For marketers, Web 2.0 offers a remarkable new opportunity to engage consumers.

If only they knew how to do it.

That’s where this article aims to help. We interviewed more than 30 executives and managers in both large and small organizations that are at the forefront of experimenting with Web 2.0 tools. From those conversations and further research, we identified a set of emerging principles for marketing.

But first, a more basic question: What is Web 2.0, anyway? Essentially, it encompasses the set of tools that allow people to build social and business connections, share information and collaborate on projects online. That includes blogs, wikis, social-networking sites and other online communities, and virtual worlds.

Millions of people have become familiar with these tools through sites like Facebook, Wikipedia and Second Life, or by writing their own blogs. And a growing number of marketers are using Web 2.0 tools to collaborate with consumers on product development, service enhancement and promotion. But most companies still don’t appear to be well versed in this area.

So here’s a look at the principles we arrived at — and how marketers can use them to get the best results.

Web 2.0 tools can be used to do what traditional advertising does: persuade consumers to buy a company’s products or services. An executive can write a blog, for instance, that regularly talks up the company’s goods. But that kind of approach misses the point of 2.0. Instead, companies should use these tools to get the consumers involved, inviting them to participate in marketing-related activities from product development to feedback to customer service.

How can you do that? A leading greeting-card and gift company that we spoke with is one of many that have set up an online community — a site where it can talk to consumers and the consumers can talk to each other. The company solicits opinions on various aspects of greeting-card design and on ideas for gifts and their pricing. It also asks the consumers to talk about their lifestyles and even upload photos of themselves, so that it can better understand its market.

A marketing manager at the company says that, as a way to obtain consumer feedback and ideas for product development, the online community is much faster and cheaper than the traditional focus groups and surveys used in the past. The conversations consumers have with each other, he adds, result in “some of the most interesting insights,” including gift ideas for specific occasions, such as a college graduation, and the prices consumers are willing to pay for different gifts.

Similarly, a large technology company uses several Web 2.0 tools to improve collaboration with both its business partners and consumers. Among other things, company employees have created wikis — Web sites that allow users to add, delete and edit content — to list answers to frequently asked questions about each product, and consumers have added significant contributions. For instance, within days of the release of a new piece of software by the company, consumers spotted a problem with it and posted a way for users to deal with it. They later proposed a way to fix the problem, which the company adopted. Having those solutions available so quickly showed customers that the company was on top of problems with its products.

Give consumers a reason to participate.

Consumers have to have some incentive to share their thoughts, opinions and experiences on a company Web site.

One lure is to make sure consumers can use the online community to network among themselves on topics of their own choosing. That way the site isn’t all about the company, it’s also about them. For instance, a toy company that created a community of hundreds of mothers to solicit their opinions and ideas on toys also enables them to write their own blogs on the site, a feature that many use to discuss family issues.

Other companies provide more-direct incentives: cash rewards or products, some of which are available only to members of the online community. Still others offer consumers peer recognition by awarding points each time they post comments, answer questions or contribute to a wiki entry. Such recognition not only encourages participation, but also has the benefit of allowing both the company and the other members of the community to identify experts on various topics.

Many companies told us that a moderator plays a critical role in keeping conversations going, highlighting information that’s important to a discussion and maintaining order. That’s important because consumers are likely to drift away if conversations peter out or if they feel that their voices are lost in a chaotic flood of comments. The moderator can also see to it that consumer input is seen and responded to by the right people within the company.

And, of course, it’s important to make a site as easy to use as possible. For instance, there should be clear, simple instructions for consumers to set up a blog or contribute to a wiki.

Listen to — and join — the conversation outside your site.

Consumers tend to trust one another’s opinions more than a company’s marketing pitch. And there is no shortage of opinions online.

The managers we interviewed accept that this type of content is here to stay and are aware of its potential impact — positive or negative — on consumers’ buying decisions. So they monitor relevant online conversations among consumers and, when appropriate, look for opportunities to inject themselves into a conversation or initiate a potential collaboration.

For example, a marketing manager of a leading consumer-electronics company monitors blogs immediately after a new-product launch in order to understand “how customers are actually reacting to the product.” Other managers keep an eye on sites like Digg.com and Del.icio.us that track the most popular topics on the Web, to see if there’s any buzz around their new products, and whether they should be adjusting, say, features or prices.

In one case, a company found a popular blogger who had spoken highly of the company’s brand. Just prior to launching a new product, the company sent the blogger a free sample, inviting him to review it with no strings attached. The end result: The blogger wrote a favorable review and generated a flood of comments. So the company got nearly free publicity and feedback.

Peter & Maria Hoey

Resist the temptation to sell, sell, sell.

Many marketers have been trained to bludgeon consumers with advertising — to sell, sell, sell anytime and anywhere consumers can be found. In an online community, it pays to resist that temptation.

When consumers are invited to participate in online communities, they expect marketers to listen and to consider their ideas. They don’t want to feel like they’re simply a captive audience for advertising, and if they do they’re likely to abandon the community.

The head of consumer research for a leading consumer-electronics organization created an online community of nearly 50,000 consumers to discuss product-development and marketing issues. One of the key principles of the community, she says, was “not to do anything about marketing, because we weren’t about selling; we were about conversing.”

In short order, community members not only identified what it was they were looking for in the company’s products, but also suggested innovations to satisfy those needs. The company quickly developed prototypes based on those suggestions, and got an enthusiastic response: Community members asked when they would be able to buy the products and if they would get the first opportunity to buy them. They didn’t have to be sold on anything.

Don’t control, let it go.

In an online community, every company needs to find an effective balance between trying to steer the conversation about its products and allowing the conversation to flow freely. In general, though, the managers we interviewed believe that companies are better off giving consumers the opportunity to say whatever is on their minds, positive or negative. Moderators can keep things running smoothly and coherently, but they shouldn’t always keep the conversation on a predetermined track. The more that consumers talk freely, the more a company can learn about how it can improve its products and its marketing.

