Walking Wounded

Let us suppose we can divide the world into those who trust service companies to treat their customers fairly, and those who assume that service companies will be looking to exploit any customer weakness or lapse of attention.

For example, some loyal customers renew without question, even though the cost creeps up from one year to the next. (This is known as price walking.) While other customers switch service providers frequently to chase the best deal. (This is known as churn. B2C businesses generally regard this as a Bad Thing when their own customers do it, not so bad when they can steal their competitors' customers.)

Price walking is a particular concern for the insurance business. The UK Financial Conduct Authority (FCA) has recently issued new measures to protect customers from price walking.

Duncan Minty, an insurance industry insider who blogs on Ethics and Insurance, believes that claims optimization (which he calls Settlement Walking) raises similar ethical issues. This is where the insurance company tries to get away with a lower claim settlement, especially with those customers who are most likely to accept and least likely to complain. He cites a Bank of England report on machine learning, which refers among other things to propensity modelling. In other words, adjusting how you treat a customer according to how you calculate they will respond.

My work on data-driven personalization includes ethics as well as practical considerations. However, there is always the potential for asymmetry between service providers and consumers. And as Tim Harford points out, this kind of exploitation long predates the emergence of algorithms and machine learning.

 

Update

In the few days since I posted this, I've seen a couple of news items about autorenewals. There seems to be a trend of increasing vigilance by various regulators in different countries to protect consumers.

Firstly, the UK's Competition and Markets Authority (CMA) has unveiled compliance principles to curb locally some of the sharper auto-renewal practices of antivirus software firms. (via The Register).

Secondly, new banking rules in India for repeating payments. Among other things, this creates challenges for free trials and introductory offers. (via Tech Crunch)

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Machine Learning in UK financial services (Bank of England / FCA, October 2019)

FCA confirms measures to protect customers from the loyalty penalty in home and motor insurance markets (FCA, 28 May 2021)

Tim Harford, Exploitative algorithms are using tricks as old as haggling at the bazaar (2 November 2018)

Joi Ito, Supposedly ‘Fair’ Algorithms Can Perpetuate Discrimination (Wired Magazine, 5 February 2019)

Duncan Minty, Is settlement walking now part of UK insurance? (18 March 2021), Why personalisation will erode the competitiveness of premiums (7 September 2021)

Manish Singh, Tech giants brace for impact in India as new payments rule goes into effect (TechCrunch, 1 October 2021)

Richard Speed, UK competition watchdog unveils principles to make a kinder antivirus business (The Register, 19 October 2021)

Related posts: The Support Economy (January 2005), The Price of Everything (May 2017), Insurance and the Veil of Ignorance (February 2019)

Related presentations: Boundaryless Customer Engagement (October 2015), Real-Time Personalization (December 2015)

Regulating Platforms

On Friday, Transport for London (TfL) declared that Uber was not fit and proper to hold a private hire operator licence. Uber's current licence expires next week. However, Uber can continue to operate in London until any appeal processes have been exhausted. (TFL Press Release, 22 September 2017)

By Saturday afternoon, a petition in Uber's favour had raised half a million signatures. Uber seems to put more energy into campaigning against evil regulators than into operating within the regulations, and was evidently already prepared for this fight. (You don't send out messages to millions of customers at the drop of a hat without a bit of forward planning.) As Emine Saner writes,

"Calling for better legislation certainly is not as exciting as a glossy app, or whipped-up social media reaction, but it may make your trip home safer – and would be a better use of online petitions."

The protests follow a number of well-worn arguments

• Many users of the Uber service (especially young women) have become dependent on a cheap, convenient and supposedly safer alternative to public transport and expensive taxis.

• Many drivers have borrowed heavily to invest in the Uber business model, and fear being thrown into penury.

• This is an anti-competitive and technologically backward move, prompted by entrenched interests. And as TfL is itself a transport operator, it is not appropriate that TfL should regulate its competitors.

None of these arguments can be taken completely at face value.

