Organization is a process, not a structure
May 6, 2012
The way in which companies organize themselves and define their internal boundaries has essentially been determined by the way in which communication between people is planned and transfer of information is designed. The classic hierarchical structure was based on the assumption that a manager or worker could have rich interaction and exchange of information only with a limited number of predetermined people. A narrowing of interaction always marked operational boundaries. Thus you did not want people to cross functional silos. This was the infamous trade-off between richness and reach.
An increasing number of companies trying to become social businesses are now becoming aware of the technical barriers and structural bottlenecks that hinder or totally prevent cooperation that is not planned in advance.
It is time to rethink. Rather than thinking of organization as an imposed structure, plan or design, organization arises from the interactions of interdependent individuals who need to come together.
The accumulating failures of attempts at organizational agility can be traced to the fundamental but mistaken assumption that organizations are structures that guide and, as a consequence, limit interaction. An organization as a structure is a seventeenth century notion from a time when philosophers began to describe the universe as a giant piece of clockwork. Our beliefs in prediction and organizational design originate from these same ideas.
A different ideal is emerging today. We want to be agile and resilient and we want to learn effectively and fast. The tension of our time is that we want our firms to be flexible and creative but we only know how to treat them as systems of boxes (or network nodes, where the shapes are round instead of square), with a fixed number of lines between them.
It is time to change the way we think about organizations. It is not about hierarchies vs. networks, but about a much deeper change. Organizations are creative, responsive processes and emergent patterns in time. All creative, responsive processes have the capacity to constantly self-organize and re-organize all the time. Change is not a problem or anomaly. Change is the organizing input rather than the typical managerial re-design process. All solutions are always temporary.
Gregory Bateson wrote: “information is a difference which makes a difference”. Information is the energy of organizing. When information is transparent to everybody, people can organize effectively around changes and differences, around customers, new technologies and competitors.
What we have still not understood is that people need to have access to information that no one could predict they would want to know. Even they themselves did not know they needed it – before they needed it. Thus an organization can never be fully planned in advance. When information is transparent, different people see different things and new interdependencies are created, thus changing the organization. The context matters more than ever. The easier the access that people have to one another and to (different) information is, the more possibilities there are.
We seek organization, but organization is a continuous process, not a structure.
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Thank you Ken Gergen for a great evening and great conversations
More on Gregory Bateson. On social business. Narrative work.
The competitive edge of the social business
November 20, 2011
“In the future, when the history of our time is written from a long-term perspective, it may be that the most important things historians will see are not technological advancements or the Internet, but the fact that for the first time a substantial and rapidly growing number of people had choices.” (Peter Drucker)
The industrial age was about limiting the scope of choices. This was accepted since the need to gather costly information and to communicate with low quality tools was minimized. Furthermore, as the scope of decision-making and action was narrowed, the learning requirements for workers and customers were limited, reducing the transaction costs of work. The efficiency contribution of mass production was in fact derived from these lower information- and communication-related costs.
Today, in contrast to people being content with limited choices, offerings need to be created to meet diverse, unique requirements.
For knowledge workers and customers the task of gaining the input needed for these situations is creating an entirely new environment. Creative learning is becoming the fundamental activity. It is not about consuming pre-determined content, passing tests or something with beginnings and ends. Learning is continuous transformation. It is the foundation for creative action. The ability to meet the needs of a situation better can only exist partially prior to the live moment. You can never be fully prepared in advance: success depends on how you are present and how you communicate.
The new competitive edge comes from interactive capacity: the ability to connect with information and people, as and when needed.
What gives the edge is not what is already known by the individual, as much as the ability to solve problems that require real-time learning through live interaction. In increasingly complex environments learning curricula cannot be effectively designed beforehand. Needs and also solutions emerge responsively.
This view focuses attention on the way everyday conversations between people create the future. Organizations are self-organizing patterns of participation and communication through which coherent action and innovation emerge.
The concept of the social business builds on an agile, iterative framework. Learning is not related to meeting the requirements set by someone else, but is motivated and expressed through personal situational needs and aspirations. The idea of interactive competence also reflects the radical change in thinking that is going on. We are leaving behind the Western preoccupation with the autonomous individual and beginning to appreciate the importance of social processes and interdependence.