One marketing executive recalled the first time she let an online community created for a client interact with very little control or moderation, resulting in an animated discussion about the look of the company’s product. The client, with great concern, asked. “Who told them [the consumers] they could do this, that they could go this far?” Of course, when this process resulted in totally new packaging that helped boost sales, the client was ecstatic.

As another executive of a company that creates online communities for clients told us: “You have to let the members drive. When community members feel controlled, told how to respond and how to act, the community shuts down.”

Find a ‘marketing technopologist.’

So who should direct a company’s forays into Web 2.0 marketing? A number of managers identified an ideal set of skills for an executive that go beyond those of a typical M.B.A. holder or tech expert. We coined the term marketing technopologist for a person who brings together strengths in marketing, technology and social interaction. A manager said, “I’d want to see someone with the usual M.B.A. consultant’s background, strong interest in psychology and sociology, and good social-networking skills throughout the organization.”

Foot soldiers need to be carefully selected as well. One large technology company weighs employees’ proven skills to choose writers for blogs that are read by consumers. The company has long used blogs internally to help employees discuss technical issues, products, and company and industry topics. When it decided to use blogs to raise its profile online, it recruited those who had shown the most skill at blogging within the company. The company currently has about 15 employees who blog publicly, mostly on technology trends, and is recruiting more the same way. Meanwhile, the bloggers plan to meet occasionally to share the lessons learned from their experiences.

Embrace experimentation.

One Web 2.0 strategy does not fit all, and sometimes the best way to find out what’s best for a given company is to try some things out and see what happens.

Blogs, wikis and online communities are among the tools that companies are most commonly using for marketing, but there are other ways to reach consumers. Some of the companies we talked with have gotten their feet wet in the online virtual world Second Life, where millions of users interact with each other through avatars. Companies can sell their goods and services and sponsor events in Second Life just as they do in the real world; one sponsored a contest for the best avatar.

Others are considering new ways to use more-familiar tools. For instance, many companies have long used instant messaging on their Web sites to allow shoppers to chat with customer-service representatives. One executive we spoke with said he would like to experiment with allowing consumers to chat with each other as they shop on his company’s site.

[via WSJ Small Business] By SALVATORE PARISE , PATRICIA J. GUINAN and BRUCE D. WEINBERG

A joint venture between three movie studios has yet to land any sort of cable distribution deal for its original programming, but it will at least launch online, offering access to some 15,000 movies. But without a TV deal, the audience will be limited.

In November, not two weeks after winning the election and still two months from becoming commander in chief, Barack Obama brought the government into the 21st century. Or at least that was what we were told when he released his first Web video address as president-elect. The clip, billed by some as a modern fireside chat, was embedded as a YouTube video on Change.gov, the incoming administration’s Web site. Sitting in a leather chair, framed slightly off center from his chest up, Obama delivered a three-minute talk on the economic crisis, vlog style.

The video quickly racked up hundreds of thousands of views, and within a few days hundreds of blogs were linking to it. Obama’s foray into viral video, the story went, heralded the beginning of a new era in government communication and transparency—”Franklin Roosevelt 2.0,” in the words of The Huffington Post. The Washington Post proclaimed the advent of the “YouTube presidency.”

1 million:
The number of views received by Obama’s first YouTube address as president-elect.

It wasn’t long, however, before savvy observers noted what was missing from this and other Obama videos: the chance for ordinary citizens to talk back. The campaign initially disabled the comment function on YouTube and prevented response videos from appearing alongside. A YouTube video without comments, some pundits groused, is more like a monologue than a chat, fireside or not. “I don’t see how one-way messages provide any more transparency for the work of the White House or government than the current old-style radio addresses,” blogged Ellen Miller, director of the Sunlight Foundation, a government-transparency watchdog group. “Is Obama ready,” challenged TechCrunch, “to be a two-way president?”

Of course, Obama’s transition team had good reasons for disabling responses. For starters, YouTube comments are typically the intellectual equivalent of truck-stop graffiti. (When the team belatedly allowed comments a couple of weeks later, the site was flooded with insights like “USA susks.”) Also, his team would have zero control over the potentially critical or embarrassing response videos that users would post next to the address. The real reason, however, was that Obama wasn’t actually trying to have a conversation with Americans via YouTube. Like every president before him, he was simply harnessing the latest tools to talk to them, one-way.

Technophiles who watched the campaign closely expected more, and now they are putting pressure on the White House to govern with unparalleled transparency and citizen interaction. Dan Froomkin of the Niemen Watchdog Journalism Project and The Washington Post summed up expectations in a blog post calling for Obama to embrace “wiki culture” in which “major policy proposals have public collaborative workspaces.”

150,000+ subscribers
follow Obama’s Twitter feed.

0 tweets
have been posted by Obama staffers since the election.

Obama has himself to blame for raising such expectations. During the campaign, he embraced every form of social media. At My.BarackObama.com, supporters could create profiles, talk to each other, and—by election day—plan some 200,000 offline dinners and living room fund-raisers. Users could log in from home to get lists of swing-state voters to telephone; this generated 3 million calls in the final four days of the race. Those efforts were combined with massive database-crunching to identify potential voters who could be approached door-to-door by last-minute canvassers, myself included.

As for John McCain’s efforts, well, he didn’t really have any. According to Andrew Rasiej and Micah Sifry, cofounders of the Personal Democracy Forum and the blog TechPresident, Obama had four times the number of Facebook supporters, 24 times the Twitter devotees, and three times the visitors to his site in the final campaign week. The public watched about 15 million hours of Obama campaign videos on YouTube. Along the way, Obama collected 13 million email addresses, more than a million cell phone numbers, and a half-billion dollars in online donations.

There’s also another reason to expect a tech-driven presidency: Obama promised it. He said he would expand government transparency by putting more data up on the Web, streaming meetings live, and letting the public comment on most legislation for five days before he signs it. He said he would bring blogs, wikis, and social networking tools with him into the executive branch—all overseen by a new national chief technology officer. Indeed, Obama’s transition site, Change.gov, offers glimmers of a potential digital presidency with its YouTube addresses, issue-based discussion forums, and inside-the-transition videos featuring future cabinet members responding to comments.

