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The EFMD business magazine

The EMC Contract as a smart coordination mechanism

Ecosystem Micro-communities
Joost Minnaar provides a brief history of RenDanHeYi and an insight into “Workbench”, the smart contracting capability that enables Haier’s internal ecosystems.

In December 2019, Haier developed an internal digital tool called Workbench to facilitate its internal market mechanisms. This tool relies on algorithms, smart contracts, and blockchain technology to make the whole greater than the sum of its parts.

Why would a firm need fancy things like blockchains, smart contracts, and algorithms in the first place? To understand this, we first need to understand the historical context of Haier and its pioneering management model, RenDanHeYi.

A new organisational structure

Guided by their ambition to boost high levels of entrepreneurship and innovation in the firm, Haier has always aimed to motivate all their employees to, in their words, ‘be their own CEO’ and to have ‘Zero Distance from their customers.’

This led them to break down their hierarchical pyramid into a network of thousands of autonomous units in the early 2000s. Ruimin Zhang, Haier’s iconic founder, gave the company’s 10,000 middle managers a life-changing choice: ‘Join our new structure or leave.’ Many left, and some stayed.

This was also the moment that can be regarded as the birth of the RenDanHeYi model. Since that defining moment, the model has seen three significant evolutions.

RenDanHeYi 1.0 – Independent Operating Units

In 2005, inspired by the work of Michael Porter, the first version of RenDanHeYi organised the firm into market chains of around 2,000 ‘Independent Operating Units,’ or ZZJYTs. Simultaneously, Haier introduced an internal labour market where employees must bid for work in one of these independent units.

The independent units were given far-reaching decision-making rights and permitted to transact with each other as if they were on the open market. The introduction of this RenDanHeYi 1.0 model enabled Haier to successfully bring market dynamics into the firm. However, the independent units were organised into three different hierarchical levels, which mostly obstructed the decision-making of the lowest-level units.

RenDanHeYi 2.0 – Micro-enterprises

n 2012, intending to resolve the tensions inherent in RenDanHeYi 1.0, Haier restructured the 2,000 independent units into 4,000 micro-enterprises, which initiated the second iteration of the RenDanHeYi model. As a result, micro-enterprises were given even more decision-making power and started to act as mini start-ups with their own balance sheet, P&L statement, and lifespan.

2000 haier restructuredThe micro-enterprises hired their own staff, distributed their own profits, set their own strategic directions, and decided which other micro-enterprises to contract and transact with. Micro-enterprises were even free to go beyond their organisational borders and contract with external partners when they thought it to be in their best interest.

RenDanHeYi 2.0 enabled Haier to reproduce the competitive dynamics of a marketplace in their firm. However, micro-enterprises were only rewarded based on their own performance—not on the performance of the partners they collaborated with. Over time, this started to create tension, especially with the rise of the Internet of Things (IoT), which resulted in customers demanding ‘smart’ products and services that required new levels of intense collaboration amongst micro-enterprises and their external partners.

RenDanHeYi 3.0 – Ecosystem Micro-communities

In 2019, aiming to solve the tensions caused by the rise of the IoT, Haier launched its latest organisational innovation, Ecosystem Micro-communities, or simply EMCs. This essentially kickstarted the third evolution of the RenDanHeYi model. EMCs can be seen as temporal alliances of micro-enterprises and external partners that must work closely together to deliver smart products and services to its users.

A dedicated contract is signed to align all the members of one EMC, which outlines the goals and responsibilities for every member, the deadlines for work, and profit-sharing agreements. When the EMC makes a profit, all its members share in the results. Conversely, when the EMC struggles, no one benefits.

Haier launched a handful of EMCs in early 2019. Within two years, the number had organically grown to more than 400. However, this also meant a rapid rise in transaction costs to run all the EMCs successfully. In fact, when EMCs were first established, the collaboration within and between EMCs occurred mainly during offline meetings. EMC contracts were primarily signed on paper.

The Workbench

This all changed with the introduction of the Workbench at the end of 2019. The tool digitalised and automated many of these offline processes that were still being performed manually, thereby radically reducing the transaction costs inside the firm. As such, the Workbench allowed Haier’s EMCs to self-organise in a wholly digital manner. However, the tool not only radically decreased transaction costs but also brought three other advantages: market efficiency, ecosystem transparency, and common prosperity.

Market efficiency

Before any micro-enterprise can become part of an EMC, it must successfully engage in a digital bidding process facilitated by the Workbench. EMCs are supposed to tender out all their goals (or ‘dan’ meaning ‘business opportunities’) they hope to achieve via the internal marketplace. The goals must outline what the EMC hopes to outsource, along with contextual information, in-depth analysis, and a clear description of the goal.

4000 bids are made through WorkbenchThese goals come in all shapes and sizes. Some are minor projects, others are grandiose and ambitious: building a state-of-the-art factory, for example, or achieving a 10 percent market share in a specific region. There is an art to formulating these goals. They must be sufficiently clear, and the potential rewards attractive enough, for the micro-enterprises to bid on them.

Bidding on the internal marketplace gives micro-enterprises the freedom to choose their work. However, Haier’s bidding process is not only open for internal micro-enterprises but also for external partners—the best bids are awarded a place in the EMC.

