008 – The IDEMS Business Model

The IDEMS Podcast
The IDEMS Podcast
008 – The IDEMS Business Model
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Description

David Stern, co-founder of IDEMS, is interviewed by Santiago Borio on the business model IDEMS has developed. The discussion presents a qualitative analysis of a three part model based around the creation of public goods, and the offer of human and digital services. It draws on successful examples and case studies combining two of the three areas.

[00:00:00] Santiago: Hi, and welcome to the IDEMS podcast. I am Santiago Borio, an Impact Activation Fellow, and I’m here with David Stern, a Founding Director of IDEMS. Hi, David.

[00:00:16] David: Hi, Santiago. Looking forward to today’s discussion.

[00:00:20] Santiago: Today is a really interesting one. I joined IDEMS, about a year after it started.

[00:00:32] David: As a subcontractor.

[00:00:33] Santiago: As a subcontractor, and a year later I joined full-time.

[00:00:36] David: The first full-time employee. I should add.

[00:00:38] Santiago: The first full-time employee, and I take that as a badge of honour, first full-time employee.

[00:00:44] David: Absolutely.

[00:00:45] Santiago: And one of the first things I was involved in was really trying to put down in paper what the business model, the IDEMS business model was all about.

[00:01:00] David: And particularly, I should say, our vision of the IDEMS business model.

[00:01:04] Santiago: And like everything else in IDEMS as you’re saying correctly, David, the vision, it wasn’t that there wasn’t a business model before. There was a lot of thought. And it was really interesting because it really opened up my eyes in terms of what, firstly, what a business model is and the sort of things that we were including in the business model itself.

[00:01:33] David: If your learning on what a business model is has come from an experience of looking at business models with us, it is not a conventional vision of what a business model is. So I apologize for the education we have given you.

[00:01:48] Santiago: In many ways it’s a qualitative business model rather than a quantitative business model and there’s loads of different ways of coming up with a business model.

[00:01:56] David: Absolutely.

[00:01:56] Santiago: We’re not going to focus on the numbers. We’re going to focus on the ideas. And there’s three components, maybe? I’m not sure what the right word is.

[00:02:07] David: I think what was critical, and this is where you actually played an important role, we… we had a lot of things since we started IDEMS, pretty well nailed down, but we aren’t very good at communicating them. That’s where these podcasts are coming in to help us get these ideas out more widely. But it had taken us two years to be able to try and actually get our heads around how to communicate what it is that we do in terms of our business model. And we actually were confronted by this when we needed to describe us for a bigger grant that we were going for. And so it was important to get this down.

[00:02:44] Santiago: Yeah, and really, as with many other things in IDEMS, there are three elements…

[00:02:54] David: Yes.

[00:02:54] Santiago: That are very much interrelated, coming into it.

[00:02:57] David: Three and four are important numbers in IDEMS. And that’s a whole other podcast as to why, there’s some maths behind that. And not just some maths, some other research, some international research in other areas, but, but I think the three areas related to the business model, and I should clarify…

[00:03:15] Santiago: Sorry, before… It is those three areas that allowed us to hone in on the logo.

[00:03:23] David: Absolutely.

[00:03:24] Santiago: 3 was coming up a lot within IDEMS. It was the three areas within the business model.

[00:03:31] David: This is where I say it’s more powerful. The logo is a trefoil knot, which is 3. It’s the smallest possible knot. There’s mathematics behind this, a whole other podcast there. And what we realized, actually, when concretizing the business model, is that, there’s a good reason why if you’re dealing with complexity, three is a very powerful number.

And actually, when we started to try and describe our business model in terms of these three components, suddenly it could make sense to others and they could grapple with some of the complexity. They could see why we couldn’t simplify it down, because we wanted the three components.

[00:04:11] Santiago: Okay, but this is becoming very abstract, so let’s go down to the concrete. What are those three components?

[00:04:19] David: I’ll try and be as simple as possible, and then we can dig into each of them, but broadly it is human services, so it is basically what we do in terms of training, the services we offer as people, our expertise…

[00:04:35] Santiago: Consultancy.

[00:04:36] David: Consultancy, all sorts of different services that we offer.