But turning his innovative campaign and transition into Government 2.0 won’t be easy. The nimble Obama startup is about to be absorbed into a stodgy, technologically backward behemoth: the federal government. Ahead are bureaucratic obstacles the campaign never imagined, along with the political land mines that transparency brings. Obama will have to preserve the enthusiasm of his supporters while engaging the larger group of people who either didn’t vote for him or didn’t vote at all. His task is to rebuild the personal connection that supporters felt they had with Obama the candidate, assuring them that he is listening to them—without being deafened by the cacophony. If he can do that, Obama can alter how the government engages its citizenry and accomplish what he really cares about: his own policy goals.

Building that intimacy from the Oval Office will be a delicate and complex task, and just letting “AcidTrout” respond to a YouTube address with “Who’s the black guy?!?” isn’t going to do it. “One of the things that gives me ulcers is that there are a lot of high expectations,” says an Obama aide. “But we’re going to have to change how government thinks about the Internet before we can do the things we want to do.”

500+ PDFs
submitted by third parties for viewing and public comment are available on Change.gov.

Still, Macon Phillips, the campaign’s deputy director of new media, who has served in a similar role for the transition, warns: “Day one is going to be a lot different than perhaps day 100.”

The basement of the General Services Administration building in Washington, with its maze of identical hallways and frosted glass doors, reeks of generic federal bureaucracy. But if the new administration plans to reboot the system, it will find a pair of guides here in Bev Godwin and Sheila Campbell, cheerful doyens of the executive branch’s Web strategy. Godwin, director of USA.gov, the federal government’s all-purpose information Web portal, and Campbell, head of the government’s Web Best Practices Team, know every manacle and chain shackling the government to the 20th century. In a drab conference room one afternoon in late November, they discussed their optimism—and detailed their concerns.

For starters, the federal government operates more than 24,000 separate sites, many of them years out of date. “Nobody stepped back and asked strategically, how do we do this?” Godwin says. “Whenever there is a new initiative or program, they put up a new Web site.” And the first thing they usually do on that site, she says, is post a bandwidth-hogging picture of the bureaucrat in charge.

3,701 comments
on health care were submitted online to secretary of health and human services designate Tom Daschle.

Godwin and Campbell have been pushing government agencies to treat citizens more like customers, rebuilding their sites to help visitors do things like find loans or obtain passports—rather than serve as static repositories for press releases and personnel photos. “At Housing and Urban Development, for example, one of the missions is to reduce homelessness,” Godwin says. “If you go to HUD.gov, can you find shelter? The answer is no.” If the government can improve itself in these little ways, they say, great. Don’t worry about trying wild stuff, like setting up federal social networks. Many agencies bar employees from even looking at sites like Facebook at work, much less building their own versions.

Progress has been achingly slow. There have been some notable exceptions—like a blog on the Transportation Security Administration Web site, open to comments and manned by five agency staffers, and NASA.gov’s numerous social media initiatives, including Twitter feeds from 20 missions and projects. But the successes are rare and isolated. “We know that there are a lot of people advocating for more open government,” Godwin says. “We’re saying, absolutely, put the data out there. But I think we have to be realistic.”

For example, many of Obama’s online campaign techniques would be impeded by a collection of obscure and well-intentioned rules. Amendments to the 1973 Rehabilitation Act, for example, require that all government Web content be made reasonably accessible—in real time—to disabled users. Also, six months of negotiations between the General Services Administration and Google to establish a federal YouTube channel have stalled over similarly intricate legal issues. Meanwhile, a Clinton-era law called the Paperwork Reduction Act requires that an agency undergo a laborious approval process any time it “surveys” more than 10 people. The result: “Agencies tend to avoid doing these kind of surveys,” Godwin says. Would having users submit information to a social network or wiki count as a survey? Nobody knows.

20.3 million:
The number of visits to Obama’s YouTube channel since its September 2006 launch.

Even triumphs like Obama’s 2006 Google for Government bill, cosponsored with Republican senator Tom Coburn, have been caught up in red tape. The bill led to the creation of FedSpending.org, a site allowing the public to track federal contracts and grants. Instead of building it in-house, the Office of Management and Budget decided to license something similar from a nonprofit watchdog group, OMB Watch—for just 4 percent of what the government had expected to spend. It was a striking victory for government efficiency, but the process behind the scenes “was extremely difficult,” says Gary Bass, executive director of OMB Watch. After floating the idea of donating the system to OMB (“the government can’t take things for free,” Bass quickly learned), the nonprofit had to sign on as a subcontractor and undergo three rounds, and six wasted months, of bidding before the deal was complete.

Changes to what is effectively the president’s homepage, WhiteHouse.gov, will encounter similar obstacles. David Almacy, a PR executive and new media consultant at Waggener Edstrom who served as the Bush administration’s White House Internet director from 2005 to 2007, recalls that following Hurricane Katrina, he posted the transcript of a speech to the site. In the text, where Bush had directed people to Redcross.org, Almacy helpfully inserted a hyperlink. “Within a few hours,” Almacy says, “I got a call from the White House general counsel’s office saying I needed to take out the link.” Some federal government Web pages, it turns out, are virtually barred from linking to nongovernmental sites to avoid the appearance of endorsing one product or organization over another.

The incoming administration is still working to assess the implications of the Presidential Records Act, the post-Nixon legislation requiring the preservation of all White House written communications. But that means that once any page goes up on the White House site, it can’t be altered, only archived and replaced, greatly slowing down the process of modifying and enhancing pages.

The Obama team was able to sidestep these kinds of troublesome rules on Change.gov, in part because, as a quasi-governmental site, it’s not subject to executive-branch restrictions. They were able to post videos on YouTube, link to outside sites, and even publish content under a Creative Commons license, allowing it to be freely shared.

24,000 Web sites
are operated by the US government.

When he does arrive at the White House, Obama or his CTO can lift some of the Internet restrictions with the stroke of a pen. Others will require congressional action or clever technology.

