Crowdsourcing and the New Risks of Emerging Technology

At its peak in 1996 Kodak – then the world’s largest camera maker and photo film supplier – had revenues in excess of $16 billion and employed more than 145,000 people. But after 130 years in business, the photography giant could no longer keep up with the digital world it helped create and filed for bankruptcy early last year.

At the very same time, a new force was emerging in photography. At Internet start-up Instagram, an online photo-sharing and social networking service, business was booming. In just over a year, the number of registered users on the website went from one million to more 30 million. The company, employing just 13 people, was acquired by Facebook for more than $1 billion last September.

How could a tiny online enterprise like Instagram thrive when an established company – one which once held two-thirds of the global market share in its industry – could not? The answer is crowdsourcing.

Crowdsourcing, a term first coined by Wired magazine in 2006, refers to the latest craze in outsourcing – the process of transferring work from employees to a vast, undefined network of people on an open basis. Generally facilitated by the Internet, crowdsourcing harnesses people power on a global scale and is seeing new business models emerge and traditional industries being disrupted. It is leading to pioneering discoveries in the fields of science and medicine, whilst also enabling tiny companies to compete on a global stage.

At one end of the spectrum, crowdsourcing – as demonstrated by Amazon’s “Mechanical Turk” – involves the sub-division of labor into literally millions of micro tasks. These are then actioned by an anonymous global workforce who perform the seemingly mindless tasks.

At the other end, websites like Wikipedia harness the knowledge of millions of contributors to create content on a size and scale that was unimaginable as little as a decade ago.

The one remarkable thing that all of this has in common is that the “workers” contribute their labor for little or no financial reward.

Crowdsourcing Challenges

As even the most traditional companies take advantage of this new breed of micro-laborers in a way that was never envisaged when employment law was originally drafted, companies and their insurers face new challenges with workers’ compensation models and employment practices liability. At the heart of this problem lies the classification of these workers and the limited remuneration that they receive.

In a recent federal class action lawsuit filed against Crowdflower, a San Francisco-based crowdsourcing platform, two members of their “crowdforce” are claiming that they are actually employees of the company and that the meagre $2 an hour they receive for their labor is in direct contravention of minimum wage rates required under the Fair Labor Standards Act. With thousands of hours worked by millions of individuals all claiming to have been underpaid by at least $5 an hour, the claim, if successful, could be disastrous for the company involved and could seal the fate of many similar crowdsourcing companies.

But it is not just employment law violations that threaten the future of this emerging technology and the companies that rely on it.

Design and build by the masses brings with it a serious risk of intellectual property rights infringement. As large numbers of anonymous contributors add lines to software source code or content to online sites, the risk that infringing elements are introduced into the final product grows exponentially and with it the risk of infringement actions against the companies that commission these projects and those that sell and use the products.

As the law in this area once more struggles to keep pace with the innovation, uncertainty over the ownership of each element contributed grows. Once again, the confusion over the classification and role of crowdworkers challenges traditional thinking, opening the door to claims that crowdsourced products are owned by the people who made them, not those that commissioned them.

This, alongside the risk of the work being copied from one place to another by a crowd contributor, means that a company may develop a substantial intellectual property portfolio which it believes to be of great value to a licensee or potential investor but which transpires to be worthless.

In a nutshell, it appears impossible to maintain the same level of risk management when products are not developed in the controlled environment of a traditional employment or outsourcing relationship with protocols, guidelines and consequences for the individuals concerned.

New Era of Growth

Crowdsourcing looks set to launch a new era of unprecedented productivity growth that Adam Smith could barely have imagined when he originally coined the concept of the “division of labor” back in 1776. More than 200 years later, almost ubiquitous access to high-powered, cheap and highly mobile computing combined with high-speed networking has made this possible. But companies that seek to take advantage of this new technology face serious challenges.

The insurance industry has a critical role to play. For the world to unlock the true power that crowdsourcing can bring, it is essential that we identify the major risks and find ways to manage and transfer them to remove the uncertainty and to allow innovation to flourish.