Problems with ICTs
The Kenex partners report no specific problems with the ICTs they use. The main problem that they, and other businesses working in the knowledge economy to create and operationalise new knowledge products, face is a lack of understanding amongst potential business partners of the different ways in which data, information, knowledge and processes contribute to the creation of value in a knowledge economy. Unless these business partners understand these processes, then unnecessary obstacles are placed in the way of companies such as Kenex which prevents them from increasing the stocks of knowledge processes from which the New Zealand economy can derive benefits into the future.
It is usually expensive to create a knowledge product, but cheap to reproduce it. Unless the costs of creation can be assured, there are few incentives to create new knowledge. Its creation is thus a risky business. Furthermore, its value does not typically decrease with time; rather its value may increase as new information is added to an existing base, making both the new and original information more valuable than either individually (that is, increasing returns and network effects). Moreover, its value is determined by its use. The same information product may have significantly different values in different uses. Finally, it is a "consumption good". Its value to the user cannot be determined until it has been "consumed" (or observed). But having "consumed" it, the value from consuming it cannot be returned or refunded if the product does not meet expectations.
Industries producing knowledge products thus face a dilemma in how to charge for their products. Unless they have a very clear understanding about how they and others use the products (and these may be many and various, due to the multiple reusability and different uses for the same information), then the products may be priced inappropriately. The great danger is, as Arrow articulates, that knowledge products will be underutilised, and specifically that inefficiently low levels of new knowledge creation will occur. For a country striving to generate superior returns to its trading rivals in a knowledge economy, inefficient use of knowledge products places that country at a disadvantage.
Creating Value from Information and Knowledge
Kenex charges clients a fee for consulting services performed. Growing revenue in this environment is predominantly a matter of getting more consulting contracts.
The consultancy's charging model relies upon the fact that it is the knowledge workers that are the "scarce resource", not the information that they process. Clients paying consulting fees are paying for the knowledge worker to process information that may be "owned" by any entity. The value comes not principally from the information input, but from the unique set of information processing skills that the knowledge worker applies to that information for which the client is willing to pay. Processing by the knowledge worker does not deprive the "owner" from being able to use the information for any other purpose, as long as the information can be reproduced at low cost. The "owner" of the information is only threatened if the processor who uses the data is competing with that owner using a process that is a substitute for the processes from which the owner derives value. Only then is it in the interests for the information owner to restrict its use in processes owned by others.
Property Rights to Information
Kenex's approach to charging for information and processes is illustrative. Kenex management draws a very clear distinction between property rights to data and property rights to the processes that manipulate and add value to that data. Moreover, the distinctions between Kenex processes (both human and software) and those processes for which rights of use have been purchased (e.g. the hardware and standard GIS software) are also recognised. Unless the agreement with the commissioning client specifically requires confidentiality of the output models, Kenex makes the GIS models it creates publicly available on its website.
Making GIS outputs available is not considered a threat to the ability of the firm to generate returns, as income is derived not from the sale of images or data, but from sale of the consulting reports and associated services that the firm provides as a result of constructing the GIS models. Whilst the models can be cheaply copied and distributed multiple times, the scarce resources from which returns are generated are the firm's human capital (i.e. report-writing and other specialist services) which is not reproducible and is a proprietary process, therefore not made freely available.
When information workers develop, through their own research and development investments, new information processing techniques (e.g. Kenex's specific mineral prospectivity modules incorporated into the GIS systems), then it is protection of the knowledge creation process rather than protection of the outputs that entitles the creator to enjoy ongoing returns. Indeed, the processor is incentivised to widely circulate the outputs in order to ensure as many potential clients as possible become aware of the value that he is capable of adding to input data, overcoming some of the "consumption good" problems of potential consumers being unable to "see before they buy" thereby increasing the returns gained from multiple uses of human capital and proprietary processes.
Only if the process can be reverse-engineered and replicated perfectly from outputs alone would it be necessary for the outputs themselves to be protected (e.g. by copyright, patent or concealment) in order for Kenex to continue making returns from the development of the process. Electronic outputs, for example, may be presented in a format that does not incorporate the software that led to its creation. Information products are often formed using processes requiring a specific complementary, but scarce human resource input, which is never replicable, so even if the process can be discerned, the full extent of value creation cannot be replicated. Hence, the need for legal protection of the processes may not be so great as for the production processes for a tangible product (e.g. a design and construction methods used for a piece of furniture), which can be discerned from the item itself.
Access to Public Data for Process Research and Development
Whilst the Kenex partners can make a comfortable return from selling services associated with their existing processes, they see significant potential to expand their existing GIS data and prospectivity modelling techniques into industries other than mining, for example horticulture and agriculture. A pilot project modelling likely planting locations for wine grapes has already been undertaken. Although Kenex can provide some data, geological knowledge and modelling skills, such projects require data and specialist knowledge from the other industries, and cross the boundaries between consulting services and research and development activities. The outcome of these projects is a new "prospectivity" application from which new business activity can be developed.