Even if Obama’s tech team gets a free hand to rework the federal webosphere, things can still go awry. Take the 2006 race of Massachusetts governor Deval Patrick. Both David Axelrod, Obama’s top campaign strategist, and David Plouffe, his campaign manager, worked for Patrick, a little-known candidate who used Internet-driven grassroots support to win. In a precursor to My.BarackObama .com, the Patrick campaign placed the state’s voter list on its Web site, allowing its supporters to download phone numbers and call neighbors. “We believed in people’s ability to organize themselves and get involved,” says Charles SteelFisher, who ran the campaign’s Web operation.

No We Can’t

Barack Obama wants to transform the way the White House connects with the public. But there are plenty of obstacles standing in his way. After the election, the governor’s team launched DevalPatrick.com to keep supporters engaged. On a MyIssue page, registered commenters could propose, comment on, and vote for legislative ideas.

But the administration was immediately blasted when a database feature designed to verify Massachusetts residency was alleged (incorrectly) to reveal unlisted phone numbers. The privacy flap lured a collection of trolls and conspiracy theorists to the site, crowding out earnest discussion on gambling bills and income taxes with 9/11 chatter and religious debates. Critics, meanwhile, said that Patrick’s efforts were less about engaging the public than about running a permanent online campaign.

Eventually Patrick’s Web site recovered, developing a more sophisticated way of moderating comments and creating forums around the governor’s plans to reduce property taxes and add public kindergarten programs. The site also allowed people to create grassroots communities to work on issues they cared about. Still, the public isn’t exactly burning up the site: The leading vote-getter, a bill to promote fathers’ custody rights in divorce cases, had just 1,100 tallies as of mid-December. Offshore wind power, meanwhile, was losing, 16 votes to 15.

Obama’s team has moved carefully as it transitions from campaigning to governing. Between two wars and an economy in shambles, building an Oval Office social network has not topped the priority list. “Day one, do we need a White House My.BarackObama? I don’t think so,” says the Obama aide, who was required by the transition press office to speak anonymously. “It’s more important to step back and ask, what are the goals for the White House? And I think that making the government more accountable and transparent is more important than getting people to act.”

To that end, the transition team served up small accountability stuff first. Change .gov supplemented Obama’s weekly YouTube addresses with periodic videos from inside the transition process, everything from staff meetings to vlog-type updates from advisers. In early December, Obama’s public director of liaison and intergovernmental affairs announced—via video—a Change.gov feature called Your Seat at the Table, through which the transition would post every document received from every interest group and outside person throwing it advice. Users were allowed to comment next to the documents, while the Open for Questions feature let them submit and vote on questions for the transition team. The latter experiment illustrated the double-edged nature of feedback when the Senate-seat-selling scandal involving Illinois governor Rod Blagojevich broke. Supporters began flagging related questions “inappropriate,” and then Obama staffers buried the queries. ABCNews.com jumped on the story and the apparent hypocrisy. Obama Transition Web Site ‘Open for Questions’—Except on Blagojevich read the headline.

Change.gov does feature some Slashdot-like issue forums where user rankings send the most popular comments to the top. The first forum, in which two staffers appeared in a short video on health care policy and asked for comments, garnered thousands of horror stories and policy prescriptions. A week later, one of the staffers reappeared with future health and human services secretary Tom Daschle in a rehearsed-looking YouTube video response. “We are just so pleased that so many of you have written in,” Daschle said, appearing extra-pleased. “I spent a lot of the weekend actually reading the comments … We want to make sure that you understand how important those comments and your contributions are.” The comments the pair selected to discuss, however, seemed serendipitously aligned with Obama’s proposed initiatives.

550,000 responses
came in from supporters after Obama adviser David Plouffe requested feedback about the campaign.

In other words, with everything he’s done so far, Obama has been acknowledging feedback but not necessarily heeding it. And that’s what we can expect from Obama’s plan to post all pending nonemergency legislation online and allow the public to comment for five days before he acts on it. By mid-December, technology advisers were still struggling to determine the best way to implement the idea. The bigger question is, what will it accomplish? Even the system’s own architects concede that it’s unlikely that online comments and voting will sway the decision to sign or veto.

Nor should it. The Obama team, for all its Web enthusiasm, recognizes that an online community—no matter how vibrant—doesn’t represent all of the American public. “A lot of people consider online interactions and communications as representative of Americans. But we have a lot more high-speed Internet lines to drop before that’s true,” the Obama aide says. And even with ubiquitous broadband, online voting would remain the ultimate in self-selected polling. There’s no reason to believe that commenters would reflect Americans as a whole or even that they’d be Americans at all. Citizens also may not be as interested in the daily machinery of Obama’s workaday government as they were in his novel campaign. Case in point: By mid-December, views of Obama’s weekly YouTube address had dropped by half.

Still, the new administration wants to be able to marshal its supporters to act. Obama himself suggested as much last April. “Our database has a couple million people on there who are activated and inspired,” he told a small group in Indianapolis. “And so what I want to do is to continue that after the election.” In mid-November, Plouffe sent out a series of emails to supporters. The first directed them to a detailed survey of their campaign experience and policy interests and told them, “It’s up to you to decide how we move forward.” Later, a Plouffe missive declared that “you’ll be instrumental in generating support to pass legislation that puts America on the road to recovery.” At a closed-door meeting with its leading activists in Chicago in December, the Obama team took it a step further and told activists to be ready to pressure Congress on economic stimulus, health care, and energy legislation. A couple of weeks later, the campaign encouraged its supporters to organize “change is coming” get-togethers to discuss the future of the Obama movement, online and off.

Obama doesn’t want his 13 million-name email list to serve as just another political interest group. He needs it to be a tool to keep people engaged with his politics and policies. “Even if you push through the best government programs,” says Michael Cornfield, a political-science professor at George Washington University, “it’s hard to solve the actual problems” without effort from regular people. A national health care plan, for example, will work a whole lot better if former precinct captains are willing to explain it to their neighbors, just as they explained how to get to the polls. And a presidential Twitter feed, Flickr photos, or WhiteHouse.gov video Q&A sessions may not vastly increase transparency or deeply inform policy, but they create a valuable intimacy with citizens. “People who think they are being listened to tend to respect more the person talking,” says Rasiej.