This understanding of competence suggests that the capability to act is a social process. The primary learning asset for a knowledge worker is interactive, reflective practice. The network is also a means for signalling: making one’s own learning visible not only to oneself, but also to others, thus creating a platform for comments, conversation, and even formal accreditation.
Learning happens in interaction between interdependent people. Competence, the ability to act more purposefully is the emergent phenomena resulting from that interaction. People are simultaneously forming and being formed by each other at the same time – all the time.
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Thank you Riel Miller, Doug Griffin, Stephen Downes, Kenneth Gergen and Ralph Stacey
The future of work – the way I see it
November 13, 2011
Technology does not determine social and organizational change, but it does create new opportunity spaces for social innovations like new employment forms. Partial employment for young unemployed people is becoming much easier than before, and truly global task-based work is becoming possible, perhaps for the first time in history.
The opportunity today is in new relational forms that don’t mimic the governance models of industrial, hierarchical firms. We are already witnessing the rise of very large-scale efforts that create tremendous value in a very new way. Coordinated value in the cases of helping Haiti or building Wikipedia type of platforms is the result of uncoordinated actions by a large number of individuals. People with different goals, different values and different motivations take part and co-create together.
The characteristics of the network economy are different from what we are used to: the industrial production of physical goods was financial capital-intensive, leading to centralized management and manufacturing facilities where you needed to be at during predetermined hours. The industrial era also created the shareholder capitalism we now experience. Having a great idea, or simply wanting to do something, was not enough to get one going. You needed a lot of money. In the network economy, individuals, interacting with each other by utilizing free or low cost social platforms and relatively cheap mobile, smart devices, can now create information products.
The production of information goods requires more human capital than financial capital. It is more about connecting with brains than connecting with money. And the good news is that you are not limited to the local supply. Work on information products does not need to be co-located. The architecture of work does not resemble a factory any more.
This is why decentralized action plays a much more important role today than ever before. The architecture of work is the network and the basic unit of work is not a process or a job role but a task.
Our management and organizational thinking is derived from the era of tangible goods production and high-cost/low-quality communications. These mindsets are not helpful in a world of widely distributed ownership of means of production/smart devices and ubiquitous connectivity.
“A corporation/employer exists to make money and the employee goes to work for the employer to make money.” Almost all economic theories have made the same assumption: the employer – employee relationship is necessary to make work possible.
We have taken that relationship as given. The other taken for granted assumption is that it is the independent employer/manager who exercises freedom of choice in choosing the goals and designing the rules that the members of the organization are to follow. The employees of the organization are not seen autonomous, with a choice of their own, but are seen as rule-following, dependent entities. People are resources.
Dependence is the opposite of taking responsibility. It is getting the daily tasks that are given to you done, or at least out of the way. We are as used to the employer choosing the work objectives as we are used to the teacher choosing the learning objectives. The manager directs the way in which the employee engages with work, and manages the timing and duration of the work. This image of work is easy to grasp because it has been taught at school where the model is the same.
In contrast to the above, digital work has brought about circumstances in which the employee in effect chooses the purpose of work, voluntarily selects the tasks, determines the modes and timing of engagement, and designs the outcomes. The worker here might be said to be largely independent of some other person’s management, but is in effect interdependent. Interdependence here means that the worker is free to choose what tasks to take up, and when to take them up, but is not independent in the sense that she would not need to make the choice.
The interdependent, task-based worker negotiates her work based on her own purposes, not the goals of somebody else, and chooses her fellow workers based on her network, not a given organization. The aim is to do meaningful things with meaningful people utilizing networks and voluntary participation.
It is not the corporation that is in the center, but the intentions and choices of individuals. This view of work focuses attention on the way ordinary, everyday work-tasks enrich life and perpetually create the future through continuous learning.
The architecture of work is not the structure of a corporation, but the structure of the IT-network. The organization is not a given hierarchy, but an ongoing process of organizing. The basis of work is not financial self-interest, but people’s different and yet, complementary expectations of the future, conditioned by their accounts of the past and developed skills.
The factory logic of mass production forced people to come to where the work is. The crowdsourcing logic of mass communication makes it possible to distribute work to where the people are, no matter where on the globe they may be.
Knowledge work is not about jobs or job roles but about tasks. Most importantly knowledge work can, if we want, be human-centric. Through mobile smart devices and ubiquitous connectivity, we can create new opportunities and a better future for millions of unemployed people.
It is possible!
