The Negative Side of the Network Economy

The negative side of the networked nature of the economy is that it is not easy to get new ideas to spread through it, even if they are good ones. Part of the problem is that before you can people to connect with your great new idea (new product, new service, new way of doing things, new way of thinking), you have to get them to break connections first.

The latest illustration comes through the twitter feed of Valdis Krebs, a story on the invention of a syringe that greatly reduces the chance of infection in hospitals. This is hugely important, as infections are one of the leading causes of hospital-related health complications. The story tells of the invention of Thomas Shaw, a flanged needle which is apparently very effective at preventing infections.

I can’t judge the technical merits of the invention from the article, but for now let’s assume that the product from Shaw and his company Retractable Technologies is genuinely better than what is being sold by the Bechton Dickinson, the firm that dominates the syringe market. If this is true, then hospitals should be lining up to buy the new syringes, right?

So far, wrong.

One issue is the way that hospitals in the US buy things. Most of them purchase supplied through collective organisations, called Group Purchasing Organizations (or GPOs). Here’s a bit about how GPO purchasing works:

Then, in 1986 Congress passed a bill exempting GPOs from the anti-kickback provisions embedded in Medicare law. This meant that instead of collecting membership dues, GPOs could collect “fees”—in other industries they might be called kickbacks or bribes—from suppliers in the form of a share of sales revenue. (For example, in exchange for signing a contract with a given gauze maker, a GPO might get a percentage of whatever the company made selling gauze to members.) The idea was to help struggling hospitals by shifting the burden of funding GPOs’ operations to vendors. To prevent abuse, “fees” of more than 3 percent of sales were supposed to be reported to member hospitals and (upon request) the secretary of health and human services.

But, as with many well-intended laws, the shift had some ground-shaking unintended consequences. Most importantly, it turned the incentives for GPOs upside down. Instead of being tied to the dues paid by members, GPOs’ revenues were now tied to the profits of the suppliers they were supposed to be pressing for lower prices. This created an incentive to cater to the sellers rather than to the buyers—to big companies like Becton Dickinson rather than to member hospitals. Before long, large suppliers began using “fees”—sometimes very generous ones—along with tiered pricing to secure deals that locked GPO members into buying their products. In many cases, hospitals were obliged to buy virtually all of their bandages or scalpels or heart monitors from one company. GPOs also began offering package deals that bundled products together. To get the best price on stethoscopes, a hospital might have to agree to buy everything from pacemakers to cotton balls from the GPO’s preferred vendors. Hospitals went along because they got price breaks, usually in the form of rebates if they met buying quotas.

Think about this in terms of connections. There are very large, complex, difficult to break ties between the GPOs and the large suppliers. The article on Shaw and Retractable Technologies cites several other examples of people and firms that have come up with great medical innovations which have essentially been killed by this arrangement.

Getting your new idea to diffuse through the economic network is often the hardest part of innovation – and also the thing at which inventors are least skilled.

Unfortunately, I’m not sure I have any really good solutions to this problem. One clear lesson from this is that when we are trying to be innovative, we must be aware of the importance of diffusion. Innovation is a process, it’s not just coming up with great ideas. Getting the ideas to spread is an essential step. And as the Retractable Technologies case shows, the deck is often stacked against you in this regard.

The second lesson is that we must understand the networked nature of the economy. When we’re getting our ideas to spread, we are trying to form connections between them and other people. We can do this by meeting their needs, and helping them realise their goals. However, before we can show that we can do that, we usually have to get them to break a connection. This can be incredibly difficult, and the playing field here is not level. Those that already have connections already have a huge advantage.

This is all part of what can make innovation so frustrating – it’s never just about the quality of the ideas. On the other hand, it’s also part of what makes it so exhilarating when it works.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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4 thoughts on “The Negative Side of the Network Economy

  1. Hi Tim,

    Good to see some critique of the new stuff.

    My impression is that network diffusion is of course different to other forms – it’ can be exponential.

  2. Thanks Martin. Nearly all of the diffusion that I’m interested in tends to be network diffusion, which is why I think it’s so important to get a handle on it…