That may not sound like a big deal. But contrary to what Web evangelists and the incoming administration would like to believe, Obama’s campaign was never a bottom-up endeavor. The incoming president didn’t crowdsource his view on the Iraq war or use Digg to determine how to allocate campaign dollars. He ran one of the most tightly controlled, top-down campaigns in modern history, to the point of pressuring outside advocacy groups not to advertise on his behalf. Rather, he asked his supporters for money and inspired them to get involved, giving them the tools to organize themselves and a message to sign on to.

Instead of turning WhiteHouse.gov into a governmental synthesis of Facebook and Wikipedia, or running a permanent campaign off the White House email list, Obama’s best shot at rebooting the government is to remember how he got there: making people feel that they were part of the solution and then enabling them to talk to one another and take action. “There is a relationship between Barack Obama and each individual, and that’s multiplied tens of millions of times over,” says Joe Rospars, the campaign’s director of new media. “But there are also millions and millions of relationships between our supporters. Both of those kinds of relationships didn’t end on Election Day.”

[via WIRED] by Evan Ratliff

Two years ago, Noah Weiss, a young programmer who spent the summer working here at Fog Creek Software, came to me with a business idea. Noah, who was still in college, had noticed that a lot of smaller tech-related blogs were running classified ads for job listings. He suggested that we do the same thing on my company’s blog, Joel on Software. The site is read by thousands of programmers a month — the ones who are so good at programming they have spare time at work to read the self-absorbed drivel I publish there.

Building an online classified ad system would be easy, Noah argued. (As any programmer would tell you: “It’s one table!”) And Fog Creek already had systems in place for charging credit cards, printing receipts, and accepting purchase orders, so the whole project wouldn’t take much work.

At first, I resisted. I had never run ads of any sort on the site and liked the idea of keeping it commercial-free.

But Noah kept arguing. “These 37signals guys are getting 50 ads a month,” he said, referring to a well-known software company in Chicago. “At $250 each, that’s — ”

Wait, I interrupted. They charge $250 for each ad? I had imagined that the going price to run a job listing would be, oh, I don’t know, $4?

That’s right, Noah said. They charge $250 per ad. “Besides,” he went on, “a job listing is not really an ad — it’s providing a community service.”

By then I had almost stopped listening. Little gears were turning in my head: $250 times 50 ads times 12 months — that revenue would allow me to hire another programmer! So we added classified ads to the site. Noah wrote the first draft of the code in about two weeks, and I spent another two weeks polishing and debugging it. The total time to build the job listing service was roughly a month.

Instead of charging the going rate of $250, we decided to charge $350. Why not? I figured we could establish ourselves as having the premium product simply by charging a premium. In the absence of additional information, consumers often use prices to judge products, and I wanted our site to be the Lexus of job listings. A few months later, 37signals raised its price to $300.

By the time you read this, that little four-week project will have made Fog Creek Software $1 million — nearly all of it profit.

That raised a question: How do you properly compensate an employee for a smash-hit, million-dollar idea? On the one hand, you could argue that you don’t have to — a software business is basically an idea factory. We were already paying Noah for his ideas. That was the nature of his employment agreement with us. Why pay twice?

But I felt we needed to do something else to express our gratitude. Should we buy Noah an Xbox 360? Pay him a cash bonus? Maybe present him with a certificate of merit, nicely laser-printed on heavyweight bond paper? Or a T-shirt that said “I Invented a Million-Dollar Business and All I Got Was This Lousy T-shirt”? We were stumped.

And what about everybody else at Fog Creek? Those people were doing their jobs, too. Simply because one programmer’s idea translated visibly and directly into a lot of money didn’t mean that the other team members weren’t adding just as much value to the business, albeit in a less direct way. At around the same time Noah came up with the classified ads idea, most of my employees were hard at work developing FogBugz 6.0, a smash hit that just about doubled our monthly sales.

Noah’s case was only the most dramatic example of a question that has long intrigued me: How do you pay employees based on performance when performance is so hard to quantify? The very idea that you can rate knowledge workers on their productivity is highly suspect and always problematic. If you mess up, the consequences are very real.

Psychologists talk about two kinds of motivation: intrinsic and extrinsic. Intrinsic motivation is what drives you to do something regardless of whether you will receive a reward. Why do you spend an hour cleaning the inside of your stove? Nobody looks in there. Your intrinsic motivation compels you to do a thorough job. We all have it — in fact, most people start out with the desire to excel at whatever they do. Extrinsic motivation is the drive to do something precisely because you expect to receive compensation, and it’s the weaker of the two.

The interesting thing, according to psychologists, is that extrinsic motivation has a way of displacing intrinsic motivation. The very act of rewarding workers for a job well done tends to make them think they are doing it solely for the reward; if the reward stops, the good work stops. And if the reward is too low, workers might think, Gosh, this is not worth it. They will forget their innate, intrinsic desire to do good work.

And the grumblers have a point: It’s impossible to know whether that bug that David fixed on Tuesday made more or less money for Fog Creek than the code Ted added on Wednesday. We are not a piecework sweatshop sewing doggie coats, where David made five and Ted made seven, so Ted should obviously get 40 percent more money.

In an environment in which judging performance is a subjective exercise, you are bound to make decisions with which employees disagree. Human beings, by their nature, tend to think of themselves as, how can I put this politely, a bit more wonderful than they really are. All of your B performers think they are A performers. The C performers think they are B performers. (A couple of your A performers think they are F performers, because they are crazy perfectionists or just clinically depressed. But they are the exceptions.)

So even if you did magically have the ability to accurately measure how good someone was at a job, the average worker, with his or her above-average opinion of his or her work, would still feel undervalued.

Throughout my career, I have observed that companies with formal systems that tie cash bonuses to performance end up with far more than half of their staff sulking and unhappy. Back when I worked at Microsoft, one of my friends got a lousy review that was neither fair nor correct: His bosses rated him based on the 5 percent of the job they observed (his infrequent interactions with them) instead of the 95 percent of his job where he was exemplary (his frequent interactions with customers). Based on that review, he almost quit in despair. But he held on, and now he is a very senior executive in charge of a product so important that you, personally, will almost certainly use it today.