• It is true that many women believe the Uber model is safer than the alternatives; however, some women have been raped, and other women have had extremely scary experiences. Uber is accused of failing to carry out proper checks, and failing to report serious incidents.

• Uber service is cheap not only because it cuts costs and exploits its drivers, but also because it is subsidized by Uber investors. This looks suspiciously like predatory pricing rather than fair competition. Analysts such as Izabella Kaminska argue that Uber will only become profitable when it has driven its competitors out of business, at which point it will be able to increase its prices. Like much of Silicon Valley, it appears to operate according to the Peter Thiel anti-competition playbook. Even Steve Bannon has been heard arguing for closer regulation of what are effectively monopoly platforms.

• Technology companies such as Uber sometimes describe themselves as "disruptive". While it is true that disruptions sometimes yield socioeconomic benefits, the belief that disruption is always good for competition is based on ideology rather than evidence. Regulation is generally opposed to disruption.

• And as Stephen Bush points out, it's not as a digital start-up company that Uber has fallen foul of regulations, but as an old fashioned minicab operator. (As John Bull explains, Uber London is just a minicab company; the app is operated by Uber BV in the Netherlands. This corporate separation helps Uber to finesse both regulation and tax.) Persuading politicians and economists to see Uber as a shining example of technological progress is just "a very, very clever marketing trick".

I'm quoting Steve Bannon because I'm just amazed to find something I agree with him about.  Regulating platforms is not the same as regulating regular companies, and the general art of regulation needs a kick up the proverbial. However, that is no reason to diss the current regulations or regulators, who are doing the best they can with insufficient regulatory mechanisms and resources. Experience from other cities shows that if Uber can't get its act together, there are plenty others that can.

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John Bull, Understanding Uber: It’s Not About The App (Reconnections 25 September 2017)

Stephen Bush, The right are defending Uber, because they don't really understand it (New Statesman 22 September 2017)

Martin Farrer, Nadia Khomami et al, More than 500,000 sign petition to save Uber as firm fights London ban (Guardian 23 September 2017)

Ryan Grim, Steve Bannon Wants Facebook and Google Regulated Like Utilities (The Intercept, 27 July 2017)

Hubert Horan, Will the Growth of Uber Increase Economic Welfare? (September 14, 2017)

Izabella Kaminska. For references see earlier post Uber Mathematics 2 (December 2016)

Sam Levine,'There is life after Uber': what happens when cities ban the service? (Guardian 23 September 2017)

Jason Murugesu, Night bus or black cab - what will save stranded Londoners post-Uber? (New Statesman 22 September 2017)

Andrew Orlowski, Why Uber isn't the poster child for capitalism you wanted (The Register, 26 September 2017)

Emine Saner, Will the end of Uber in London make women more or less safe? (Guardian, 25 September 2017)


Related posts (with further references): Platform, Regulation, Uber

Uber Mathematics 3

Where are Uber's real competitors? The obvious answer would be the traditional taxi operators in large cities. Taxi services are usually controlled by city authorities or other regulators, to ensure that the prices are fair, and that the drivers and the vehicles are safe. Taxi drivers in various cities have protested against Uber, arguing that it cheats regulation by using unlicensed drivers to undercut prices. However, regulators (such as the UK CMA) have sometimes decided that consumer interests are best promoted by allowing Uber to compete with established providers.

Uber is therefore selling itself three ways - not only to passengers and drivers but also to regulators. In a sense, this makes it a three-sided platform.

However, as discussed in my earlier posts, some commentators are dubious that Uber can ever be profitable in this competitive space, even with substantial deregulation in its favour. What Uber really wants (they argue) is to persuade city authorities to stop investing in public transport, to stop subsidizing buses and subsidize Uber transport instead. If other competing modes of transport are decommissioned, the Uber business model starts to look quite different - just another privatized yet publicly subsidized monopoly, supposedly independent but effectively underwritten by the government.