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Thank you Ralph Stacey, Doug Griffin and Yochai Benkler
The modern business enterprise is easily defined. It has two particular characteristics: it contains many separate operating units and a hierarchy of executives. As a social innovation the modern enterprise was born when the volume of economic activities reached a level that made administrative coordination more efficient and more lucrative than market coordination.
Before the rise of the modern firm, the activities of small, often personally owned enterprises were enabled and constrained by market and price mechanisms.
The important innovation of the modern firm was to “internalize” activities by bringing many discrete components under one roof and under a system of coordination. The modern multi-unit business corporation replaced the small, single-unit, enterprise because administrative coordination permitted greater productivity and lower (transaction)costs per task than was possible before.
The big idea behind industrial management was to purchase or set up units that were fit enough to operate as independent entities, but instead integrate them into one system. Bringing these activities together gave the corporation many advantages: by standardizing interaction between units, the cost of transactions were lowered and the cost of information on markets and sources of supply were dramatically reduced.
The principle of internalization permitted the flows of goods, services and information to be planned from one unit to another. Budgeting of flows allowed more efficient use of facilities and personnel than was the norm earlier. The advantages of internalizing many business units within a single enterprise could not be realized without management.
Managers essentially carried out the functions formerly handled by price and market mechanisms. Managers were now the enablers.
The practices and procedures that were invented at the dawn of industrialism have become standard operating methods and are still taught in business schools today. The existence of a managerial hierarchy as means for coordination is not questioned. It is the defining characteristic of the modern business enterprise.
Facing a world that has changed
Two aspects of work have changed dramatically. First, all financially successful offerings involve customization, or aggregation by the end-user. This means that companies must thrive in situations where very little information or communication can be made routine. Second, all successful firms are actively involved in emergent, responsive interaction with people “outside”: customers and network partners. These firms understand that value is not created inside the organization but in the larger ecosystem they are one part of.
We all have mindsets of the world that serve as maps that guide what we see and how we understand the world around us. The maps can be helpful but also outdated and incorrect. Management practices of the industrial, passive-mass-consumer era were based on standardization, management coordination and repetition. These approaches and principles are not just less useful, but critically wrong today.
Both of the change drivers: customization and interactive value creation, demand that firms value people more than they value budgets, processes, organizational units and hierarchies. Firms must attract and link contributions from skilled individuals – no matter where those people are and where those contributions come from. The products the firm sells to its clients are not offerings of the firm per se, but offerings created by specific individuals in specific situations of “local” interaction. This is why business-to-business (B2B) value systems are not different from business-to-customer (B2C) value systems. It is about people in interaction in both cases.
Work is always interaction between interdependent individuals.
It is now more expensive to internalize than to network
Interaction can only partially be planned in advance. People need to participate based on transparent information and high quality communication systems enabling responsiveness. Some work is also in the future located “inside” the firm, but the really important part of interaction takes place “outside“. A larger and larger number of the contributing individuals are necessarily customers and network partners who are outside the company Intranet as we know it know. The explanation for this is that it is now more expensive to internalize than to network. The fundamental principles of organizing are changing because of the Internet and the low cost and high quality of communication. This is why there are no, and never will be, successful social media implementations inside firewalls.
Work today is network-enabled, situational collaboration based on interdependency that typically links operational units and spans over traditional value systems. The approach that managers do the coordination for the workers is just too slow and too costly in the low transaction cost environments we live in today.
The enablers have turned into a constraint.
The systems of value creation need to be architectures that make wide area participation possible. The goal is interoperability and low barriers to experimentation and networked learning.
The task today is to create a valid context in which people think about and experience social media / social business. The difficulty is that this context has to make sense in the world we are going to, and not the world we are coming from.
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Thank you Ralph Stacey, Doug Griffin, Kim Weckström, Tim O’Reilly, Alfred Chandler, Riitta Raesmaa, Olli Parviainen and Luis Suarez
More on the subject: what bosses do in the Economist. A post on group intelligence by Tom Malone. Work of Steve Denning. Article in the Ivey Business Journal. More on the new context: digital literacy. Greg Satell on networks. Stowe Boyd´s blog post.
What it takes to get a job done
April 25, 2011
Physical tasks can normally be broken up in a reductionist way. Bigger tasks can be divided by assigning people to different smaller parts of the whole. For intellectual tasks, it is much harder to find parts that make for an efficient division of labour. Intellectual tasks are by default linked and complex. Reductionism does not work.
