Net Gain and Net Worth author John Hagel talks about his the future of business-customer relationships in the Internet era. At the time this interview took place, John was leader of McKinsey's interactive multimedia practice in Palo Alto, California.
by: Christian Sarkar

Update: June, 2002- After 16 years with McKinsey, John Hagel recently set up his own consultancy- learn more at johnhagel.com.

In Net Worth, John Hagel III (see bio) and co-author Marc Singer explore the world of online commerce and the importance of the customer in shaping its future.

I spoke with Hagel about the way the Internet is changing business-customer relationships and particularly about the concepts of "community" and "infomediation," which are both central to Hagel's thinking about new opportunities in the e-world.

What's an infomediary?

It's an agent, if you will, who works with the customer to capture profiles about the customers, helps them to manage those profiles and maximize their value and helps the customer to protect that information from access by vendors. The infomediary maximizes the value of the information by being helpful to the customer in locating products and services that are most relevant to the customer based on who they are and what their preferences are. It can also be in the form of providing portions of the profile to selected vendors at the request of the customer.

A lot of companies are beginning to experiment with certain elements of an infomediary business, many of them focusing in on the customer-agent notion. You have companies like ComputerNet and BizRate, who are helping customers evaluate different vendors based partly on information about who the customer is. Some of the financial service intermediaries like Intuit and E*Trade are providing analytic tools that will tell the customer, "If you help me understand what your needs are, say in terms of retirement planning, we'll help you decide what products are most relevant to you and then help you locate those products."

Why would people want to give such information away?

The whole notion is around this value exchange. Obviously, the calculus is going to differ by customer and product type. So certain customers are more privacy-oriented. But I believe that most customers are willing to provide information about themselves if they can be assured about two things: One is that they'll get some tangible value in return, and second, that the information won't later be misused in some way.

The example I like to give is frequent flyer programs on airlines. Most passengers won't even board an airline until they insist that the airline capture information about their travel activity. They have a clear sense that there's some tangible value that's at stake. Our sense is that most customers want tangible value that's not in pure monetary form but in the form of some product offer tailored to their particular profile.

Do you foresee all these portal-type sites trying to be infomediaries?

In some respects, they have a natural opportunity to target the infomediary business in the sense that they've established themselves as a natural place for users of a network to come and locate resources. The challenge is that many of the portals are beginning to become very dependent on what I'd characterize as privileged real estate deals. They're providing privileged positioning for a bank on their financial services page in return for large sums of money.

Are they more vendor-oriented than customer-oriented?

That's the issue. Those revenue streams are very vendor-dependent and create the potential for substantial vendor bias. If a portal is going to be very aggressive about helping customers find the best product and service at the best price, I'd expect that a lot of these companies that are paying for these privileged real estate deals are going to come to the portal and say, "What's going on here?" The economics are going to make it difficult for the portals to be aggressive in representing the customers interests.

So you are suggesting a new kind of customer-oriented portal?

Absolutely. Our sense is that that's one of the most significant open windows in terms of business opportunities on the Internet today. No one occupies this space. People are starting to move into it, at what I characterize as a segmented-portal or category-portal level. E*Trade is moving into this space, and Microsoft with their Money product - they're trying to position themselves as helpful to the customers in selecting among a broad range of financial service providers. But it's still one of the largest unaddressed opportunities on the Internet.

How can all this help companies who want to succeed on the Internet?

[Many companies] are underperforming in relation to the strategic opportunity. Many of them approach the Internet in a defensive mode that says, "We're really focused on holding on to our existing customers and preventing other people from taking them away on the Internet." Our view is that if your customers are potentially vulnerable on the Internet, that means other companies' customers are vulnerable. So why not use this as a growth vehicle to expand your business by targeting new customers and create more loyalty with your existing customers? On the operational side, most large companies have Internet websites up and running. But again, our view is that they're spending more than they should and getting less return than they should.

What effect will infomediation have on the physical markets?

It's probably one of our more provocative perspectives. Our view is that while the infomediary concept will emerge in the online environment most rapidly, it will spill over and start to affect transactional activity offline as well. The key notion is being able to create trust on the part of the customer, that you, as an infomediary, can be helpful to them and, at the same time, not abuse the access you have to their information. You can think of many ways of using some of the new payment technologies. Certainly, as we move into the smart card terrain, you think of being able to use information through capture and access technologies to drive offline transactions as well as online transactions.

You build up customer expectations with services on the Internet, and the physical stores will have to match that. If you think about it in retailing terms, most physical retailers have had to make a substantial trade-off between breadth of selection and depth of assistance to the customer. So you can either go into a superstore that has a very broad selection but you can't find a salesperson to talk to. Or you can get a lot of help and advice, but it's going to be on a very limited selection of products. One of the many things the Internet is doing is overcoming that trade-off and saying that you can have both [and customers will increasingly expect that].

Amazon.com is trying to create a community as well as trying to be an infomediary. Is it possible to combine both?

In the earlier book Net Gain, we briefly talked about the infomediary opportunity as a later stage of development of virtual communities. The notion was that virtual communities as an economic enterprise provide a very powerful way of building trust with customers and to increasingly take the customer's side in terms of facilitating transactions online. As that is accomplished in a virtual community, the opportunity to say, "We can help you beyond the products and services in the virtual community. We can help you with a much broader range of products."

What does it take to be an infomediary?

One of the reasons you don't find many examples today is that there's a broad range of skills and capabilities involved. One of the challenges is that, on the one hand, to be successful as an infomediary requires quickly gaining access to a broad range of customers and building trust with them. That's very hard for a startup to do.

Unlike the virtual community, this is not a business that startups will be able to target alone. It will take them too long to build the customers and the trust. You need to build large customers bases and trust quickly, and [partnering with] large companies can provide that.

The other pieces that are critical here are the Internet speed phenomenon, which large companies find very hard to deal with, and a deep set of skills around profile collection and management. Many of the Internet-based companies tend to have that kind of skill and culture. In the end, the real winners are going to be a creative combination between large companies, who can provide rapid access to large customer bases, and smaller players.

What's your next focus?

My primary focus now is the notion that the changes the Internet is putting into place are going to spill over into the physical world in a profound way. It's particularly around this notion that large companies today represent unnatural bundles of three different kinds of business.

First is a customer relationship business, which focuses on identifying certain types of customers, building relationships with them, helping them access and tailor bundles of products and services. The infomediary is clearly an example of that kind of business.

The second kind is what we call product innovation and commercialization businesses, or businesses that are focused on coming up with the most new products in terms of features, functions or price, and getting them to market quickly.

The third type is an infrastructure management business, which focuses on very large volume routine kinds of processing operations. It could be a logistics company like FedEx, or a backoffice credit card processor who processes transactions on behalf of another company.

Each of those has different economics, skills sets and cultures that are required to be successful. And they're bundled together because of high transaction costs. As the Internet starts to drive down transaction costs, the opportunity is to create very focused entities that excel at one of those three types of businesses. While that will happen fastest on the Internet, we believe it will lead to a widespread restructuring of industries, companies and physical space.

Further reading: see John Hagel's online weblog- sign up for it here.