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All you need to know about Uber (BBC News, 9 July 2015) Uber says TfL cab proposals 'against public interest' (BBC News, 2 October 2015)

Does Uber have an ally in the CMA? (Maclay Murray & Spens, 12 October 2016)

Anne-Sylvaine Chassany, Uber: a route out of the French banlieues (FT, 3 March 2016)

Dave Lee, Is Uber getting too vital to fail? (BBC News, 10 December 2016)


Related Posts
Uber Mathematics (Nov 2016) Uber Mathematics 2 (Dec 2016)

Design for Regulation

One source of complexity in organizational design is the requirement for various forms of regulation and governance. This requirement results in significant levels of bureaucracy and management overhead, as seen across much of the public sector as well as in many large commercial organizations.

It is tempting to think that much of this regulation and governance is redundant, and that such organizations would be far more efficient and effective if these layers of bureaucracy were eliminated. Of course that will sometimes be true, but it would be architecturally wrong to eliminate any specific regulatory mechanism without understanding the purpose and systemic effects of this mechanism. (The fallacy of eliminating things just because you don't understand why they're there is known as Chesterton's Fence. See my post on Low-Hanging Fruit.)

In general system terms, some form of regulation may be required to maintain integrity of structure and behaviour. The architect needs to understand the abstract need for regulation, without prejudging any specific mechanism or institutional solution. This understanding calls for the Cybernetic Viewpoint.

The Cybernetic Viewpoint allows us to consider the existence, purpose and style of regulation, while deferring the question of responsibility for regulation and its technical mechanisms.

There is a considerable debate about the proper style of regulation. There are many voices speaking for principles-based or performance-based or risk-based regulation, typically contrasted with rules-based or process-based regulation.  The need for precise specification and enforcement in a given situation may depend on the degree of trust.

The existence of some form of regulation may be inferred from some form of regularity in the structure and behaviour of a system, even if we don't always know the precise mechanism that produces this regularity. This inference may follow Stafford Beer's POSIWID principle - the Purpose Of a System Is What It Does.

Aside from the style of regulation, there is even greater debate as to the responsibility for regulation. There are emergent forms of regulation (such as market forces or consumer choice), collaborative forms (such as industry self-regulation), and institutional forms (such as independent regulatory bodies). We can identify four main categories as follows. (The labels for these categories are copied from the System-of-Systems world.)

• Directed regulation - central regulation by a single regulatory authority

• Acknowledged regulation - where there are multiple aspects of regulation handled by specialist regulatory bodies. 

• Collaborative regulation - where regulation is distributed around the ecosystem, such as self-regulation

• Virtual regulation - where a regulatory effect is produced by crowd behaviour, such as market forces

People often have strong preferences between these categories, partly based on political affiliation, and partly based on the degree of trust in the players.

To sum up, architects need to think about regulation both in abstract terms (where market forces, self-regulation and statutory procedures may be regarded as alternative and potentially interchangeable solutions to a common regulatory requirement) and in specific terms (where the implementation of a given regulatory instrument may have a significant impact on system and organization design).

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John Kay, Regulation by Rules or Regulation by Values (Feb 2000)

Arnold Kling, Why We Need Principles-Based Regulation (American Enterprise Institute, May 2012) via EconLog

James Surowiecki, Parsing Paulson (New Yorker, April 2008)

Robert Teitelman, The paradoxes of rules-based regulation (Deal Economy, Sept 2011)

Regulation and Complexity

@timharford's article So Many Numbers, So Little Time yesterday prompted me to think about the causal relationship between regulation and complexity

There are at least three contrasting ideas about this relationship.

1. Red tape directly causes complexity. The solution to complexity is therefore to cut red tape. See for example the OECD document Overcoming Barriers to Administrative Simplification Strategies: Guidance for Policy Makers (pdf, 2009).

2. Conflicts of interest and mutual mistrust create complexity. The response to this complexity manifests itself in complicated forms of contractual negotiation, governance and regulation, which is the outward symptom of the intrinsic complexity of the situation. See for example my discussion of the Oil Industry example in my post Beyond Multiview.