It is what we call public goods, and this is sort of central to open source approaches in software development. This is…

[00:04:51] Santiago: Open educational resources.

[00:04:53] David: Open educational resources, parks, green spaces, you know, that’s a public good as well. But broadly speaking, this idea that we have public goods and we produce public goods, we develop public goods.

And the third one is what we call digital services. And we don’t actually really offer many digital services yet, but this is central to our vision as a long term organization. And without that third component, our strategy doesn’t make sense. And this is sort of where understanding how we work as an organization, if we think about those three things, then suddenly the complexities of the organization fit into place and our long term business model fits into place.

[00:05:44] Santiago: Okay, let’s start by digging into the first one you mentioned, human services. My understanding is that you were already offering human services before IDEMS was conceived.

[00:05:58] David: I’m very grateful to my time at Reading University. I was in a self financing unit, which broadly was self financing because of the research contracts it brought in, because it offered consultancy, because it offered training. And so it was cost recovery within the university. And through that, I learned a lot about offering my services, and the value of my services, and how to discuss that, and arguably to sell those services to others. Because I can bring value in many different areas. And so at the heart of our starting was the fact that when we launched IDEMS, a lot of the people I was working with wanted to have mine and my co founder’s services. And we were able to offer those services as consultancy services.

[00:06:50] Santiago: And the way you put it in the past was quite nice. You have skills that people need.

[00:06:54] David: Exactly. It’s that simple. And I have, not only do I have skills that people need, I have a rare set of skills, I have a niche set of skills that actually is in demand.

[00:07:07] Santiago: For example?

[00:07:08] David: Well, there’s a lot of people with mathematical science skills. There’s a lot of people working in international development. It’s not that many people with strong mathematical science skills working in international development. That’s a simple example where I have spent a lot of the time on the ground in low resource environments. I understand how they work. I have spent time as a mathematical scientist building software, writing software for banks, doing statistical analysis, working with data, doing data science, building sort of algorithms and doing maths. And putting those two services together to understand the local situations on the ground in low resource environments and understanding how software is built, how to work with data, how to work with algorithms, that’s a rare combination.

And so I’m able to bring those two skills together. I’m actually next week off to a meeting where we’re bringing together people with different skills and I’m coming in specifically because I have that combination of skills.

[00:08:09] Santiago: Okay. So, in essence, then, human services are any services that you essentially need a human in order to deliver.

[00:08:20] David: I’ll go a little bit further. It’s sort of… there’s a whole set of business models around human services. There’s lots of companies based around this, and there’s ways in which such companies work. And they work, you know, this ranges from accounting firms, lawyers, all sorts of different company models are based on human services.

And the services where their clients, contract the company for the time that people spend and they pay for that time and the company – essentially the people it employs – their time is budgeted and they make a profit as a company because people bring in more work than their cost to company and then you have a business which is in profit.

[00:09:06] Santiago: Okay, great.

[00:09:07] David: It’s that simple and broadly. As a business, that’s how we’ve worked. That is how IDEMS has been set up. It’s been set up because we charge for our time and our cost to company related to the money we bring in is less and so we have been a profitable business for five years on that simple model.

[00:09:28] Santiago: And a lot of the human services, this type of services, have been in training, in consultancy, but there’s also been quite a few contracts related to software development.

[00:09:41] David: And this is really interesting because this is where the second one, which is public goods. Many people think of this as being not a business model, but if you combine it with human services, then we get contracted to build open source software, which is a public good.

[00:10:03] Santiago: And we see that as a human service still.

[00:10:08] David: So commercially we see that as a human service. But the things that we build, the public goods that we create, they exist and they have value in their own right. Now, other people can offer human services on those same public goods. But as the people who develop them, who maintain them, who have those expertise, we actually have an added value for some of those, because we have a deeper understanding.

And so, by contributing to them, by being builders of them, by actually investing in them, we then, if you want, have an added value that we gain for the commercial services we offer.

[00:10:55] Santiago: Okay, so part of our human services are to create public goods. You mentioned open source software.

[00:11:05] David: And maybe let me just be clear here that it’s creating public goods, but also using them in our consultancy, in our training.