The machine metaphor led to the belief that if we only can arrange the parts in the right way, we optimize efficiency. When the image of work was the assembly line, work could be fragmented and individual performance goals could be set for each worker. The world was all about little boxes separated from one another.
The demands of work are different now: how efficient an organization is reflects the links people have with one another and the links they have to the contexts of value. How many handshakes separates them from one another and from the things that matter? We are beginning to see the world as relations.
When we talk about relations, we often take examples from nature: murmuration and bird flocks. The V shape of a bird flock does not result from one bird being selected as the leader, and the other birds lining up behind the leader. Instead, each bird’s behaviour is based on its position relative to nearby birds. Ornithologists say that the V shape is not planned or centrally determined; it emerges out of simple, and relatively few, rules of interaction. The bird flock demonstrates a striking feature of emergent phenomena. But the birds do not need to figure out the rules of flight that guide how they organize themselves. These rules are genetically hardwired. Nature provides this for the birds.
Birds then are not “free like birds”.
When it comes to people it is a different story. Mother nature does not provide deterministic rules for collaboration. We are free to choose, or not to choose, our own ways of doing things together. Accordingly we are ourselves responsible for formulating the principles we use to organize our life. Social systems are thus fundamentally different from natural mechanisms.
New architectures of work
We have examples of social architectures that redefine some basic beliefs about social systems.
The wiki is at the moment the best departure from division of labor and workflows. Wikis let people work digitally together the very same way they would work face-to-face. In a physical meeting, there are always more or less the wrong people present and the transaction costs are very high. Unlike email, which pushes copies of the same information to people to work or edit separately, a wiki pulls non co-located people together to work collaboratively, and with very low transaction costs. Email and physical meetings are excluding ways of doing things. They leave people out. A wiki (depending on the topic, the context) is always inviting and including. The goal is to enable groups to form around shared contexts without preset organizational walls, or rules of engagement.
Ward Cunningham described his invention in 1995 as the simplest online database that could possibly work. An important principle of the wiki is the conscious emphasis on using as little structure as possible to get the job done. A wiki does not force hierarchy on the people. In this case, less structure and less hierarchy mean less transaction costs. A wiki always starts out flat, with all the pages on the same level. This allows people to dynamically create the organization and hierarchy that makes most sense in the situation at hand to get the job done.
People work together to reach a balance of different viewpoints through interaction as they iterate the content of work. The wiki way of working is essentially the digital and more advanced version of a meeting or a workshop. It enables multiple people to inhabit the same space, see the same thing and participate freely. Some might just listen, some make comments or a small edits, while others might make more significant contributions and conclusions.
New work is about responsive, free and voluntary participation by people who contribute as little, or as much as they like, and who are motivated by something much more elusive than only money. The society has moved away from the era of boxes to the time of networks and linked individualism. Being connected to people – from elsewhere – is a cultural necessity and links, not boxes, are the new texture of value creation.
Organizations are their communicative performance.
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Thank you R. Keith Sawyer, Stewart Mader, Robert Cummings, Rod Collins, Doug Griffin, Kim Weckström, Richard Harper and Yochai Benkler
More on the subject: Center for Network Culture. The Agile Manifesto. About Ushahidis. Zen habits. Examples of wikis.
The problem with the iPad and Facebook
April 17, 2011
I loved Napster.
I saw Napster as a fundamentally important social innovation when it came out in 1999. These thoughts were brought to my mind as I recently heard of Shawn Fanning and his new venture.
The original Internet was designed as a peer-to-peer system, like Napster was. Up until around 1993, the Internet had only one model of connectivity. Computers were assumed to be always on and always connected. The goal of the original Arpanet after 1969 was to share computing resources through integrating networks and allowing every host to be an equal player. Any two computers on the Internet could send packets to each other. Firewalls were unknown and communication patterns were by default symmetric.
Reach together with symmetry and equality were the things that made the Internet such a radical social innovation.
The explosion of the Internet in 1993 – 1994 was largely the result of the web browser and a different logic: the client-server protocol. The client initiates a connection to a known server, asks a question, downloads the answer and disconnects. The device running the client doesn’t need to have a permanent address. It does not even need to be always on. This is the reason why broadband providers gave us asymmetric bandwidth. More bandwidth is offered when getting data from the Internet than when sending data to it. The assumption was that the majority of users want to download and consume, not upload and produce.