3. Regulation triggers complex behaviour. In his article, Tim Harford suggests that it isn't always economic complexity causing regulatory complexity: in the financial industry, the causation often runs the other way. (Chester Spatt made a similar point in a keynote address earlier this year. Complexity of Regulation, HBLR June 2012.) Every attempt by the regulators to introduce greater complexity into market controls, in the hope of regulating the market more effectively, prompts an increase in the complexity of market behaviour.

Complex rules invite complex rule-bending, says Tim Harford. If at least some of the market players are more agile than the regulators, then they can always escape real regulation by shifting market operations to a higher complexity than the regulators can control. In which case it is not really the regulators who are controlling the market but the market players themselves. So what price Requisite Variety?

There is another twist to the story. Bad behaviour by large companies (Enron, WorldCom) has prompted legislation such as Sarbanes-Oxley, which turns out to be more burdensome for small companies than for larger companies. There seem to be significant economies of scale in such areas as compliance and tax avoidance: large companies can afford armies of accountants and lawyers and lobbyists and PR companies, some of the largest and most profitable companies pay practically no corporation tax. So who really benefits from all this red tape?

(In consequence, many start-up companies are designed to be acquired by a large company rather than undergo the massive administrative costs of a public flotation. Some commentators suggest that this tendency reduces the contribution of start-up companies to the macroeconomic goals of growth and full employment.)

See also Compliance and Control (May 2005), Requisite Variety and Wall Street Regulation (May 2012)

(updated October 15th 2012)

High Frequency Trading

Tim Bass upsets a few more people with his provocative posts arguing that authorities should Strongly Regulate High Frequency Trading (May 2010) and claiming that High Frequency Trading Destroys Market Integrity (May 2010).


Reading through the comments, it is necessary to separate three separate questions.

1. the potential value of certain classes of technology (notably CEP) to those using these technologies
2. the system-wide effects of using these technologies
3. the ethical consequences of these system-wide effects.

Taking the third question first, what does "market integrity" actually mean? The notion of "equal playing field" implies that certain forms of advantage are eliminated. The notion of "playing field" implies that certain forms of advantage may still exist - otherwise there would be no point playing.

For example, some sports are so expensive that only affluent people or well-funded organizations can compete. (Think F1 motor racing, yacht racing, anything with horses.) And in any sport, wealth can get you access to superior training facilities - tennis players with money can fly to Florida when it's raining at home. But there are still rules that prevent certain forms of unfair practices, or certain types of equipment, and there is still a certain amount of talent involved, so that the outcome cannot be simply predicted from the amount invested.

High frequency trading may indeed be directly available to some players and not others. Lots of people clearly believe this provides a genuine advantage, else they wouldn't invest in it. The effects of this are asymmetric - those possessing the technology may experience a detectable advantage, even if those lacking the technology may not experience a detectable disadvantage. Taking profits out of the system, without harming any individual investor, is a "victimless crime"; according to extreme libertarians, a "victimless crime" isn't a crime at all, and is therefore not an appropriate subject for regulation.

However, most people accept the need for some market regulation, not just to protect individual investors, but also to protect the integrity of the market. If only we knew what that actually meant in this case.

See Tim Harford, Algorithm and Blues (Financial Times Feb 2013)


Updated 3 Feb 2013

Online pricing practices to be regulated?

The British Office of Fair Trading (OFT) is starting an investigation of online pricing practices. [BBC News, 15 October 2009]

Type	Description	Typical Offenders
Drip pricing	Consumers only see an element of the price upfront and end up paying much more due to optional or compulsory extras	Airlines, car hire firms and insurance companies
Time-limited offers	For example, sales that finish at the end of the month or last for one day only.	Carpet stores and furniture sellers
Baiting sales	A company advertises discounts to attract visitors whilst having few items at that price on sale
Reference prices	Artificially inflating the pre-sale price of an item in order to make the discount look more attractive.	Companies offering cruises or selling furniture. Supermarkets
Complex pricing	It is difficult for a consumer to assess an individual price, such as with three-for-two offers and 'free' add-ons.	Mobile phone companies, supermarkets and computer stores
Surge pricing	Prices increase dramatically in response to peak demand	Uber
Customized pricing	Prices are individually tailored using information collected about a consumer's internet use
Price comparison websites	There may be some hidden financial ties or other collusion between an apparently independent comparison site and the suppliers whose prices they are comparing

I have talked about some of these pricing schemes and scams before, in particular complexity-based pricing. I've also talked about ways (such as the infamous Ghetto Latte) whereby consumers can get a better deal than the service provider intended. All this kind of thing results in chronic distrust between service provider and service user, and excessive transaction costs. Might seem like a classic argument for regulatory intervention, if we could really believe that would make the situation fairer. What do you think?