So, back to Noah, the guy with the million-dollar idea. Though we don’t believe in performance bonuses, we still wanted to recognize his contribution. We decided to give Noah 10,000 shares of stock — conditional on him coming back to work for us full time when he graduated. Because Fog Creek is private and our stock is hard to value, we could say “it’s only fair that you share in the wealth” without assigning an actual dollar amount to it. It wasn’t the perfect solution, but everybody thought it made sense.

Noah seemed pleased, and we hoped the stock would entice him to come back to Fog Creek to take a full-time job. Which…he didn’t. Google made him a better offer. That’s another flaw with performance-based rewards: They are easy for one of your competitors to top.

Oh, well. Thanks for the summer, Noah. We are keeping an empty office here in case you change your mind.

[via Inc Magazine] by Joel Spolsky

Inquiries, Sales and Funding Rise in Anticipation of New Regulations — and Spending — From Obama Administration

While many small businesses continue to struggle with tight credit and declining sales, one fledgling industry is seeing a boom in investment and sales growth: alternative energy.

Alternative-energy firms are reporting an influx of inquiries and business from a wide range of companies looking to increase their energy efficiency, especially from those that believe the Obama administration will impose stricter regulations requiring them to conserve energy. President-elect Obama has spoken often of the importance of alternative energy, also known as clean technology, and his federal stimulus package is expected to include plans to beef up alternative-energy infrastructure and improve energy efficiency in government buildings. In a speech last week, he called for the U.S. to double the production of alternative energy in three years.

So start-ups across a variety of areas — solar power, biofuels and energy conservation among them — are getting increased financing from venture capitalists and lenders at a time when other small companies are cutting back and being turned away by investors. And many are hiring more staff, boosting marketing efforts and expanding geographically.

Alternative energy “has been the brightest sector in venture capital over the last year,” says Brian Fan, research director at Cleantech Group, an industry trade organization in San Francisco. “Everyone is thinking it’s going to be a big priority of the incoming administration.”

While the overall volume of venture-capital deals sank last year, investments in clean-technology companies totaled $8.4 billion, up nearly 40% from 2007, according to Cleantech Group. In the third quarter alone, venture capitalists poured $2.6 billion into clean technology, a quarterly record. In the fourth quarter, they invested $1.7 billion.

Some venture capitalists think clean technology is the next big thing — the innovation that will drive the economy, much as Internet-related ventures did a decade ago. “Anytime big innovation comes along, it brings the chance to build big companies,” says Erik Straser, general partner at venture-capital firm Mohr Davidow Ventures in Menlo Park, Calif., which has investments in several alternative-energy start-ups.

But whether the administration will turn to energy initiatives quickly enough for all these companies to reap the rewards remains to be seen. And unlike with other new types of technology companies, the growth of clean technology “depends on the right kind of government policies and incentives,” Mr. Fan says, because implementation requires a certain amount of infrastructure and tax credits to offset the expense for users.

“The policy side is absolutely critical,” he says. “If [the right policies] don’t get pushed through, we will see a good number of these start-ups suspend operation.”

Just the anticipation of a new administration has been enough to spur interest among companies. Green Panel Inc., a solar technology and installation company in Brighton Mich., is planning to add four employees to the 14-person, two-year-old firm over the next few weeks to handle new business that has come in since the election. Even though no new energy regulations are in place yet, big companies are starting to take a look at alternative-energy options, says Adam Harris, Green Panel’s chief executive. He says one industrial firm held off on an order of solar panels until after the election. And he has heard from other firms whose executives want to have systems in place ahead of any regulations for big companies.

“What’s really changed is the push from the top — the fear of what could happen if they don’t” put plans in place to cut dependence on nonrenewable energy like fossil fuels, Mr. Harris says. The firm expects to double its revenue this year to nearly $4 million.

Executives at venture-capital backed Greenline Industries Inc., a Larkspur, Calif., maker of biodiesel production equipment, believe the Obama administration will create a huge demand for biodiesel and other advanced biofuels. The president-elect has said he’ll require that 60 billion gallons of advanced biofuels are produced by 2030, spurred by tax incentives and government spending. The appointment of former Iowa governor Tom Vilsack as agriculture secretary makes increased demand even more likely, Greenline executives say, because of his commitment to ethanol production in his state.

Greenline, which has 35 employees, declines to offer specific projections but plans to triple its sales staff in the coming weeks. “It’s a reaction to the administration change and to changes we expect as a result of the people [Mr. Obama] has picked — the policies that will be happening and the growth in demand we expect,” says Donn Tice, Greenline’s chief executive. The company’s latest round of venture-capital financing was in March, for $20 million.

Mr. Tice says calls from potential customers have picked up in the weeks since the election, and he expects the pace to accelerate once Mr. Obama takes office. In December, Mesilla Valley Transportation signed a deal with Greenline for a 10 million-gallon processing plant, part of a multistage, $25 million project of a company offshoot called Global Alternative Fuels. The election “expedited things,” says Dean Rigg, chief financial officer of the transportation company in Las Cruces, N.M., which started processing biodiesel fuel with Greenline equipment about 2½ years ago. “We’re all betting” that a push toward new biofuels will come quickly from Washington, he says.

Two weeks after the inauguration, Greenline plans to launch a new corporate logo and a new tagline: “Ask Greenline.” Michael Brown, the firm’s founder, says it’s a response to the idea that more and more people are asking how to develop alternative fuels.

Some small companies are counting on the government itself for new business. Verdiem Corp. sells software that provides centralized control over power consumption, such as remotely turning off computer monitors left on overnight. Over the past year and a half, most of the Seattle-based company’s growth has come from corporate customers. But with Mr. Obama’s declarations that he plans to improve the government’s own energy efficiency, Verdiem Chief Executive Jeremy Jaech sees opportunity. The 60-employee company is planning to add three or four new salespeople to its 20-person sales staff in the weeks ahead to focus specifically on federal operations in Washington, D.C. The company hopes to win the business through the information-technology companies that play a role in managing government buildings.

