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Other McKinsey articles of interest:
Integrating purchasing in M&A: An interview with Lenovo's chief procurement officer
The promise of prediction markets: A roundtable

This article was originally published by The McKinsey Quarterly.

By James M. Manyika, Roger P. Roberts, and Kara L. Sprague

Technology alone is rarely the key to unlocking economic value: companies create real wealth when they combine technology with new ways of doing business. Through our work and research, we have identified eight technology-enabled trends that will help shape businesses and the economy in coming years. These trends fall within three broad areas of business activity: managing relationships, managing capital and assets, and leveraging information in new ways. Managing relationships

1. Distributing cocreation

The Internet and related technologies give companies radical new ways to harvest the talents of innovators working outside corporate boundaries. Today, in the high-technology, consumer product, and automotive sectors, among others, companies routinely involve customers, suppliers, small specialist businesses, and independent contractors in the creation of new products. Outsiders offer insights that help shape product development, but companies typically control the innovation process. Technology now allows companies to delegate substantial control to outsiders-cocreation-in essence by outsourcing innovation to business partners that work together in networks. By distributing innovation through the value chain, companies may reduce their costs and usher new products to market faster by eliminating the bottlenecks that come with total control.

Information goods such as software and editorial content are ripe for this kind of decentralized innovation; the Linux operating system, for example, was developed over the Internet by a network of specialists. But companies can also create physical goods in this way. Loncin, a leading Chinese motorcycle manufacturer, sets broad specifications for products and then lets its suppliers work with one another to design the components, make sure everything fits together, and reduce costs. In the past, Loncin didn't make extensive use of information technology to manage the supplier community-an approach reflecting business realities in China and in this specific industrial market. But recent advances in open-standards-based computing (for example, computer-aided-design programs that work well with other kinds of software) are making it easier to cocreate physical goods for more complex value chains in competitive markets.

If this approach to innovation becomes broadly accepted, the impact on companies and industries could be substantial. We estimate, for instance, that in the US economy alone roughly 12 percent of all labor activity could be transformed by more distributed and networked forms of innovation-from reducing the amount of legal and administrative activity that intellectual property involves to restructuring or eliminating some traditional R&D work.

Companies pursuing this trend will have less control over innovation and the intellectual property that goes with it, however. They will also have to compete for the attention and time of the best and most capable contributors.

Further reading:

Yochai Benkler, The Wealth of Networks: How Social Production Transforms Markets and Freedom, Cambridge, MA: Yale University Press, 2006.

Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology, Boston: Harvard Business School Press, 2003.

James Surowiecki, The Wisdom of Crowds: Why the Many Are Smarter than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, New York: Doubleday, 2004. Eric von Hippel, Democratizing Innovation, Cambridge, MA: MIT Press, 2005.

2. Using consumers as innovators

Consumers also cocreate with companies; the online encyclopedia Wikipedia, for instance, could be viewed as a service or product created by its distributed customers. But the differences between the way companies cocreate with partners, on the one hand, and with customers, on the other, are so marked that the consumer side is really a separate trend. These differences include the nature and range of the interactions, the economics of making them work, and the management challenges associated with them.

As the Internet has evolved-an evolution prompted in part by new Web 2.0 technologies-it has become a more widespread platform for interaction, communication, and activism. Consumers increasingly want to engage online with one another and with organizations of all kinds. Companies can tap this new mood of customer engagement for their economic benefit.

OhmyNews, for instance, is a popular South Korean online newspaper written by upwards of 60,000 contributing "citizen reporters." It has quickly become one of South Korea's most influential media outlets, with around 700,000 site visits a day. Another company that goes out of its way to engage customers, the online clothing store Threadless, asks people to submit new designs for T-shirts. Each week, hundreds of participants propose ideas and the community at large votes for its favorites. The top four to six designs are printed on shirts and sold in the store; the winners receive a combination of cash prizes and store credit. In September 2007 Threadless opened its first physical retail operation, in Chicago.

Companies that involve customers in design, testing, marketing (such as viral marketing), and the after-sales process get better insights into customer needs and behavior and may be able to cut the cost of acquiring customers, engender greater loyalty, and speed up development cycles. But a company open to allowing customers to help it innovate must ensure that it isn't unduly influenced by information gleaned from a vocal minority. It must also be wary of focusing on the immediate rather than longer-range needs of customers and be careful to avoid raising and then failing to meet their expectations.

