The Age of Excess Capacity

For the past several months I have been thinking about trends in the logistics industry and in the economy as a whole. The rate of innovation is so high right now that I have been unable to think categorically about it all. What I mean is, I would like to be able to see a news piece about a company with a great idea and think, “Right, that‘s another example of this.” My problem has been that I just haven’t been able to assemble a coherent list of “thises.” Today’s post is my attempt to define a “this” for the gig economy.

Before I get to my Organizing Principle, a personal story:  In 2004 I gave an INFORMS presentation that included a very unsatisfying conjecture I had worked unsuccessfully to prove for about three months. I was “sure” my method produced optimal solutions, and had worked both to prove the result and to disprove it by counterexample, all to no avail. Knowing the presentation would be attended by about thirty colleagues and Ph.D. students, I decided to make my claim (the conjecture) and then offer $100 to the first person who could disprove it. Assuming each person gave only 10 minutes of thought to it, I would get 5 hours of work and a proof (by counterexample) that my method was not optimal, all for $100—not bad; else, I would get the work for free.

After my talk, I was told that people were actively working on my problem in the elevator as they returned to their rooms. Alas, the next morning my friend Samir Amiouny produced a counterexample that led to a minor modification of my algorithm, which then produced his solution as well. Without knowing it, I had just used “the crowd” to solve a knotty technical problem.

I didn’t think in these terms at the time, but my experiment was successful because it tapped into the otherwise unused intellectual capacity of my audience. Had they not been given a nice little problem to think about, my audience might have left the presentation and engaged in something unproductive like small talk or going to coffee—instead of, you know, working on my problem! The experiment was also successful because the seminar itself served as a coordinating mechanism that gave a common understanding of the task and established the rules. Finally, I had offered them an incentive to work voluntarily on my problem, thereby selecting from the audience the most willing and motivated problem solvers.

It is important to note that I probably did not attract the most capable problem solvers, only the most willing and motivated. Had I offered $100,000 instead of $100, I suspect I would have attracted the efforts of the entire group, including the most capable problem solvers. The level of reward determines the capability of the talent pool.

And now to the gig economy at large. I might be the last to realize this, but it seems that the Organizing Principle around gig economy businesses is something like this:

Find excess capacity in resources, organizations, systems, and individuals and then create a coordinating mechanism that allows providers, for a price, to offer their capacity voluntarily and spontaneously.

In other words, there is a lot of excess capacity out there, if people and organizations are willing to make it available. We have entered The Age of Excess Capacity, in which resources can be productive much more of the time. Why hasn’t this been done in the past? We have lacked the coordinating mechanisms, a void now filled by apps and mobile computing. Now, some examples of Excess Capacity Businesses.

Uber is the most famous example of an Excess Capacity Business. The genius behind Uber was the realization that empty seats (unused capacity) fill the highways and streets of every city in the world, and the drivers of some of those seats might be willing to volunteer them to people needing a ride. Why was this never done before? Before Uber, there was no coordinating mechanism between the drivers and potential customers, so customers could not participate; and there was no reward, so drivers had no incentive to participate. Note the key elements: a coordinating mechanism and a reward for providers.

AirBnB is also an Excess Capacity Business, based on the observation that an empty bedroom is “unused storage capacity” for people. Every day millions of people drive past empty residential bedrooms to pay $100 per night to stay in sterile hotel rooms. Enter a coordinating mechanism (AirBnB software) and a reward for the provider (rent), and presto—a billion dollar company.

Maketime is an Excess Capacity Business in manufacturing that attempts to match customers with idle machines (via software, the coordinating mechanism), giving manufacturers higher rates of utilization on their existing assets and therefore a higher rate of return (reward).

Co-creation in product development (e.g., FirstBuild) taps excess mental capacity of engineers, industrial designers, makers, and hobbyists. Think about how many brilliant people waste intellectual energy every night as they watch YouTube videos and play video games! FirstBuild offers the coordinating mechanism (co-creation software platform) and reward to its providers, who retain the IP on their inventions.

For all of these businesses, providers must be volunteers and able to withdraw their service spontaneously because, presumably, the asset was not purchased with a gig economy in mind. I didn’t buy a car so I could be an Uber driver, and I don’t have an extra bedroom so I can let it out on AirBnB. Some might choose to do these things, but the business models do not assume this is the case.

Now for some more interesting cases. What about parking lots, which are mostly empty? Should a shopping mall rent out portions of its parking lot at night to enable, say, real time crossdocking of freight in an urban environment? Doing so at night seems pretty safe, but what about during the day?

How about your garage? Why not build a company called AirDC that connects pallets with pallet positions in residential areas in real time? Think about the value of a highly distributed, virtual distribution center in downtown Atlanta. Just as Uber operates a taxi service without cars, AirDC would offer a distribution center with no building.

And my favorite: railroad tracks. What do you imagine is the utilization of an inch of railroad track? 0.001 percent? Surely we can do better!

To review: the unifying idea—the Organizing Principle—among all of these businesses is:

• Recognition of unused capacity. Why is it just sitting there when others might be able to use it right now?
• A coordinating mechanism, usually via software. Uber and AirBnB, for example, are software companies, not transportation or hotel companies. Why isn’t the resource being used right now? How can we connect potential users with idle resources?
• Voluntary participation by providers. Unlike contracts, which bind seller and buyer, resources in an Excess Capacity Business can choose to enter or leave service at their leisure. By definition, they are offering marginal capacity, and therefore must be allowed to withdraw for a time, as, for example, when they are at full utilization (e.g., in-laws encroaching on your AirBnB cash flow).

In closing, I can’t help but note that the growth potential of an Excess Capacity Business is limited by…the amount of excess capacity! In these heady days of $60B Uber valuations (more than Ford and GM), let us not forget that Uber and its competitors are at the mercy of a public willing to spend its free time driving a cab around town. That pool is limited.