All parties must be mindful about their biddings: They must bid high enough to get a place in the EMC, but the risk of overbidding is also present. If one can’t deliver on their promise, they are essentially ‘punished’ by compromising their credibility within Haier’s star-based performance rating system. The rating is significant, as parties will eventually be disadvantaged in future bids if their rating is too low.

The Workbench has completely digitalised and automated these goal-setting and bidding processes while greatly increasing the efficiency of Haier’s internal market mechanisms. (To give you a sense of scope: each month, more than 4,000 bids are made through the Workbench, of which 100 are successfully turned into new contracts.)

Ecosystem transparency

When the members of the EMC are identified based on their winning bids, it becomes time for the next step: the contract. The Workbench automatically generates the EMC contract once all parties in the EMC agree with the terms of collaboration, as this is the place where template-based EMC contracts are digitally initiated, created, signed, and periodically updated.

EMC contracts are ‘smart contracts’ stored in blockchains (Ethereum) to create increased transparency around the contracts. Smart contracts are self-executing agreements in which a chain of action is triggered when certain conditions are met. These contracts are automatically enforced through the Workbench and cannot be altered.

During the duration of the contract, the Workbench breaks down the goals and sub-goals via detailed daily activities and deliverables for all members of the EMC. The tool also tracks the daily performance of the members compared to their respective deliverables. This allows all members to easily and rapidly spot any differences between planned and actual performance. The Workbench makes this process of real-time performance tracking transparent to all members in their respective ecosystems.

Common prosperity

The Workbench also automatically generates rewards proposals between the different members of one EMC, which are guided by Haier’s remuneration system based on profit-sharing mechanisms. Every micro-enterprise shares in the profit of the EMC they are part of when the goals outlined in the EMC contract are reached. Haier’s profit-sharing mechanisms include specific objectives and events that will trigger certain bonuses. In a nutshell: Do better than the market average, and you’ll get a share in the profits.

Haier’s profit-sharing remuneration system is built around the Chinese concept of ‘common prosperity.’ It enables the EMCs to make the cake bigger and divide it fairly among all members of the ecosystem. The Workbench automatically executes the profit-sharing agreements as guided by common prosperity, with members of an EMC only sharing in the profits when the entire ecosystem succeeds at making a profit.

Profit-sharing is based on agreements on the value and size of the contribution by each member of the EMC, which are re-evaluated each month. Any changes in profit-sharing agreements are made through the Workbench, as all EMC members can alter conditions in their smart contract as long as they find consensus with each other.

A real example

Let’s illustrate how an EMC works with a real example. One day, Haier employee Yu Zhang went out for dinner to enjoy one of China’s most famous dishes: Peking roast duck. The dish is somewhat complex and challenging to cook; most people can only enjoy it by getting a table at a fancy restaurant.

While enjoying his dinner, Yu’s entrepreneurial idea was born: He would help ordinary people cook restaurant-quality dishes at home through Haier’s smart kitchen appliances. And he was going to start his entrepreneurial adventure with the iconic Peking roast duck. Yu launched the Smart Cooking EMC in May 2019 through the Workbench to make this happen.

Yu knew he needed to recruit partners to make his EMC a success. He required both internal micro-enterprises to develop new smart kitchen appliance solutions and external partners with knowledge about Peking roast ducks. Yu started by searching for a chef that could develop the optimal Peking roast duck recipe and eventually found an ally in Chef Weili Zhang. The two then searched for a farm that could supply them with ducks, a food processing factory, a partner that could provide them with unique packing material, and a logistical partner.

20,000 EMC had soldIn the meantime, Yu set out internal tenders via the Workbench to attract micro-enterprises to the EMC that could help them develop the necessary smart technologies. For example, they needed a micro-enterprise that could help them identify the best cooling conditions for people to store semi-finished ducks in their home refrigerators. They also needed a micro-enterprise that could help them develop a new programmable oven that could roast the duck with a push of a single button. Multiple internal micro-enterprises then joined the EMC via a successful bidding process.

Once all the necessary partners were integrated, an EMC contract was automatically generated through the Workbench. The smart contract specified what partners were expected to invest in time and money, the goals they needed to reach, and agreements about future profit-sharing percentages. The contract was updated monthly on critical metrics, but only by consensus of all leaders of the different micro-enterprises and the external partners that made up the EMC.

In September 2020, after only six months of development time, the EMC successfully launched its first Peking roast duck product on the market. Three months later, the EMC had sold more than 20,000 ducks and achieved a revenue of four million RMB (USD 600,000). The profits were shared automatically with all partners via Workbench. But this was just the beginning. In the months after, the EMC would expand its offerings by bringing 16 more complex dishes to consumers’ homes.

Yu’s entrepreneurial dream had become a reality. He set up his own start-up and became an entrepreneur thanks to RenDanHeYi and its EMC concept. As Yu’s story shows, the EMC concept allows everyone to be an entrepreneur, to have Zero Distance to customers, and to create common prosperity for all.

In short, RenDanHeYi has enabled Haier to become the largest and most successful start-up factory in the world.

See other articles from RenDanHeYi: Pioneering the Quantum Organisation.

The EMC Contract as a smart coordination mechanism

Joost Minnaar is Co-Founder of Corporate Rebels and co-author of Start-up Factory: Haier's RenDanHeYi model and the end of management as we know it.

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