[00:11:13] Santiago: That’s part of the interrelation with the two…

[00:11:17] David: Exactly.

[00:11:17] Santiago: Which I was hoping to get to in a short while. But I want to really have a careful understanding of what we really mean by public good. Because open source software, and in the software world, and same with education, same with publishing, textbooks. It’s really important to understand what we mean by public good.

[00:11:46] David: Yes, there is a formal definition. But one of the things is, is it’s taken about I would argue 30 years, maybe more, for the understanding of exactly what a public good is in this sort of domain and why it needs all of that. And one of the key things is that enabling people to use something freely is not enough. So for it to be a public good, you have to also allow other people to develop it. You have to allow other people to take it and make it their own. And that’s really important. And there’s been a long history, academically in different contexts, which have shown why, if you don’t do that, or if you put restrictions on how people use things commercially, why that would not qualify as a public good. And so there’s a whole academic area, if you want, which has been studying this.

[00:12:48] Santiago: I think we had a discussion about free textbooks…

[00:12:51] David: Yes.

[00:12:51] Santiago: Versus open textbooks, that I think explains this quite nicely. Do you want to delve into that?

[00:12:57] David: Okay, I mean, if you have a free textbook, that means that you can give, you can let anyone use that textbook. If you have an open textbook, then if I go to another context, I can adapt it to my local context. And so I can create a version which is more tailored to the needs of that minority group, maybe, or that other context. And that’s the fundamental difference. Free is not enough. Free, they can use it. But they have no power over making it their own. Open, they can take it, they can edit it, they can make it their own, and they can use it. And then the person who took it and made it their own, if they want to sort of have a business model around that, they can. And so you’re actually giving that ability for people to take it and to make it their own.

[00:13:48] Santiago: And we believe as well that by making it their own there’s going to be improvements made into it.

[00:13:55] David: Absolutely. And this is the thing, if you do this right, and if you get these things right, it’s not just that we believe this, it has been proven in a number of different contexts to be good for business. It out competes other business models. Because then the people making it their own, they lead to improvements, which means that the original developers benefit more. And if you get those structures right, everybody wins from this in certain ways, as long as you’re not too greedy.

And this is… there’s sort of some elements about optimisation and maximisation around this, which are difficult. And so, as long as you’re in a context where you are not trying to maximize and exclude others, you know, this is this collaborative versus competitive.

[00:14:38] Santiago: That’s exactly what I was going to say. That there are arguments for not open software, where innovations have happened because of the closeness of the software. But…

[00:14:50] David: What, can you give me any instance of that? I mean, I’m not…

[00:14:53] Santiago: Sketchpad that then,

[00:14:54] David: okay, this is… Oh, wonderful, wonderful example. Sketchpad and GeoGebra, you’re thinking.

[00:14:59] Santiago: Sketchpad and GeoGebra, yes.

[00:15:00] David: So there’s a wonderful…

[00:15:02] Santiago: These are both dynamic geometry software used for education.

[00:15:06] David: And the point which I think is so important in what you’re saying is that Sketchpad was a much more innovative system, which GeoGebra then learned a lot from and created an open source version and killed off the market. This is a wonderful instance, and you’re absolutely right.

I would argue that really, the problem wasn’t that GeoGebra was open. The problem was that the development team behind Sketchpad did not embrace open and therefore did not build the business models around it to be innovative. They were a more innovative team, I actually know the developers in different ways and they were fantastic. And they had so much, they built a team that was so innovative. So I’d love to have another podcast about that. We can dig into that.

[00:15:55] Santiago: We surely will. But that, that kind of represents what we mean by public good in the context that we’ve been working at. But public good could be much more, as you were saying, it could be a park, a green space.

[00:16:10] David: And this is important, we’ve thought about this very hard. We’re coming really from an open source context, you know, really looking at software development, open source software, then that’s become open education resources, open data, open AI, all sorts of other things, but really coming from the technology app.

That’s where we’re coming from. But others before us have already made the link between that and public goods. So this has not come from us. And what we realized as we were conceptualizing the business model is that actually, conceptually, what we’re talking about is public goods. It’s not just open.