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Update: Surge Pricing added 25 September 2017
NYE Surge Pricing Explained (Uber Website December 2011, via Web Archive)

Broken Business Models 2

I heard someone on the radio the other day talking about bankruptcy. [BBC Radio 4, InBusiness, 18 December 2008] One of the features of the current economic crisis is that there seems to be a much shorter leadtime between a company's getting into difficulty, its creditors and suppliers getting edgy, and the company directors calling in the administrators.

Once upon a time I worked for a company that sometimes had threadbare cashflow, limping from month to month, the accounts department constantly trying to press customers to pay early and suppliers to accept late payment. (I should say I was not a director of this company, and didn't know much about this until later.) This company survived and prospered; I am sure many now-successful companies have had similar periods of uncertainty in their history.

Directors know they will be held personally liable if the company collapses, especially if they continue to trade when the company is non-viable. This is not just a question of being risk-averse, it is also that there has been a systemic change over the past few years. New kinds of regulation (such as Sarbanes-Oxley) combine with new technologies (such as SOA) to promote and enable maximum transparency and minimum latency. This greatly reduces the ability and willingness of company directors to wing their way through a crisis, thus making the crisis worse.

SOA is in no way responsible for the current crisis, but the presence of SOA and related technologies may have had some effect on the way that the crisis has developed and is continuing to develop.

The answer for risk-averse company directors is not to turn their backs on transparency and rapid-response, but to embrace these things, not just for the sake of their companies but to preserve their own wealth. "SOA or debtor's prison" - now that makes a compelling argument doesn't it?

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This is one of a series of posts on Broken Business Models

• 16 December 2008
• 19 December 2008
• 1 February 2009
• 12 February 2009 

See also Two Kinds of Business Model (December 2008)

SOA Example - Real-Time Regulation

In a couple of recent posts on Turbulent Markets, I asked whether real-time profit and loss could tame turbulent markets (answer: No), and asked whether some other form of real-time event-driven system could perform a regulatory function (answer: Possibly).

Bloggers from some of the CEP vendors have been making similar suggestions for a while.

Back in March 2008, there was a flurry of interest in the strange fate of Eliot Spitzer, who was apparently exposed by the very regulatory technologies he himself had advocated.

• The Technology That Toppled Eliot Spitzer (Technology Review)
• Algorithms for the War on the Unexpected (Emergent Chaos)

Jesper Joergensen of BEA (BEA now part of Oracle, Jesper has now joined SalesForce, Jesper's BEA blog has disappeared) took the opportunity to put in a plug for BEA's event processing products. "If anyone working in a bank's anti-money laundering, compliance or fraud detection unit is reading this", he writes, "go check out [my company's products]. This is the technology you need to automate these compliance requirements."

There is obviously a need for systems to trap people like Eliot Spitzer. But I'm not convinced that simple compliance systems need to be real-time service-oriented event-driven systems. See my post on Real-Time Fraud Detection.

But a much stronger case can be made for real-time risk management. Chris Martins (Progress Apama) put the case for CEP and real-time risk in March 2008. More recently, Jeff Wotton (Aleri) has put the case for real-time risk consolidation, drawing on an interview with Nick Leeson. Meanwhile, Progress Actional has a product page on Real-Time Risk Profiling for Banks.

The point about real-time risk aggregation is that you need to produce a rapid and reliable picture of total risk, drawing on data from many heterogeneous sources. In a typical business environment, new types of risk and sources of data are constantly being added, and you want to be able to plug these into your risk consolidation straightaway. In this kind of scenario, it should be very easy to justify SOA.