It was not about symmetry and equality any more.
The client-server model was not the only development that changed usage patterns. The original model was transformed even more as a result of firewalls. Now the hosts of the network could not talk freely to other hosts because of firewalls creating obstacles to communication.
One of the most common and widely spread social developments is people being able to be their own authors and publishers. What Napster did was a different and likewise revolutionary social innovation. It came up with a third alternative, a new logic between producing and consuming: every computer in the network was used as a re-publisher and curator.
The assumption that there were few publishers and many consumers did not hold any more. Napster changed the flow of data.
The real genius of Napster was the way it made collaboration automatic. By default, a consumer of files was also a producer of files for the network. Once somebody downloaded a file, her machine was available to pass along the file to other users when needed. A central addressing authority connected the nodes of the network and then after that left everything else to take place by itself.
The totally transparent architecture produced value as a by-product of people getting what they wanted. No altruistic sharing motives were needed
Napster was a very decentralized system with some important centralized elements. In a decentralized system every host in the system is an equal participant. No hosts have facilitating or administrative roles. But Napster was also a search engine. It maintained a master song list adding and removing songs as individual users came online. This created redundancy and led to a high probability that a given file could be found although the probability of a given user being online is very low. As a result the contribution of one individual is very small but the collaborative interaction of the group creates tremendous value.
In a centralized, hierarchical system, coordination between peers is controlled and mediated by a central server, one host. A modern version of a hierarchical system transfers some coordination responsibility down from the centre to a tree-like architecture of coordinators. In this model, peers are organized into groups, where a local manager/host mediates communication between peers in the same group, but communication between peers in different groups is passed upwards to a higher level manager. This is essentially the way firms operate today.
Ronald Coase developed the concept of transaction costs. These are the costs of coordinating actions and the costs of interacting and contracting. When it is cheaper to do this inside a formal organization than as a network of more or less independent parties, organizations will form and prevail.
The reverse side of the Coasean theory is even more interesting. As transaction costs outside the organization fall as a result of technological and societal advance, the reasons for formal coming together dissolve. This leads to the organization becoming outdated, unless it can simplify its processes significantly. The big challenge for many organizations is to do things in a much, much simpler and more responsive way. The sad truth is that it is easier for managers to grasp the threat of competition than the risk of simply becoming obsolete.
In theory, if transaction costs in society at large become low enough, there will be no hierarchical, formal organizations as we have known them. The transaction costs of forming and maintaining these types of organizations are higher than the transaction costs of the alternative ways of creating the same value. The traditional hierarchical and formal organization is just too complicated, slow, and far too costly as a system. Unfortunately, the mainstream business schools haven’t figured this out yet. They still keep on teaching yesterday’s pricey way of doing things.
Peer-to-peer is an architectural model that is much more interesting, but also much more demanding, than the dominant client-server models. I believe that Napster gave us a glimpse of the future. The architecture it pioneered is going to be a viable model for the agile value constellations of the very near future.
Client-server is not the only truth and Facebook is (just) a modern version of a Telco. Facebook is not the same as the Internet.
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Thank you Larry Lessig, Clay Shirky and Andy Oram
More on the subject: The early history of the Internet. Blog post by Doc Searls. Blog Napsterization.org. On personal data. Personal leverage for personal data by Doc Searls. On user-centric identity. Blog post by Venessa Miemis.
Reinventing capitalism
January 8, 2011
Economist Brian Arthur from the Santa Fe Institute argues that the ever increasing role of knowledge in value creation makes the foundations of economics badly outdated. Likewise, Peter Drucker predicted that “knowledge may come to occupy the place in the politics of the knowledge-based society which property and income occupied over the three centuries that we have come to call the age of capitalism.”
Luckily, an important and growing body of research and writing is exploring the theoretical nature of capital-centric enterprises. Although most of these efforts are still sketchy, they may well lead to normative implications concerning the allocation of claims and control rights in firms. If this happens, the new approaches may be very different from those principal-agent models that are the norm in capital-centric firms today.
In principal-agent models, employees are viewed as agents of the firm, and the managers of firms are viewed as agents of the shareholders. The management challenge is to design the terms of the relationships in a way that will encourage the agents to behave in ways that benefit the principals.
The firm is viewed as a contracting mechanism between providers of financial capital (the principals) and managers (the agents). Principal-agent models are extremely influential in corporate governance and have in reality formed the basis of mainstream compensation structures.