Mr. Jaech believes Mr. Obama will need to practice what he has preached, reducing energy consumption on the federal government’s estimated 6.5 million personal computers. And Mr. Obama will have to start with his own offices, he believes. For his company, Mr. Jaech adds, “it’s low-hanging fruit.”

But while Mr. Jaech anticipates quick growth from Washington, Verdiem is hiring in stages. “I know the federal government can take a while to do things,” he says.

[via WSJ Small Business] by Simona Covel at simona.covel@wsj.com

The U.S. Small Business Administration is offering Web chats to help small businesses across the country weather the recession.

President-elect wants to computerize the nation’s health care records in five years. But the plan comes with a hefty price tag, and specialized labor is scarce.

NEW YORK (CNNMoney.com) — President-elect Barack Obama, as part of the effort to revive the economy, has proposed a massive effort to modernize health care by making all health records standardized and electronic.

Here’s the audacious plan: Computerize all health records within five years. The quality of health care for all Americans gets a big boost, and costs decline.

Sounds good. But it won’t be easy.

In fact, many hurdles stand in the way. Only about 8% of the nation’s 5,000 hospitals and 17% of its 800,000 physicians currently use the kind of common computerized record-keeping systems that Obama envisions for the whole nation. And some experts say that serious concerns about patient privacy must be addressed first. Finally, the country suffers a dearth of skilled workers necessary to build and implement the necessary technology.

“The hard part of this is that we can’t just drop a computer on every doctor’s desk,” said Dr. David Brailer, former National Coordinator for Health Information Technology, who served as President Bush’s health information czar from 2004 to 2006. “Getting electronic records up and running is a very technical task.”

It also won’t come cheap. Independent studies from Harvard, RAND and the Commonwealth Fund have shown that such a plan could cost at least $75 billion to $100 billion over the ten years they think the hospitals would need to implement program.

That’s a huge amount of money — since the total cost of the stimulus plan is estimated to cost about $800 billion, the health care initiative would be one of the priciest parts to the plan.

The biggest cost will be paying and training the labor force needed to create the network. Luis Castillo, senior vice president of Siemens Healthcare, a company that designs health care technology, said the laborers will have the extremely difficult task of designing a a system that “thinks like a physician.”

“Doctors cannot spend hours and hours learning a new system,” said Castillo. “It needs to be a ubiquitous, ‘anytime, anywhere’ solution that has easily accessible data in a simple-to-use Web-based application.”

But highly skilled health information technology professionals are as rare as they come, and many IT workers will need to be trained as health technology experts.

Early government estimates showed about 212,000 jobs could be created from this program, but Brailer said there simply aren’t that many Americans who are qualified.

Furthermore, ensuring the privacy of patients’ records in a nationalized computer network will be tricky. There are obvious concerns about hackers and system failures. And new online health record systems, such as Google Health are not currently subject to the Health Insurance Portability and Accountability Act, the national health privacy law.

“HIPAA was never intended for the digital age, because the laws never anticipated the emergence of Web-based records,” said Brailer. “Congress can pass one of numerous policy proposals for change, it’s just a question if they have the will to do that.”

The Obama transition operation declined a request to elaborate on Obama’s proposal. The president-elect said Thursday in a speech on the economy thatthe benefits of a modernized national health record system go beyond just cost savings.

“This will cut waste, eliminate red tape, and reduce the need to repeat expensive medical tests,” said Obama. “It just won’t save billions of dollars and thousands of jobs — it will save lives by reducing the deadly but preventable medical errors that pervade our health care system,” he added.

Still, compared to the $2 trillion a year that the industry spends, the$100 billion experts say it may cost to implement Obama’s planis a drop in the bucket.

“We must reduce waste to become more efficient” said Brailer.

The savings of such a plan could be substantial. Brailer estimates that a fully computerized health record system could save the industry $200 billion to $300 billion a year.

That could ultimately slow the rapid rise of health care premiums, which have cut into Americans’ paychecks. While wages are rising at a rate of around 3% a year, health care costs are growing at about three times that rate.

“Obama’s support for electronic medical records is one of the key efforts of health reform that actually will deliver lower costs for hard-working American families,” said Larry McNeely, a health care advocate at U.S. Public Interest Research Group. “Long-term savings can’t happen unless we have 21st century health information technology.”

Massachusetts has developed a plan to fully computerize records at its 14,000 physicians’ offices by 2012 and its 63 hospitals by 2014. After a pilot program, the state legislature estimates it will cost about $340 million to build the statewide computer system, with a cost of about $2 million per hospital.

“[Obama's] timeframe is very ambitious, but there is a need to be able to track data on patients and talk across providers and health care systems,” said Dr. JudyAnn Bigby, Secretary of Health and Human Services for Massachusetts. “The program will allow for greater patient safety.”

Some say some of the hard work has begun. The Bush administration laid much of the groundwork for the program, leading to several pilot programs in a handful of states, as well as a standardization of medical records.

“The whole structure has already been developed,” said Stephen Schoenbaum, executive director of The Commonwealth Fund’s commission on a high performance health system. “It’s feasible to at least make a lot of progress on this in the next five years.”

[via CNN Money] by David Goldman

Would you like power with those fries?

A new garage-engineered generator burns the waste oil from restaurants’ deep fryers to generate electricity and hot water. Put 80 gallons of grease into the Vegawatt each week, and its creators promise it will generate about 5 kilowatts of power.

That’s about 10 percent of the total energy needs of Finz, a seafood restaurant in Dedham, Massachusetts, where the first Vegawatt is being tested. At New England electricity rates, the system offsets about $2.50 worth of electricity with each gallon of waste oil poured into it.

Vegawatt’s founder and inventor, James Peret, estimates that restaurants purchasing the $22,000 machine will save about $1,000 per month in electricity costs, for a payback time of two years.