Event Processing Example - Turbulent Markets 2

In my previous post on Turbulent Markets, I answered a rhetorical question posed by Bob Giffords and Mark Palmer ("Can Real-Time Profit and Loss Tame the Turbulent Markets?"). Mark has now followed up with a proposal to Regulate News Market Data Sources.

The story starts with a large fluctuation in the stock price of United Airlines (UAL), which dropped from $12 to $3 in just 15 minutes, apparently in an over-reaction to an incorrect news story. Some journalists blamed computers. In response, Brenda Michaelson pointed out that "Shiny technology alone doesn't guarantee better decisions. Just faster decisions."

Of course, as Mark points out, what counts as a "better decision" depends on your perspective. The people who reacted fastest to the incorrect news story probably made lots of money. In the very short term, a market trader doesn't care whether a news story is true or false, because a false news story can have just as strong an effect on prices as a true one. In the longer term, true (or at least well-corroborated) stories usually (but not always) win out over false (or poorly corroborated) stories; but by that time the market may be chasing a completely different rumour.

But Mark acknowledges that such wild fluctuations are "just not right" - in other words wrong for everyone else, and probably for the stability and integrity of the market as a whole. So Mark's proposed solution is to regulate rumour - "automated trading based on unregulated sources of information should be prohibited".

Apart from the fact that the control of rumour sounds like one of the twelve labours of Hercules ...

(in fact Agatha Christie adopted exactly that interpretation of the Lernaean Hydra when she wrote twelve stories for Hercule Poirot based on the twelve labours)

... the notion of regulating sources of information seems to inhibit many of the supposed benefits of real-time event processing in financial markets. Unless of course you plug some real-time regulation (in other words, a real-time event-driven information filter, directly controlled by the regulator) into an event-driven system architecture. Now that would be an interesting challenge.

Event Processing Example - Turbulent Markets

Can Real-Time Profit and Loss tame the turbulent markets? ask Bob Giffords (independent analyst) and Mark Palmer (Streambase).

The simple answer is No. Turbulence is a complex systems phenomenon. (Complex event processing is not primarily about complex systems, although some of the advocates of complex event processing might benefit from knowing a bit more about complex systems.)

If we want to know how turbulence can be tamed, we need to understand the root causes of turbulence, in terms of the non-linear effects of feedback loops. This is properly a job for market regulators. For example, central banks may try to reduce volatility in the money supply, and have sophisticated economic models to support their analysis. But the recent history of market regulation is a sorry one. Some analysts have argued that regulations such as Basel2 actually amplify volatility and turbulence in the system, because they force individual banks to execute transactions in response to market movements in order to maintain key ratios.

So it would be interesting to see an application of complex event processing in regulating a complex system. But this is not what the white paper is about. Perhaps wisely, it doesn't actually talk about taming the markets, merely about riding (=profiting from) the markets.

If some players have better tools, including CEP systems, this may give them an advantage in a competitive turbulent market. But this raises three important questions at the ecosystem level,

1. How does the use of these tools affect the market itself? Does the level of turbulence increase or decrease?

2. If the players with the best tools are those that profit the most from turbulence, then they possibly have an interest in promoting increased turbulence, even if this is damaging to everyone else.

3. What would happen to the ecosystem if these tools become commonplace? Would the advantages of these tools be reduced if everyone else had them?

Pay As You Drive

Norwich Union has been experimenting with Pay-As-You-Drive insurance for a little while now, and has now made this service generally available to UK drivers, in association with technology company TrafficMaster, which provides the satellite navigation devices. [Norwich Union website, TrafficMaster website, BBC News report]

PAYD is an interesting application of the concept of differentiated context-aware services. Drivers pay a variable amount for car insurance, depending on the identity of the driver (under 23s pay more than older drivers) and the context (daytime versus nighttime, motorway versus town) as well as the number of miles driven.

This kind of differentiated service not only reduces the cost of insurance for some drivers, but also allows the driver a greater level of control over the insurance bill - by driving less. PAYD may also have a beneficial effect on road congestion and pollution.

