Posts Tagged ‘esko kilpi’

Cloud Company – a New Form of Organization

Friday, June 25th, 2010

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.

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.

Cloud is the metaphor for the internet and Cloud Computing is the metaphor for a technological paradigm shift in the way how we utilize software and information. Google and Amazon particularly have been busy building the cloud. Practically it is an idea based on Technological Determinism, that technology would drive the development of society’s culture and social behavior.

An opposite view would see culture as a dominating force in technological development. Neither is accurate, as technology and culture are rather intertwining. Media theorist Marshall McLuhan famously said that “We shape our tools. And then our tools shape us.” What the cloud is shaping is our forms of organization, intertwingled by technology and culture. The internet will dramatically lower the transaction costs of doing business. As companies decentralize various layers including infrastructure, R&D, marketing and sales, they eventually empower a new form of organization to emerge: the Cloud Company.

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 have the ability to take 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, what paper goes from here to there. This is the world dominated by bureaucracies, hierarchies, command & control and people as cogs in the 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 impossible 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, because of lowered transaction costs.

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.

Here is how one company might look like, where certain organizational functions have been supported with internet-enabled decentralized models and technologies:

Cloud Company.029 Cloud Company – a New Form of Organization

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.

Thanks to: Esko Kilpi, Pasi Mäenpää

Interactive Value Creation, Apples and Nokias

Wednesday, December 9th, 2009

Recently I’ve been talking with my colleague Esko Kilpi about interactive value creation and its relation to social media. In Esko Kilpi’s new blog he writes (I suggest you to follow his space, even though part of the articles are in Finnish, there will be highly relevant stuff in English too):

As the demands for higher value and creativity are the norm today and the complexity of offerings has grown, we have begun to see that division of labour has reached its points of diminishing returns.”

I agree. The industrial production logic has reached its limits in the increasingly networked society. He continues to elaborate that higher value creation is impossible without interaction. There is a move from action dominated by division of labor to interaction driven by increasing complexity. The result is higher value activity.

My example that follows is very personal regarding the Finnish psyche: why Apple is doing better in interactive value creation compared to Nokia?

Closed Design Process

Apple is very well known for its secrecy in creating new product. Nokia is well known for embracing openness through open source and open platforms. So from interaction point of view, Nokia should be doing better. Or is it?

In innovation, if you believe you know better than anyone in the world  how to complete a certain task, there are good reasons to operate in a closed manner. If you know for sure that in-house resources, ideas and capabilities are limited in achieving a certain goal, you should open the process up for outside contributions.

Apple has a focused design process and knows how to do it. It has a vigorous design process outlined here, including some basic principles grounded in perfectionism:

Pixel Perfect Mockups [...] removes all ambiguity.
10 to 3 to 1
: [...] start with seven in order to make three look good.

Nokia is known to be an engineer driven land, where production efficiency often has the ability to dominate final design decisions. They might have better technical devices, but not the most original and detailed approaches to UI design. What matters is the ability to produce a truck-load of devices with minimum costs.

Apple constantly designs new products ending up as trendsetters. Their activities doing so seems almost effortless. In the background, there is obviously the unquestionable belief in their own design ability.

Open Value Creation

Let’s take the iPhone. It’s beautifully designed. What Apple doesn’t know, is how people would use the device. Every usage pattern is contextual in nature.

What you have on an iPhone is a minimum set of features that would be needed for an internet-connected phone and multimedia device. The end-user is the final missing piece in completing the product. Apple created the Appstore, so that people could come up with new ways for using the device. If you are a sailor, you might need some maps for sailing. If you love restaurants, you might have a restaurant guide. If you are a Star Wars fan, maybe you have lightsaber in your pocket. The clue is that Apple doesn’t have the resources nor the crystal ball to say how the device would be used.

Open interactive value creation is about designing the bare minimum and let people build on top of the platform and have the ability to try (almost) everything. Apple has invested in communicating their design principles regarding the iPhone. Take a look at any of the engineering documents and you see the difference. That’s why so many applications look so great: everyone is working on an app as if it would be eventually approved by Steve Jobs himself.

Ambiguity of Designing for Demographics

Nokia has a very different strategy. It runs focus group studies, figures out various demographics and designs phones for the imaginary average middle of the gaussian shape. At least that’s how it looks like. You end up with products like the Nokia 5300 XpressMusic and a myriad of other differently branded products obviously targeting different demographics.

As a result your phone will be full of pre-loaded apps, music and other details that a typical average user in the target demographic might use (let’s bet in this case we are talking about a 25-35 year old hip cool group that has  a life). The end result? You use 5-10% of the features, because nothing is really exactly right in context.

This is why designing for demographics creates unnecessary clutter and ambiguity in product design. Apple seems to know this by making the phone as simple as possible: one device, you customize the rest for yourself: apps, music and physical appearance.

The byproduct of the way how Apple designs their core offering and how people build on top of it is meaningful conversation. Creative work, that people do in interaction. Pushing boundaries.

What really matters is context. The context of use. The conversation that happens around a particular context. The way how the company listens and links this conversation back to its R&D. Designing a product too far and insisting on saying what it is doesn’t result in interactive value creation.

As far as engineering goes, Nokia is very open on the technical level but lacks the ability to be open on the design level.

Nokia is very open in the beginning, but behaves more closed as they make final decisions on how the device would be used.

Apple is very closed in the beginning, but becomes more open towards the long tail of usage.