And the reason this is so important is that if we were to be imagining, in the long run… As an organization, there is absolutely no reason why managing a public good, green space, wouldn’t be a sensible part of our business model, or couldn’t be a sensible part of our business model. It would fit in, potentially, in exactly the same way that open source software does.

And that’s something which I’d be so excited to investigate. Now, there’s no way we’re going to afford to investigate this in the next 15 years, but conceptually we are talking about public goods. And there’s real good reason why it is public goods and not just limited to the tech.

The commercial aspect is so much easier than the tech. The people trying to do this with public goods in terms of green spaces and so on, they’ve got a much harder job than us. If someone were to come to me now and say, oh, you want to do this with open spaces? Great, here’s an open space. I say, no, I don’t think we’re ready. I don’t think we have what we need now. But in the long run, I’d love to take on that challenge.

[00:17:55] Santiago: Yeah, but what I was trying to get to is that there’s loads of different types of public goods. We are focusing on some specific ones, because it’s our strength, because it’s where we can, contribute.

[00:18:07] David: It’s not just that. I mean, I have to be transparent and honest about this. It’s because that’s where the profit margin is. No, the profit margin on doing this for, for green space, for community centre, is really much smaller. That’s harder. I’d love to do that.

[00:18:23] Santiago: That opens another debate, we are digressing. So, third area, digital services.

[00:18:29] David: Yes.

[00:18:30] Santiago: So, what are digital services?

[00:18:33] David: Well, I think it’s really important that if you think about the business model that we’ve got, this business model is not scalable. It is sustainable. You can build really solid, sustainable business models around this. Actually, when you’re small, it’s hard to be sustainable because there’s so many ebbs and flows. But for the big companies that do this, it’s a really sustainable business model that you just need to manage your manpower versus your contracts. And if you’re big enough, then managing that in different ways is absolutely possible.

However, it’s not scalable in the way that digital services are. And I’m afraid I’ve learned and I’ve been inspired by the tech startup scene. And the heart of that is the digital services. And this is totally consistent. Inspirations for me include RStudio and how they transitioned from really a public good base of the RStudio software into their digital services around that public good. And they’re doing some amazing work building out the public goods. The best R code which is written always seems to be coming out of RStudio at the moment, this is sort of consistently good work coming out from them, but their business models are really around digital services.

[00:19:45] Santiago: But can you give a couple of examples?

[00:19:48] David: Hosting is a really simple and trivial one. They offer an online version. Another one which is very simple is, you know, licensing. So actually having a commercial licence which means that you take responsibility in certain ways. That sort of licensing where you have a commercial licence, you offer services around it, which could include human services as well, but can just be the sort of services of taking responsibility for the software which is produced in a different way.

[00:20:16] Santiago: Sorry, if you have a licence does that not go in contradiction with the good being public.

[00:20:23] David: No, it just means that you don’t have to pay for the licence. So, why would people choose to pay for a licence when they don’t have to? Well, one of the reasons, and this comes back to the banks for example, is they want to be able to sue someone if it goes wrong. Actually this gives them confidence. The cost of the licence is much smaller than the potential reputation loss they have if they, if they don’t have someone taking responsibility for the software working as they need it to work.

[00:20:52] Santiago: Ah, and I’ve come across a similar but much smaller case example.

[00:20:57] David: Yeah.

[00:20:58] Santiago: In the educational world with some edtech.

[00:21:01] David: Yes.

[00:21:02] Santiago: Online assessment systems that were free.

[00:21:05] David: Yeah.

[00:21:05] Santiago: Were completely free and they had to change the licences, but had opt out clauses, and schools that couldn’t afford it simply had to apply.

[00:21:18] David: Yes, and this is the sort of thing where there’s different ways of doing this. And having a licence where you can opt out a payment in different ways, that’s a very good example of what I would consider to be a very ethical digital service. That you need the licence there to be able to support the development of the product. And this is exactly what we come back, you mentioned your sort of Sketchpad versus GeoGebra, I would have argued that if Sketchpad had taken that approach, they could have been so successful. Actually, instead of competing with GeoGebra, going open, the quality of their software, the quality of their code was incredible. And they had a development team that they needed to pay to do that, which costs a million dollars a year. So they needed a business model which supported that.