However, although Norwich Union has evidently gone to some trouble to explain and manage the differences between regular insurance and PAYD, drivers adopting this kind of insurance will have to deal with some new complications, and I think we can expect the scheme to evolve further. For example, the arrangements for driving outside the UK seem unsatisfactory, and we may perhaps expect the emergence of the equivalent of "roaming charges" as insurers in other countries adopt similar or interoperable schemes.

Norwich Union has also gone to some trouble to deal with some of the security and privacy concerns of the scheme. The in-car device itself contains no data that can identify the driver or the vehicle. The data are encrypted for transmission, and then deleted from the in-car device. Not bad, although probably not perfect. (I haven't done a detailed analysis.)

However, the privacy issues are unlikely to deter many consumers. Context-aware services often involve some voluntary trade-off between privacy and consumer value. The consumer grants the service provider access to some personal information (such as consumption patterns), and gets some value in return (such as more precisely targetted special offers). PAYD is no different in that respect from any other scheme that permits the service provider (retailer, airline, credit card) to collect and process large quantities of consumer data.

It is going to be interesting to see the popularity of this kind of scheme, and the willingness of consumers to accept some level of complexity and strangeness, if they are convinced that this will give them a more cost-effective and (at least partially) user-controlled service.

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Related Posts

Pay As You Drive 2 (June 2008)
Pay As You Drive 3 (June 2009)

Differential Regulation

The economic questions of payment and cross-subsidy are highly relevant to the service economy, so here is an item cross-posted from the Business Organization Management blog.

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In some industries, economic questions of payment and cross-subsidy arouse strong passionate arguments, while in other industries these same questions arouse very little interest.

For example, Martin Geddes contrasts telecom with retail.

Telecom isn’t the only industry with distribution bottlenecks, significant market power, and cross-subsidy between the stages of production. Just look at how baked beans are positioned in supermarket shelves. Manufacturers in the UK pay the supermarkets to buy prime positions. Yet telecom incites such great passion in intelligent people. Baked beans don’t. What’s going on?

Martin explains this difference in political terms. Telecoms (along with media and internet) are implicated in democracy and participation, whereas baked beans aren't.

There is another possible explanation in historical terms. Telecoms used to be huge state monopolies, retail used to be hundreds of thousands of tiny independent stores. This is why the public and the regulators pay closer attention to telecom than to retail. (A long delay between cause and effect is easily explained in systems terms.)

And we don't have to choose between these explanations, since they don't actually contradict one another - so they may both contribute to the observed difference. (Multiple explanation is common in social systems.)

So what aspects of business does a society choose to regulate? This is an extremely interesting and complex question, with economic, ethical, social and political threads.

Technorati Tags: regulation

Compliance and Control

The US Sarbanes-Oxley Act of 2002 (SOX) mandates what is effectively a systems engineering solution to the problem of bezzle. Reliability of a company's published accounts is achieved not by human oversight alone, but by a set of information and control systems that ensures information quality and management accountability. Executive officers are required to sign the accounts and are criminally liable for any inaccuracy. The act also mandates near-real-time disclosure of any material events.

One of the basic tenets of control theory is that a control system must have as much flexibility and variety as the system it is trying to control. This is known as Requisite Variety. Previous attempts at internal audit and control have either themselves lacked flexibility and responsiveness, thus compromising their ability to deliver effective control, or have imposed inflexibility and unresponsiveness on the underlying system. Neither of these outcomes is acceptable.

For the management controls to be effective there must be some way for the management system to intervene in the transaction system. There is an architectural choice between direct and indirect intervention.