“You take this waste resource and make it a profit center,” said Peret, who spent four long years cooking up the project in his garage. “When I started telling people, they said, ‘Someone’s gotta have done this.’ I’d run into more people. They’d say, ‘Why hasn’t anyone done this?’ My only response was, ‘I don’t know; it seems like a good idea.’”

While Vegawatt is a small solution, Peret’s invention is a very clever embodiment of several long-cherished alternative-energy ideas: capturing both the heat and power from fuel combustion, making energy where it’s used, and recycling used resources. Big industrial plants that make paper, for example, have long taken advantage of these concepts to save on their utility bills, but the Vegawatt will be the first product that could turn thousands of fast food restaurants into mini power plants.

“Now the restaurant owners are going to be motivated to put every single drop of waste oil into this thing, because it will pay for itself,” Peret said.

And importantly, it provides convenience for restaurateurs or Burger King managers, instead of subtracting it, like so many green solutions seem to.

Restaurants that fry delicious things like chicken and french fries generate dozens of gallons of waste oil that have to be stored in barrels out back. Because used cooking oil is considered a low-grade hazardous material, they haven’t been allowed to just throw it away; they generally had to pay rendering-plant operators to come. But it is now a sellers’ market for grease.

Higher crude prices have made other types of oil more expensive. Biodiesel makers and renderers have become increasingly willing to pay up to 40 cents a gallon for the stuff. There have even been reports of “biodiesel pirates” stealing fryer grease.

In fact, Vegawatt is derived from the home-brew fuel movement that many trace back to Dr. Thomas Reed, who popularized a recipe to convert waste cooking oil into biodiesel more than 20 years ago. Peret converted his truck to run on straight vegetable oil, or SVO to home brewers. But he was troubled by the inefficiency of the process.

“If you want to run waste vegetable oil in your car, it’s not as simple as going behind a restaurant and filling up,” Peret said. “People that do this spend the majority of their free time collecting fuel from restaurants.”

Peret realized he could use the same engine technology to power an on-site generator and defray a restaurant’s electricity costs.

“It’s not difficult to go from spinning tires to spinning magnets,” he said

So he created a test unit — which you can see at the back of his garage in the top photo — that’s basically a diesel generator hacked to run waste cooking oil. It feeds power directly into the restaurant’s electrical system through a 30 amp hook-in.

Vegawatt is more efficient than a typical coal or natural gas plant. Peret said it can capture 70 percent of the fuel’s caloric value. That’s because the generator captures and uses the waste heat it generates.

“All the water [the restaurant] would send to its boiler, instead of sending it straight there from the city, we run it through our heat exchanger first,” Peret said. “Depending on the flow, [the water] can go into the hot water heater at 120 degrees.” (This non-electrical energy savings is included in the 5-kilowatt rating cited above.)

The big power plants, though technically very efficient, waste most of the fuel they burn. After accounting for all the sources of energy waste “what you are left with … is just 27.6 units of usable energy out of every 100 units you started with,” energy researcher Benjamin Sovacool explained in his recent book, The Dirty Energy Dilemma. “In terms of making toast, it would have been nearly four times more efficient just to burn a lump of coal and place your bread over the flame.”

Biomass energy sources — like waste wood, switchgrass or cooking oil — are best when used right near the source of their creation. Dragging the stuff creates more emissions and raises the cost of the fuel. Vegawatt doesn’t have that problem. By company estimates, the Vegawatt generates 50 percent less carbon dioxide than a comparable amount of electricity from a coal power plant.

“In terms of the amount of energy that it takes to transport this waste, it’s a french fry,” Peret said. “You just feed the guy who is picking up the bucket and pouring it into the system.”

Forest Gregg, an alternative-fuels expert and author of last year’s SVO: Powering Your Vehicle with Straight Vegetble Oil, called it a “nifty application and a great business idea.”

Gregg also drew attention to a strong part of Vegawatt’s pitch: that it won’t require “intervention or maintenance by restaurant staff.” That’s because when users buy a system — or lease it for $450 a month — they get a service contract with the company for cleaning and maintenance.

The owner of the very first Vegawatt, George Carey (pictured above), seems pleased with the unit, too. He heartily endorses the company on its website, saying, “The Vegawatt system enables me to significantly reduce my energy costs, generate clean energy on-site, and very importantly, reduce the heavy energy footprint of my restaurant.”

See Also:

• Tapping the Vortex for Green Energy
• Global Energy Network Depends on a Few Vulnerable Nodes
• How A Google Engineer Hacks His Energy Usage
• Biofuel Startup Strives to Meet Obama’s Green Ambitions
• Obama Voices Biofuel Doubts
• Biofuel Solution at Sea, not on Land
• DOE Invests $125 Million in Synthetic Life to Develop Biofuels …
• Food vs. Fuel: Saltwater Crops May Be Key to Solving Earth’s Land …

[via WIRED] by Alexis Madrigal

Yesterday I gave a high-level overview of Technorati’s State of the Blogosphere Report for 2008.  Today I want to underscore a few more of the findings about blogging and brands, the growing credibility of blogs, and the active role of bloggers in other online activities.

The research shows that brands make up a major part of bloggers’ online conversations. “More than four in five bloggers post product or brand reviews, and blog about brands they love or hate. Even day-to-day experiences with customer care or in a retail store are fodder for blog posts. Companies are already reaching out to bloggers: one-third of bloggers have been approached to be brand advocates.”

The Technorati research also shows a general sense amongst bloggers that blogs are being taken more seriously as information sources.

37% of bloggers have been quoted in traditional media based on a blog post. Half of bloggers believe that blogs will be a primary source for news and entertainment in the next five years. Bloggers are less bullish on the prospects for traditional media — one in five bloggers don’t think that newspapers will survive the next ten years.

Bloggers are active Web 2.0 participants, using a variety of Web 2.0 tools.

Blogger Participation in Web 2.0 Activities

Bloggers are generally the first to learn about new web technologies and applications, such as RSS and Twitter. On average, bloggers participate in five of the ten Web 2.0 activities listed, with one-third regularly conducting more than seven Web 2.0 activities.

[via Grown Up Digital] by Don Tapscott

Fast Company: Greatest Gadgets of 2008