As early as 1964 Gary Becker coined the term “human capital” to refer to the fact that many of the skills and knowledge required to do knowledge work could only be acquired if “some investment was made in time and resources”.
In his seminal work, Becker considered the implications of the fact that some of the knowledge and skills acquired by employees have a much higher value in some relationships than they do in others. The labor services of employees with specialized skills can thus no longer be modelled as undifferentiated, generic inputs, for which wages and quantity, the number of employees, and the number of hours of work, are determined. Once employees are understood to have specialized skills, it matters which employee does what tasks for what firm. With specific human capital, the productivity of a particular individual depends not just on being part of a firm, but on being part of a particular group of people engaged in a particular task.
More importantly, once acquired, knowledge and skills that are specialized are assets that are at risk following the very same logic as that by which financial assets are at risk.
Is human capital then conceptually the same as financial capital and should investors in firm specific human capital also be seen as principals? Should capitalism accordingly create a much larger number of capitalists?
According to the mainstream principal-agent view of the firm, a corporation is understood to be something apart from each of its participants. The nexus of investments view suggested here offers a view of corporations that stresses willing participation by both financial investors and human capital investors, and the ability of both parties to protect their interests. A firm is essentially about creating long-term contracts when short-term contracts are too bothersome. Reinventing capitalism is about renegotiating many of the things that we have too long taken for granted.
I believe that everybody will benefit, if, in the future, a larger number of workers think like owners and act like investors.
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Thank you Brian Arthur, Steve Denning, John Hagel, Umair Haque, Gary Becker, Margaret Blair, Ronald Coase, Oliver Williamson, Harold Demsetz, Oliver Hart and Jeff Gates
Background reading. Robert H. Frank in the Boston Globe.
Online is not a separate place
August 31, 2010
With the emergence of writing, physical presence was no longer necessary for sharing information. In other words, a person’s being there was not necessary for their influence to be felt. As typing replaced handwriting or when movable type replaced the hand copying of words, it became even easier to communicate with words that replicated ideas and simulated human interaction without face-to-face contact.
Cultures without writing used human contact as a means for interpreting shared reality. Information within these cultures was community-based and people tended to construct their identities in relation to the community. People were dependent on contact with others for information. Print cultures in contrast encouraged more individuality and less connectivity with the community. Literacy led to people looking for information through the relatively isolated practice of reading rather than through face-to-face interaction.
When encountering anything for which we don’t already have a term, we turn to metaphor in order to make a comparison between the new phenomenon and a familiar thing. For example we display applications on our desktops, we place documents in folders, and we check our mailboxes for messages or we speak about virtual communities when we refer to groups of people communicating online.
Online communication has challenged our ideas of what a community can be. Social media allow people to relate to groups of people who live beyond the borders of location and time in the very same way that print once allowed information to be free from the constraints of location. Social media thus redefine what local interaction is and remove the constraints we earlier had on community building. The view of online as a separate space, a “virtual” space or “cyberspace” is an unfortunate example of a misleading metaphor that makes it hard to understand what is going on today. Our social media tools are no more alternatives to real life than books; they are very much part of it – making life more meaningful. People who are concerned about the increasing use of online communication and digital media often express their worries about the decay of face-to-face contact, but in effect social media are reducing the transaction costs of group activities and are increasingly the new coordination tools for real-world action. It is all about a richer life!
Communities are about belonging. The public access that the Internet now allows people to have is mistakenly believed to mean trying to get the broadest possible audience. But in effect people are trying to reach people like themselves, like-minded people, in order to belong to a community. There has been a tremendous increase in the amount of material that is available to the public, not really intended for the public, but instead for the emerging communities.
Many of our behaviours are held in place not by rational decisions or desires but by present or bygone constraints. Our cultures are shaped as much by these constraints as they are by capabilities and aspirations. Changes often take place very fast when the constraints are removed. The challenge is that misleading metaphors are often the biggest obstacles to moving forward after the technological constraints are gone.
Change occurs not so much as a result of new information leading to individual learning but when the patterns of connectedness between individuals change. Learning as a result of the print revolution was seen as an individual process. Learning as a result of the social media revolution is an active process of communication between people. Knowledge was earlier seen as being stored in content. Today knowledge is understood to be perpetually constructed in communication. Books could be transmitted from one person to another. Today knowledge is the process of relating. The technological constraints are gone; now is the time to get rid of the wrong, constraining metaphors.