Although possibilities for developing new processes exist, the risks of research and development not leading to the creation of viable commercialisable model each time are significant. Greg likens the risks of research and development to the risks faced by prospecting companies looking for commercial mineral deposits, which also have high probability of failure. In the mining industry, the risks of failure are managed by joint ventures between prospecting companies employing geologists who provide scientific input, mining companies who provide the technology to extract the minerals when located and financiers who provide the resources to carry out the exploration.
Kenex has successfully developed joint ventures with companies (e.g. mining, horticulture) willing to exploit a "prospective" location (e.g. for gold, or grape growing) identified using GIS systems and models developed by Kenex and consultant partners from the other specialties (e.g. horticulturists) who have access to the specialist knowledge and the data required to create and perfect the models. In effect, the owners of the data provide a role similar to financiers in that the data are essential resources to the process of developing the model. The joint venture structure shares both the risks of failure and the gains from success across all participating parties, and ensures that the property rights to the resulting intellectual property developed are clearly vested in the joint venture, rather than any of the individual partners. All profits from successful applications are therefore shared amongst the partners, unless a commercial decision is made to dissolve the venture and sell the intellectual property (i.e. the model) developed. Without common ownership of the joint venture, no individual business partner would be able to bear the risks of undertaking the development, and the potential commercial benefits from a successful development are lost to the economy.
However, if the potential partners for such research and development projects are not clear about how they create value from their own information and/or processes, then the ability to negotiate either purchase of the requisite skills and data or the respective contributions to a joint venture is severely compromised. The Kenex partners have found that the attitudes towards both availability of data and the willingness of owners of information and skills, to enter into efficient commercial agreements to enable the development of new knowledge processes, are highly variable. Within the mining industry, there have been few obstacles, and it is from this industry that most of the Kenex joint ventures have emerged, resulting in the development of models for gold and granite gold prospectivity. However, where the requisite resources reside in state ownership, either in government departments or CRIs, the partners have come up against obstacles that have at times appeared to have arisen out of either a lack of understanding about how to value information and processes, or a fundamental lack of understanding about the use of equity partnerships as a means to manage the risk of research and development. Furthermore, the approaches have been inconsistent between various state entities.
Price Discrimination for Government-Owned Information
For example, Crown Minerals data collected as a by-product of the permit management process is freely available, albeit with a transaction charge for reproduction. However, data from Landcare is charged for according to a schedule that appears to bear little resemblance to the costs of reproduction. For a particular set of data that Kenex sought to get on behalf of a client, a charge of $1800 was quoted for public sector entities or publicly-funded research, a price could be negotiated with "approved companies", or if the client was a consultant, a fee based upon a number of data points was quoted that equated to $41,000.5 As Kenex was deemed to be a consultant, the highest charge would apply. Approaches to negotiate as an "approved company" failed to reach any satisfactory conclusion, as Kenex was unwilling to pay a substantial sum until it could be ascertained if the available data could in fact be used for the required purpose. Landcare, on the other hand, would not let Kenex see the data to assess its usefulness without paying the fee first.
Such discriminatory pricing based upon organisational ownership alone takes no cognisance of the use to which the data is put. When the use is research and development, the effect is to "crowd out" such activities undertaken by private sector enterprises in favour of publicly funded research. Kenex could put a proposal to FoRST for exactly the same project that it might offer to a private sector funder, but if the state funds the research, the price for the data is less, even though the applications developed will be used by the same industry sector in the same country. If the price for access to data is prohibitively high, then private sector funding will not arise; if FoRST does not fund the research then it will not occur either. Thus, FoRST "sets the agenda" for research using CRI data, yet in the current environment, FoRST-funded projects probably have the most "inelastic" demand. The net result is less research and development undertaken in total. And just as with minerals prospecting, valuable information is lost. When a well is dry or a core sample fails to reveal evidence of the sought-after mineral, even this information is valuable, as it will prevent future prospectors from going over the same ground. In the research environment, the potentially profitable development will not be created, and even if the research is undertaken and the results are not able to be commercialised, there is still value, as the failure by this venture will prevent future ventures from pursuing what has already turned out to be a failure.
Furthermore, the only reason for discriminatory pricing in the private sector is the transfer of all surplus (or as much surplus as possible) to the seller. CRIs are charged with generating a return on their assets to their owner, the government. However, in respect of information for research and development, the "cost" of the profit is a reduction in the quantity of research undertaken. Thus the government's role as an owner of the CRI expecting the return of dividends is at conflict with its role as custodian of a New Zealand knowledge economy that stimulates the creation of knowledge and knowledge products. The current pricing schedule favours the interests of ownership over the public good. This does not appear consistent with a "Knowledge Economy" strategy.
