  1) heavy social networkers love the convenience of mobile devices that enables ‘always on’ accessibility and portability; 2) the growing penetration of smartphones which combine almost laptop-type functionality with ultra-fast networks;   3) users are being forced to access Twitter etc. using their phones as most corporations ban social networks within their firewalls.    Look for the large social networking sites to launch improved and portable versions of their functionality.  

Revenue models will mature

Large social media sites will develop advertising models that can properly measure traffic and behavior while demonstrating ROI for advertisers.  However, there may be significant user backlash to increased advertising similar to what was seen with MySpace when they went too far trying to monetize eyeballs.  Interestingly, other sources of revenue will become even more lucrative.  According to the NY Times, sales of virtual goods within social media sites (already a $5B global business) by firms like Zynga and Playfish will continue to grow.  Social media sites will also test new revenue-generating applications like social gaming and entertainment shopping (e.g., Swoopo) in order to leverage their millions of users and attract revenue-paying partners.  Finally, after 5 years of providing free services, many sites will begin evaluating new subscription models.  Linkedin already offers a premium service, although no more than 5% of users have signed up.  Considering that newspapers and are beginning to charge for premium content, can YouTube and Facebook be so far behind?  

Brand communities will slowly emerge

Social media-based brand communities are taking shape by design and chance.  These will be internal employee/partner-centric ones as well as external, customer-based communities.  While communities have significant marketing potential for promotion and brand-building, it will be a challenge for firms to establish a credible voice and safeguard brand risk. Look for savvy marketers to develop micro content and marketing programs tailored to different communities.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Is it Time for Your Firm to Go on a Data Diet?

In the effort to better target profitable customers and enable 1:1 marketing, companies have been collecting and managing as much customer information as they can get their hands on.  Many industries & leaders, such as credit cards (Capital One), retail (Amazon) and consumer goods (Dell) have built strong franchises through data-driven marketing. Although collecting as much data as possible makes sense for some firms, it doesn’t for others.  Hoarding reams of information comes with significant direct and indirect cost as well as missed business opportunity. My experience along with a published study out of the Wharton School of Business can shed some light on the challenges associated with over-zealous data collection.

Bytes may be small and easy to collect but they could also be costly and tough to use.  While storage costs have been declining, the price tag of managing this information has been on the rise in terms of  needed labor, training and application software (for analytics, security and data cleaning). Furthermore, operating costs (maintenance, energy and infrastructure) required to support the data warehouse has also been increasing.   Not surprisingly, keeping lots of data increases the liklihood that marketers will want to use it through costly and potentially wasteful consumer programs.   

In general, the more data you amass the greater the chance of a security beach.  These breaches can be an expensive proposition with significant brand risk.  According to the Ponemon Institute, a group that researches and consults on privacy & information security issues, each 2008 data breach is estimated to cost $202 per compromised record. The research also found that breeches may cause companies to lose sizable numbers of customers.  For example, two firms in healthcare and financial services lost 6.5% and 5.5% of their customers, respectively, after security breeches.

In many large enterprises, collecting and utilizing voluminous amounts of data is a challenge due to: the sheer volume of information gathered (particulary via sophisticated CRM systems); the presence of different IT systems that reduce integration; “siloed” business units that do not effectively collaborate and; a lack of data accuracy and standards that create complexity.  Moreover, cultural and competitive factors often come into play. Specifically, managers often feel the need to become data pack rats because they can or because their competitors do.  All of these issues combine to reduce marketing program effectiveness by extending execution time, reducing tactical flexibility and increasing program complexity.     

For many companies, “less data is more.” How can your firm start a data diet?

1.     Keep only the data that is needed for forecasting and execution

• Cull old, unused and irrelevant data 
• If possible, store information in a more usable and leaner format like a histogram

2.     Collect only what is strategic to your business

• Amass what is directly linked to the key business drivers and metrics
• Be realistic. For example, if you don’t need to do 1:1 marketing, you don’t need to keep individual customer information
• Understand the costs & benefits of the data you are accumulating

3.     Adopt a cross-organizational approach to data collection and management

• Set and adhere to data standards around file formats, business rules and security
• Connect IT resources, people and processes with your marketing requirements

Clearly, hoarding data with little business benefit and lots of risk does not make sense.  How much information you collect will depend on the organization but the decision inevitably will boil down to the value and usability of the data versus the cost and risk of keeping it. 

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Houston, We Now have a Commercial Space Industry

Space is no longer the final frontier for private enterprise.  One major deal and the emergence of some private operators is an indication that this nascent industry will finally take off (pardon the pun) in 2010. 

For the first time, two commercial operators, SpaceX and Orbital Sciences, will begin providing delivery services for NASA as part of a large multi million dollar contract to transport cargo into space.  One of the deal’s triggers was NASA’s recognition that the US will face a 6-7 year launch gap beginning next year when the Space Shuttle program is retired.   Since the Space Shuttle has essentially been a delivery vehicle for cargo and astronauts, a replacement will be needed to fill the void.  A new NASA-developed shuttle replacement program is planned by 2017.   However, this timing could be in doubt as the choice of vehicle has yet to be made and the public funding environment remains murky.

Though there are cargo delivery options with non-US space agencies, one of NASA’s major issues is with the cost and reliability of transporting astronauts.  After this year, NASA will be dependent on the availability and kindness of Russia’s Soyuz space craft, which carries a $50M per seat tariff.  However, many pundits believe a US private industry solution could launch astronauts into space at a fraction of the Soyuz rate.  Futron, a research firm, pegs the potential 2021 orbital (read: astronaut transport) market for commercial providers at 60 passengers and $300M in revenue. 

Importantly, the SpaceX/Orbital contract may not be the only deal done between NASA and commercial operators.  A new generation of suborbital vehicles currently under development could open up new market opportunities for other services such as microgravity science research, astronaut training and remote sensing.  For perspective, NASA spends $300M (according to Virgin Galactic) conducting its own suborbital work.

Other than the pending delivery gap, other factors will likely increase the appeal of private sector offerings.  Widespread technological advances in computing power, materials and miniaturization are bringing down the cost of blasting objects into space; tight government budgets are restricting the amount of suborbital R&D that NASA can conduct and; there is grudging acceptance in many parts of the US governement that commercial operators could deliver solutions as good if not better than NASA and other government agencies.

Interestingly, 2010 could finally witness the emergence of space tourism.  A number of players including Virgin Galactic and XCOR will use their proprietary launch vehicles to begin suborbital trips for the well-heeled.  Although the pricey customer experience will likely be no more comfortable than being squeezed into a plane’s cockpit, there has been extensive, global interest.   In February 2009, Virgin Galactic claimed they received $39M in deposits from 300 customers.  Many developments may facilitate greater consumer demand including: declining payload costs that will help reduce seat fees well below the million dollar threshold; enhanced capsule comfort and; improvements in perception around safety and reliability. Estimates on the size of the space tourism market vary widely.  Futron forecasts the 2021 suborbital tourist market at 15,000 passengers and $700M in revenue.

It’s too early to tell whether cargo transport and tourism will be the “killer apps” that kick starts a commercial space industry.  Many challenges remain in areas like investment finance, technology and regulations that will need to be addressed.  However, it’s a promising start and its happening in 2010.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.