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Reed’s Law and the Center of the Universe

It’s become a seamless part of the standard business lunch—sitting down at the table, pulling in your chair, taking out your smartphone, and placing it on the table in front of you. Everybody in the restaurant does the same. The conversations may be face-to-face, but the presence is worldwide. With each smartphone comes a world of contacts—phone numbers, e-mail addresses, social networking profiles. Each device connects the dots between the people at the table and their extended network of friends and associates, both online and off. There may only be two people at the table, but there are 33 Million People in the Room.

When Chris Anderson and June Cohen opened up TED’s online social network and expanded their community into the millions, they were building on a concept called Reed’s Law. The law, created by Internet “uncle” David Reed, states that the effectiveness of large networks (and social networks in particular) can scale exponentially with the size and social importance of the network. In other words, Reed suggests that every new person on a network doubles its value. Let’s go back to the restaurant and say that between you, your lunch partner, and all the contacts in both of your phones, you have a network of 25 individuals. According to Reed’s Law, the amount of possible connections and subgroups within your group of 25 individuals is an astonishing 33 million. Add just five more individuals to your network and the amount of possible connections shoots all the way up to a billion. Reed’s law explains why social networks have literally exploded onto the scene, but more importantly, it shows the vast potential offered therein. When each new addition to a network doubles its value, the revenue-generating possibilities multiply pretty quickly.

Take for example the first social networking application for collaborative research and development to incorporate pregenerated expert profiles. With more than 1.4 million biomedical experts from more than 150 countries, the BioMedExperts site currently houses approximately 12 million preestablished network connections, none of which were uploaded by a human. Each of these connections between people, ideas, and areas of interest was automatically generated from more than six million scientific publications from 6,500 journals, and experts can access the system to revise and/or update their personal details, publications, and/or preferences. As a biomedical research scientist who blogs under the name DrugMonkey wrote in a June 23, 2008, post: “Obviously the serious geekery part is starting with your own cloud of connections and seeing what it can tell you... the database allows a little more broad-based research which is where it comes in handy as a networking tool, among other things.”

The open platform also reflects the real-life activity network of experts worldwide even as the social tools enable them to connect in the virtual world.

Of course, not every scientist invited to join the BioMedExperts online network will participate, let alone create a subgroup within the larger network, just as not every possible subgroup calculated by Reed’s law will emerge and be fruitful. For every person who does not join the network, the value of the network will be exponentially diminished. Fair enough, since it is in the potential value of the connections that do form that you want to invest your time, energy, and resources. But are all connections created equal, or are some connections more important than others?

A joint study by researchers at UCLA and Boardex, a corporate social networking platform, looked at how being right in the center of a network affects the financial success of that company. The conclusion is obvious, but not for the reason you might expect. You’d think that the reason the company would do well is because everyone would recognize them as the center of their “universe,” and they’d have bigger brand awareness, a larger market, more sales, and increased revenue. What you might not expect is that being positioned in the center actually gives you more information, and it’s the information that then gives you power.

The center of the universe study shows what you might expect: Companies are influenced by their social connections. Surprisingly, it also provides scientific evidence to suggest that these companies are empowered to exploit their competitive position in the network. Being in the center means that your company makes better policy decisions and better investments, and those advantages improve your bottom line.

The idea that a company can be the center of the universe for its industry is pretty heady, especially when it means being the hub of information for those around you. The revelation that the more a company hires highly networked employees, the better chance the company has at being the center of its industry’s network is even more impressive. Changes within the company occur not only when a director and key executive are hired or fired, but also when they develop new connections by sitting on a new board of directors, by joining new organizations, and by using social technology to leverage their relationships. Connected people are hubs of information, and they have an enormous impact on both the inner workings of a company and on how other firms perceive the company. Think of it as if you were planning a party. The most memorable parties aren’t the ones that have the best location or the best music. The best parties, and the best companies for that matter, are the ones that have the most interesting mix of people.

But what happens when highly connected people leave a network? The center of the universe study answered that question by looking at the impact that the death of a highly connected corporate decision maker could have on the life and performance of the company it served. To do that, the UCLA researchers tracked more than 2,000 firms and 30,000 key executives from 2000 to 2006. Not surprisingly, the study determined that when highly connected people die, so too do the connections between their companies.

The study demonstrates that companies that influence the culture around the firm’s larger business community are positioned more centrally in the network and are, in turn, highly influenced by the culture around them. Being at the heart of the business hub leads to better decisions because companies are exposed to a wider set of information than their less networked counterparts. The more pertinent information you have access to, the better the decisions you are likely to make and the better your company is likely to run.

Researchers also uncovered another compelling reason to be in the center of the universe, so to speak. The team focused on directors who actively positioned themselves right in the heart of their business networks, and as you might imagine, they found strong evidence to suggest that the more connected the director, the more she was compensated. After all, in business, it’s not just about what you know. It’s also about who you know and how well you use those relationships.

So far, we’ve seen that a company’s social networking capabilities and the active networking of its employees have an impact on everything from the inner workings of boards to the influence they amass in the larger business community. But what if you are a well-connected slacker with a lot of cultural appeal—someone who doesn’t produce real value for the company, but who is well liked by all? Would you still receive higher compensation than your less connected colleagues? To find that out, researchers Nguyen and Dang took the center of the universe hypothesis one step further by looking at the French elite. They discovered that not only are socially well-connected CEOs more likely to make more money, they are also far less likely to be fired for poor performance, and, amazingly, they were more likely than their unconnected peers to find new and solid employment when they were shown the door.

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