And so being able to have the right business models to support that innovative team actually broke up the team. You know, that team’s now dispersed and they’re not as productive as they are apart as they were together. That’s a whole different story. But this is the point. This is why the digital services and those business models are so important to be able to sustain development on the public goods and to be able to build those business models. And I would argue a big inspiration for me is the likes of RStudio who have done this so successfully.

[00:22:36] Santiago: Before we get to the three together, I think it’s worth delving into the combination between the physical and the digital.

[00:22:45] David: Yes.

[00:22:46] Santiago: Because that area, where they overlap, and I think you have to give the Mpesa example.

[00:22:53] David: Well, the Mpesa example is a really beautiful instance. And this is sort of, again, it’s part of the inspiration, being inspired by some of the low resource environment innovation is really important where, actually the Mpesa example is not the only one, but it’s the most well known example.

Let’s just say what this is. This is in Kenya, mobile money. This is using mobile phones to transfer money between people.

[00:23:23] Santiago: Mobile credit.

[00:23:23] David: Well, it’s a… Credit has different connotations in different ways, so I don’t want there to be misunderstanding. This doesn’t mean debt. You have essentially what, and I don’t want to call it a bank account because then I’m getting in trouble because it’s not a bank account, but you have an account where you have a sort of, you have money in your account. And the whole point is that the reason that you don’t have this in Europe is because the banks have regulations on this and the mobile phone companies therefore can’t do it.

[00:23:52] Santiago: But let’s go back. You have money in your mobile phone.

[00:23:55] David: And the point is that then you can go to a mobile phone agent, Mpesa agent, who will then say, okay, well, you can take money out and you can put money in, in different ways. And then you can use your phone to send it to other people or to pay for bills or to pay for things.

[00:24:09] Santiago: Which is not very different to digital wallets.

[00:24:12] David: No, exactly. It is in some sense a… It’s not a precursor to digital wallets because they existed in different forms, but it does go back quite a long way. And so yes, it sort of really is very much like digital wallets, but in a way where the… The essence of this came from mobile funds and actually the utility of this. And this has transformed Africa in particular, in many ways, not just Africa, but, in Kenya now, you go to any village in the middle of anywhere and there are mobile phone agents who offer Mpesa services.

[00:24:47] Santiago: And what is the digital service exactly?

[00:24:50] David: Well, so the digital service in that particular context is the mobile phone operator offering the ability to sort of have this transfer and to have the payments going up and down in different ways and transferred between different devices. So they’re offering that digital infrastructure.

[00:25:06] Santiago: And the business model around it is they take a commission for each transaction.

[00:25:10] David: A very small commission for each transaction.

[00:25:12] Santiago: And what is the human service?

[00:25:14] David: Well, these agents, they also enable this to happen, and actually, almost always they provide the security that it’s the right person doing this in different ways, and so they make the whole system work.

And they take a small commission. And so you have these very small commissions, microtransactions, which are leading to jobs, job creation, and the digital services are working alongside the human services in really exciting and interesting ways. And that is an inspiration, and it’s what we imagine for the future, and this is sort of very central to, I would argue, what I see as, as a sort of, an alternative mode for tech to interact with society, where instead of tech replacing human interactions, it actually augments them. It enhances them. And that’s what we’re looking for. We’re looking for tech enhancing human interactions.

[00:26:07] Santiago: And you were getting to the beauty of the three combined.

[00:26:10] David: Well, broadly, this is it. That actually, if you take this idea of having open, public goods, tech innovation, which then is combined with digital services, which support human services…

Suddenly, that’s an incredibly powerful ecosystem, which can be, and this is the key point, it can be inclusive tech, it can be inclusive services. Currently, most digital services are exclusive. And I would love to dig into how you could imagine a Netflix, a Spotify but with inclusive services rather than exclusive services.

Netflix is cracking down on people who are not paying, who are sharing their accounts. That’s the wrong approach because that’s excluding more and more people who want access to those services. If we can imagine ways to have inclusive services, the people who, who are at the margins of society can access, but the whole system works. That’s where I envisage our collaborative society could be a much better model.