Strategic Obstacles
This begs the question of whether there is any strategic reason why CRIs would want to crowd out private sector research using "their" data. It is feasible that CRIs view organisations such as Kenex as rivals for private sector research funds. This may be reasonable if the CRI is undertaking research in the same area as Kenex. Yet Kenex is the only enterprise either public or private in New Zealand using the combination of GIS and Bayesian modelling to develop prospectivity models. So even here the rationale is flawed. The only other feasible strategic reason may be that the CRIs see Kenex as competitors for state-funded research. Yet even this appears to be barely plausible, because if Kenex did apply and receive FoRST funding in competitive processes, the CRI would be bound to supply data at the lowest price under the state-funded research clause. Only if the discriminatory pricing actually forces Kenex from the market would this benefit the CRI. Yet this is only an academic question. Kenex has never applied for FoRST funding, as it has access to funding from the private sector.
The only possible outcome of the discriminatory pricing is to increase the cost of identical research undertaken in the private sector so that it is many times higher than the same research in the public sector. If the private sector funder pays the high prices, then less research is undertaken for the same combined budgets than if the lower price was charged. Thus, the research that is undertaken is inefficiently expensive. The only loser is the New Zealand economy that could have got more research for its dollar.
Joint Ventures as a Solution
The problem of pricing of information could be overcome, however, by the custodians of the data assessing the price and availability of the information by the use to which it is put rather than a crude proxy of ownership form of the accessing organisation. Ownership of the information need not change; access could be offered on a licence basis, limiting the ways in which the data was used without threatening the other uses to which it might be put. If fear that the resulting process will be used for profitable purposes from which the information owner might be excluded if the CRI is merely a supplier, then the logical contractual approach would be to take an equity stake in a joint venture company to undertake the research. That is, the government could become a part owner in the research by providing the information as a "share". Similar approaches could be taken if the intellectual capital of government- or CRI-employed personnel was important to the research process (for example, acgricultural scientists for developing agriculture sector models).
Yet even with this approach, Kenex has encountered resistance. Repeated attempts to form joint ventures with GNS and discussions with Landcare and have failed, as according to Greg, the management of these CRIs cannot "get their heads around the model" as a way of progressing the research. Negotiations of this form with GNS were pursued for over twelve months before Kenex gave up trying to establish a project along these lines. Not only does Kenex lose out on the potential research opportunity, but negotiating with these entities is a time-consuming process. Michelle estimates that negotiating with government departments, one way and another, has taken approximately one man-year in the eighteen months that Kenex has been operating, for negligible productive outcome. It is with a touch of irony that Greg identifies Kenex's origins as a joint venture between a government department and a CRI. If these arrangements can be acceptable when both partners are government-owned, he asks, why are they problematic when one is privately owned?
Government Support for Knowledge Companies
Greg, Michelle and Sue all express disappointment with the levels of support promised, but not provided, by the government agencies charged with assisting businesses to establish themselves in the New Zealand "knowledge economy". As a new small business with a knowledge product, Kenex would appear to be an ideal candidate for support from these agencies. However, the reality has been sobering. The partners have approached Trade and Enterprise New Zealand, BizInfo and the Wellington Regional Development Agency to see if they could qualify for assistance to grow the business by moving into other areas such as agriculture.
Whilst ostensibly assistance is available, the nature of the Kenex "product" does not fit neatly into any of the categories for which "knowledge economy" money is available. Their product is none of a true product, service nor software. Sue likens the process of applying to "passing a test by ticking the boxes". If you can tick the right boxes, then you may be eligible for assistance. Even though Kenex's product is a pure knowledge one exported to all corners of the globe, it didn't fit the profile of exportable "high technology products" (electronic equipment) or "high technology software", so didn't qualify for assistance. Furthermore, the partners had great difficulty in convincing the assessors that the real benefits of their products extended far beyond the contract value of the sale of analysis based upon the models into flow-on investment in the mining, horticulture and agriculture sectors in New Zealand.
Furthermore, the partners found that the officials with whom they dealt had no real concept of knowledge as a commodity, but rather could comprehend only tangible products that they could count or measure. This explains the focus on electronic equipment and software as the sectors to have benefited most from "knowledge economy" business support policies. Yet these products are only the tip of the iceberg of the potential knowledge products that could be developed. As Howell (2003)6 notes, by focusing on the technologies, it is easy to overlook the fact that the real value in an information economy is generated not by the technologies, but the information they process. It makes little sense to talk of the information economy and then measure it by counting the machines that process and transmit information rather than the value that is created from the information itself. This is about as sensible as measuring the value added to the economy by electricity solely by counting the generators that create it and the wires that transmit it, whilst ignoring the value added by industries that use it. Yet government support to businesses, by the Kenex partners' experience, is skewed towards the information equivalent of makers of generators and wires rather than the companies that make and sell things using electricity.
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