Direct	Indirect
When the management subsystem detects an anomaly, it immediately intervenes in the transaction subsystem - possibly changing the status of some transaction record, or moving a transaction to a different account within the general ledger. Changes to the transaction system may also involve adjustments to elements of policy or context governing the transaction subsystem.	When the management subsystem detects an anomaly, it triggers a piece of workflow, or generates some additional transactions, which are fed back into the transaction system. A human supervisor is notified, who may have the authority to make changes in the transaction system and/or undertake further investigation.
This approach tightly couples the management subsystem and the transaction subsystem into a single unified system. The management subsystem is intrusive into the transaction subsystem.	This approach maintains loose coupling between the management subsystem and the transaction subsystem. The software component of the management subsystem provides non-intrusive monitoring. This can be implemented as an instance of the Observer pattern.

The SOA principle of loose coupling clearly favors the indirect, non-intrusive approach. However, we must be careful to ensure that the indirect control remains effective. There needs to be some coordination between the collaboration or process management layer in the management subsystem, and the collaboration or process management layer in the transaction subsystem.
In a dynamic SOA environment, we actually need a double instance of the Observer pattern. The management system needs to monitor dynamic changes to the transaction workflow, as well as the transactions themselves.
The management subsystem must be as adaptable as the transaction subsystem - and this calls for the same SOA design principles to be applied to both.

Information Management / Business Intelligence	Information architects may wish to think of SOX requirements in terms of data integrity - providing a guarantee of consistency and completeness across multiple diverse applications and data stores. For information management, Sarbanes-Oxley provides a push towards real-time closed-loop information management and business intelligence. Many BI products are now Web Service enabled, and this makes it easier to quickly plug BI capabilities such as monitoring and data mining into the business process.
Model-Driven Compliance	It is impossible for an organization of any size or complexity to achieve SOX compliance without some serious modeling effort - involving both data and process, and showing how data are transformed across multiple and diverse applications and data stores.
Web Service Based EAI	SOX compliance typically requires a major rewiring job to corporate financial information systems. In some cases, some additional applications and packages will need to be quickly plugged in to complete the solution. New or reengineered interfaces should be rendered as Web Services by default. Organizations that are already using a Web Service or EAI platform will be able to leverage this to achieve SOX compliance more quickly.

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See also


CBDI Report April 2004: Sarbanes-Oxley Drives Web Services Adoption
Notions: Bezzle

Local Loop Unbundling

The UK telecom regulator Ofcom published a long-awaited report last week, widely seen as a further challenge to BT's near-monopoly over the local telecoms network. Ofcom's action is partly triggered by a view of technological change, leading to a key forking point: BT opportunity versus regulator opportunity.

Technological change	"There is a fundamental change going on from a technological point of view. If that had not been going on, Ofcom might not have been so keen to come up with a brand new regulatory framework."	Emma Gilthorpe, head of regulatory affairs at Cable & Wireless (BT's biggest rival)
BT opportunity: dominance	"Rival operators stressed that they did not want BT to make life more difficult for them by adopting a closed path with its new network which would allow it to leapfrog its rivals on technology and cost structure."	Mark Page, head of telecoms at A.T. Kearney
Regulator opportunity: equivalence	"It's a timely intervention. The whole network is being built from scratch so it is an ideal opportunity to design it with 'equivalence' in mind."	Richard Sweet, head of regulation at Thus.

All quotes taken from report "The New Age of Communication: Ofcom forces BT to overhaul and open up" by Robert Budden in the Financial Times, November 20th 2004.

Ofcom's actions have already driven a wedge between BT Retail and BT Wholesale, and create an internal conflict of interest inside BT. For example, if BT Retail were to invest in local loop unbundling, it would be able to compete more vigorously with rival telecoms retailers, but this would damage revenues at BT Wholesale.

From the point of view of the service-oriented enterprise, this is an extremely important issue. The design (geometry) of the service network - how services are bundled or unbundled, where the added-value is created and controlled - becomes a strategic issue across the industry, and a matter for close regulatory scrutiny. In regulated industries, the players look to get maximum advantage within a given set of constraints, while also lobbying for advantageous regulatory changes. In unregulated industries, the players simply look to get maximum short-term and long-term advantage. In both cases, the design of business services is now much too important to be regarded as merely a matter of technical efficiency, to be delegated to technological specialists; it is now (more clearly than ever) a matter for the business itself, affecting the profitability and sustainability of the business as a whole.