How social media and digital working environments are really changing management, collaboration, and organizations?
This is the question that is most interesting to me and I believe, very transformational in the long-term on how we relate to each other and how things get done.
Last year I was happy to work on this question for a Finnish telecom operator, Elisa together with their VP of Corporate Customers, Pasi Mäenpää. As we know, the traditional operator business of selling subscriptions and connectivity is commoditizing and many plans are going flat rate. The value has moved upwards to the actual applications of communication technologies in the enterprise. Understanding corporate customers and their true business requirements and opportunities is increasingly important. This leads us to ask the question, how is the business environment and practices of organizations truly changing?
To grasp this question, together with my team we produced a video and a presentation on the future of organizations and management:
On Youtube: Cloud Company – Change Happens (2010)
The related slides “A New Era of Leadership – From Hierarchy to Network” are here.
This work eventually led to the term “Cloud Company”, now the title of a book we are writing.
Here are some of the key takeaways from the work in collaboration with Pasi Mäenpää and Esko Kilpi:
Management = Communication x Coordination x Responsibility = Collaboration
Management traditionally can be defined as effective communication, efficient coordination, and someone taking responsibility of the actions. Manager communicates to subordinates, coordinates resources, supervises operations, and takes (and gives) responsibility. This is mirroring the typical hierarchical thinking of organizations.
What happens today in digitally distributed collaborative networks is that communication becomes the means between people, coordination is the distributed peer-production activities among the people, and responsibility is something that people will take in their own hands because of transparency of activities and open information. Thus the idea is that in organizations today all effective communication, coordination, and taking of responsibility needs to be digitally distributed in order to remain viable.
There are two ideas on how effective organizations work. One that is based on complete centralization and the other based on complete decentralization. Most organizations are more or less different variations of the two.
Centralizated Organizations
A completely centralized organization is centrally planned and hierarchical in nature. The idea is that efficiency requires conscious coordination of resources and division of labor. Communication relationships and channels are pre-defined and planned – who reports to whom and what paper goes where. This is the world dominated by bureaucracies, hierarchies, command & control, and people as cogs in a machine.
Lenin tried to run Soviet Union like a big factory, as a centrally planned economy (or command economy). It was the most Fordist and Taylorist system ever envisioned. Everything would be centrally coordinated. The problem of such big hierarchies is that internal coordination costs increase as the size of the organization increases.
Over time it gets increasingly hard to predict the future and efficiently adapt to changing conditions. If internal coordination costs are higher than the value created and generated, the whole system collapses to its own absurdity. This economic calculation problem led to major problems in Soviet Union. Economic planners were not able to detect consumer preferences, shortages, and surpluses with sufficient accuracy. Resources were wasted and misallocated, eventually leading to the collapse of the whole house of cards.
Just like Soviet Union, most companies today are miniature centrally planned economies facing the same problems of internal coordination problems as the size of the hierarchy increases.
Decentralized Organizations
The father of modern economics, Adam Smith wrote in 1776 a revolutionary book, The Wealth of Nations. During the time his work was concentrated on supporting the political agenda of Great Britain to dissipate mercantilism, the economic reality that dominated Western European economic policies at the time. Mercantilism was based on a protectionist ideology of controlling import and export of goods for the nation’s good.
Adam Smith’s idea was that free market economy based on self-regulation would be more effective from the resource allocation point of view. Rational self-interest of individuals and companies in the short term would lead to common good in the long term. Competition and supply & demand in the context of rational self-interest would create economic balance.
The question then becomes, when does economic activity take place on decentralized markets and when do centralized organizations form as a necessity?
Lowering Transaction Costs
In 1991 economist Ronald Coase received the Nobel’s price on his theory of transaction costs. For a reference, take a look at The Nature of The Firm (1937). . When transaction costs increase, centralized organizations form to take care of the necessary side activities to achieve the goal. As transaction costs drop, certain economic activities are increasingly done on the open markets.
As an example, in the newspaper industry a photographer needs to take the pictures, journalist needs to write the story, an editor lays out the text, the printing press produces the publication and then someone takes care of the logistics of delivery. In the context of these activities there are other costs such as legal, marketing and administrative costs. All of these activities include high transaction costs that make it increasingly difficult to deliver such a product reliably without centralized coordination and organization.
As we know, Internet has enabled new forms of organization such as the Wikipedia or Huffington Post to emerge in the publication industry. Internet has radically reduced transaction costs involved in producing resources like an encyclopedia or a newspaper. According to Harward Law School Professor Yochai Benkler, digitally distributed collaborative environments have enabled a new form of organization to emerge between the traditional nation state and the private company, based on the logic of commons-based peer-production. In the open markets, people and organizations improve the common resources, eventually gaining more than their individual contribution is worth.
As companies thrive for higher value creation and move up in the economic food chain, it is impossible to do so today without lowering the transaction costs involved in producing these goods and services. Therefore all effective organizations today will utilize digitally distributed collaboration and management environments and practices.
The Emergence of the Cloud Company
The next stage in running successful organizations is to understand that effective organizations today are operating closer to the logic of the open free markets. This means that companies thriving for higher value will decentralize many core layers that were traditionally centralized, including infrastructure, information storage and processing, collaboration, services, sales, and customer service.
This stage will be driven by cloud computing, crowdsourcing, digital mass-customization (such as the iTunes App Store where each person actually creates the end product through individual customization), commons-based peer-production, and other emerging decentralized models for carrying out work in the digital business ecosystem: therefore the name Cloud Company.
Now if you look at the chart we have in our e-book, it will make more sense after reading all of that:
A Cloud Company (or real Enterprise 2.0) will be much more effective than its more or less centralized competitors, because it’s capable of distributing certain organizational activities on the market, operate in a much more customer-oriented and centered way, changes dynamically the costs of running the business, is capable of lowering transaction and internal coordination costs and utilizes latest social media and collaboration environments for digitally distributed communication, coordination and wide taking of responsibility.
My colleague Esko Kilpi writes:
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.
That’s the future of organizations in the digital age.
Article appeared originally on Teemu Arina’s blog.
Thanks to: Esko Kilpi, Pasi Mäenpää
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