Further reading:

C. K. Prahalad and Venkat Ramaswamy, The Future of Competition: Co-Creating Unique Value with Customers, Boston: Harvard Business School Press, 2004.

Don Tapscott and Anthony D. Williams, Wikinomics: How Mass Collaboration Changes Everything, New York: Portfolio Hardcover, 2006.

3. Tapping into a world of talent

As more and more sophisticated work takes place interactively online and new collaboration and communications tools emerge, companies can outsource increasingly specialized aspects of their work and still maintain organizational coherence. Much as technology permits them to decentralize innovation through networks or customers, it also allows them to parcel out more work to specialists, free agents, and talent networks.

Top talent for a range of activities-from finance to marketing and IT to operations-can be found anywhere. The best person for a task may be a free agent in India or an employee of a small company in Italy rather than someone who works for a global business services provider. Software and Internet technologies are making it easier and less costly for companies to integrate and manage the work of an expanding number of outsiders, and this development opens up many contracting options for managers of corporate functions.

The implications of shifting more work to freelancers are interesting. For one thing, new talent-deployment models could emerge. TopCoder, a company that has created a network of software developers, may represent one such model. TopCoder gives organizations that want to have software developed for them access to its talent pool. Customers explain the kind of software they want and offer prizes to the developers who do the best job creating it-an approach that costs less than employing experienced engineers. Furthermore, changes in the nature of labor relationships could lead to new pricing models that would shift payment schemes from time and materials to compensation for results.

This trend should gather steam in sectors such as software, health care delivery, professional services, and real estate, where companies can easily segment work into discrete tasks for independent contractors and then reaggregate it. As companies move in this direction, they will need to understand the value of their human capital more fully and manage different classes of contributors accordingly. They will also have to build capabilities to engage talent globally or contract with talent aggregators that specialize in providing such services. Competitive advantage will shift to companies that can master the art of breaking down and recomposing tasks.

Further reading:

Richard Florida, The Rise of the Creative Class: And How It's Transforming Work, Leisure, Community, and Everyday Life, New York: Basic Books, 2004.

Daniel H. Pink, Free Agent Nation: How America's New Independent Workers Are Transforming the Way We Live, New York: Warner Books, 2001.

4. Extracting more value from interactions

Companies have been automating or offshoring an increasing proportion of their production and manufacturing (transformational) activities and their clerical or simple rule-based (transactional) activities. As a result, a growing proportion of the labor force in developed economies engages primarily in work that involves negotiations and conversations, knowledge, judgment, and ad hoc collaboration-tacit interactions, as we call them. By 2015 we expect employment in jobs primarily involving such interactions to account for about 44 percent of total US employment, up from 40 percent today. Europe and Japan will experience similar changes in the composition of their workforces.

The application of technology has reduced differences among the productivity of transformational and transactional employees, but huge inconsistencies persist in the productivity of high-value tacit ones. Improving it is more about increasing their effectiveness-for instance, by focusing them on interactions that create value and ensuring that they have the right information and context-than about efficiency. Technology tools that promote tacit interactions, such as wikis, virtual team environments, and videoconferencing, may become no less ubiquitous than computers are now. As companies learn to use these tools, they will develop managerial innovations-smarter and faster ways for individuals and teams to create value through interactions-that will be difficult for their rivals to replicate. Companies in sectors such as health care and banking are already moving down this road.

As companies improve the productivity of these workers, it will be necessary to couple investments in technologies with the right combination of incentives and organizational values to drive their adoption and use by employees. There is still substantial room for automating transactional activities, and the payoff can typically be realized much more quickly and measured much more clearly than the payoff from investments to make tacit work more effective. Creating the business case for investing in interactions will be challenging-but critical-for managers.

Further reading:

Bradford C. Johnson, James M. Manyika, and Lareina A. Yee, "The next revolution in interactions," mckinseyquarterly.com, November 2005.

Scott C. Beardsley, Bradford C. Johnson, and James M. Manyika, "Competitive advantage from better interactions," mckinseyquarterly.com, May 2006.

Thomas W. Malone, The Future of Work: How the New Order of Business Will Shape Your Organization, Your Management Style, and Your Life, Boston: Harvard Business School Press, 2004.