Photo by istargazer

Eric just posted on the advantages of transparency. I’m a fanatical believer in the power of more openness to transform businesses and my whole email startup is based on the idea that there’s hidden information in our emails that’s worth revealing. The problem is, within the tech community ‘open’ is a synonym for ‘good’, and that gets my contrarian antenna twitching. As Fred Wilson says, you don’t make money by doing the same thing as everyone else, so here’s a couple of examples of transparency gone wrong.

Misleading metrics

The mortgage industry moved from a centralized business model to one where different stages were handled by separate firms. Landing clients was handled by mortgage brokers, firms like Countrywide would then write the mortgage, but the money itself was provided by investors through securitization. In the old days a single firm would handle all of this in-house, which meant they had deep and immediate access to all the information about a borrower at every stage. To make the decentralized model work, an open and standardized way of categorizing the quality of the loan was developed. Statistics and measures to cover the credit history, income and collateral offered by the borrower were passed up the chain. These were then used by the agencies to rate the loans and split them into tranches of risk. It looked like a model of transparency, increasing the efficiency of a whole industry.

The problem was the metrics were systematically false. Brokers had massive financial incentives to inflate collateral house values through friendly assessors, and help borrowers inflate their income. Unlike the old single-firm approach, there was no real accountability for the true quality of the loans, they would still get their commission. The rating agencies relied on the broker data, and had similar incentives to grade the loans favorably.

Part of the reason we’re in this mess is that the appearance of transparency made everyone complacent. A manager of a team of sales people in the single firm model would get fired if her team were fudging originations. Her management would have a strong incentive to prevent lax lending standards because that would lose the firm money. There just wasn’t an accountability mechanism to go along with the new open model, and so the apparent transparency was a dangerous illusion.

Destroying the magic

Walter Bagehot said about royalty "The monarchy’s mystery is its life. We must not let in daylight upon magic." The same could apply to Apple. One of the distinctive elements of its culture is the obsessive secrecy. This isn’t just the usual bureaucratic urge to hide information, it’s a deliberate part of their marketing strategy. The impact of any announcement is so much larger when it’s a surprise. When nobody knows what Apple’s really working on, people’s imagination runs overtime anticipating what could be coming next. Any projects that went south before release were never known to the public, helping us look far better in comparison to more open companies.

There’s massive downsides to this too, I always struggled with simple things like getting trusted developers onto beta programs because of the secrecy, but it’s hard to argue with the results.