We are living a communication revolution that equals the changes brought about by print.
Thank you Andrew Wood, Euan Semple, Matthew Smith, Clay Shirky and Ralph Stacey
Background
Reading revolutions Thomas vander Wal’s blog
The real Enterprise 2.0
April 30, 2010
Lenin famously said that the economic system in Russia would be run as one big factory. Many economists at the time said that this was impossible. Yet there were already big factories in the West then, and there still are, so why not? Is there a limit to the size of a factory that cannot be surpassed, or is it because the factory logic cannot be used outside of a real factory?
The typical hierarchical form of an organization is meant to simplify communication, accountability and the coordination of tasks. In theory an employee needs only one connection, to the boss. This is far easier than communicating with all and trying to coordinate actions with everyone. And what about accountability? The worker is accountable only to her manager. That manager reports to her manager on the next higher rank, and the chain goes further, leading in the end to – Lenin.
During the centuries since the publication of “The Wealth of Nations” by Adam Smith, in 1776, the principal theme of most economists has been that government regulation or centralized planning were not necessary in order to make an economic system function well. The coordination would be the result of markets. Lenin and the communists were advised to move to a market economy. The parties in that system follow their own self-interest and are governed, when it comes to the actual choices they make, by a system of prices. This is the polar opposite of centralized planning. Adam Smith was a proponent of extreme decentralization.
A 21-year-old comes out with a revolutionary new theory
Ronald Coase was one of the first economists who started to question mainstream thinking in economics. If a system of prices and competition would do all the coordination necessary, why did we have centralized planning, not only in the now bygone communist countries, but also in well functioning and successful firms? Why did we need management, whose function was to coordinate?
Ronald Coase set out to bring the different views together. It is almost impossible now to fathom that he found the answer as early as during the summer of 1932, at the age of 21. He realized that there were costs involved in using the pricing mechanism. The needs and offerings have to find one another. The prices have to be discovered. Negotiations need to be undertaken. Contracts have to be made. There may be disputes that later have to be settled. These costs were not part of “the invisible hand” equation of Adam Smith. Ronald Coase called these costs transaction costs.
The first revolutionary argument was that a firm would emerge, exist and continue to exist successfully only if it performed its planning, coordination and management functions at a lower cost than would be incurred by means of market transactions, and also at a lower cost than would apply if the same things could be performed by another firm.
The second revolutionary argument was that a well-functioning economic system needs both markets and planning. This depends on the size of the organization and the level of the market side transaction costs. Increasing the size increases (internal) transaction costs. Running an organization is difficult and running a bigger organization is more difficult.
Management is an overhead
Managerial overhead increases as the organization grows. Management, communication and coordination are all transaction costs. Every sales call, every offer, every agreement and every meeting also consumes limited resources and increases transaction costs.
As the corporation grows, all its energy finally goes into maintaining the corporation and does not benefit external stakeholders.
Whenever transaction costs inside the organization reach the level of the transaction costs in the markets, markets outperform firms and outperform central planning/coordination in general. This was the main theoretical argument against Lenin. The same thing is clearly still evident today in companies like GM, or organizations like large health care units.
Communist countries learned their lesson, but we still haven’t.
An organization can only be successful when the costs of hierarchical coordination are lower than the gains achieved from that coordination.
The existence of high transaction costs outside of firms leads to the emergence of the firm as we know it, and management as we know it. A large part of corporate economic activity is designed to accomplish what high market transaction costs prevented earlier.
The Internet is an extinction-level event for the traditional firm
If the (transaction)costs of exchanging value in the society at large go down drastically, the form and logic of economic and organizational entities also change! Accordingly, a very different kind of management is needed.
Today, with social media, we stand on the threshold of an economy where the fundamental processes of communication and coordination are being transformed. Familiar economic entities are becoming increasingly irrelevant as the Internet, not the traditional organization, becomes the most efficient means to communicate, coordinate and exchange value.
For most of the developed world, hierarchies, as much as markets, make up the dominant economic pattern. The Internet is nothing less than an extinction-level event for the traditional firm. The Internet makes it possible to create new forms of value creation and new forms of value exchange.
It changes our views of markets and hierarchies in ways that Adam Smith or Lenin could never have imagined.
Thank you @cshirky
