Posts Tagged ‘management’

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

Real-time web and management cybernetics

Sunday, October 4th, 2009

On 1st of October I gave a presentation at MindTrek entitled “Collaborative Edge: Real-time Social Technologies in the Enterprise” at the “Social Media: Now What?!” track and later on 7th of October I spoke briefly about it also at the 5th World Conference on Mass-Customization.

My presentation is built around the ideas of Stafford Beer, who was the founding father of management cybernetics. His ideas are now more timely than ever, because of the advent of the real-time web. Stafford along with his team built the first real-time computer controlled planned economy at the government of Chile in the beginning of 1970′s. I’m very interested in this because I was part of a team that created Real-Time Economy Community.

Stafford Beer’s project was called Cybersyn. It aimed to create an electronic nervous system for the Chilean economy. As progressive as they were, they included machine learning with a Bayesian filtering (cool in email spam prevention in the early 2000) and social features by letting every citizen and factory worker to influence the decision making. He also included some social innovations too, like having a diverse cross-disciplinary team (rather than a group of generalists) working in a futuristic Opsroom: the ultimate combination of man and the machine.

250px Cybersyn control room Real time web and management cybernetics

Cybersyn Opsroom inspired by Tulip Chair design by Eero Saarinen from Finland.

Recently I’ve been thinking about how to implement the real-time web in the enterprise. If there is one guy who really knows how to do it, he is definitely Stafford Beer with his Viable System Model (VSM). The aim of such a system was to remain viable to its users by involving the ability to adapt to changing conditions. This requires real-time data to be generated, reflected and interpreted by every employee (and customer) to lesser or greater extent.

This is very close to what I’ve said in the past that learning is not a separate process to be managed in organizations through training, but rather an inseparable part of all such activity that seeks to avoid stagnation and remain useful over time.

His ideas were more bottom-up than top-down: due to limitations of single or small groups of individuals to comprehend everything what is going on (=top management), one needs communication and conversation with employees, partners and customers – The very ideas that concepts like crowdsourcing or open innovation aim to address.

Stafford’s contribution was also to emphasize the importance of increasing the amount of variety in highly fluctuating systems, where you cannot predict the possible states of the system beforehand. This is exactly what companies like Apple do: by not knowing what applications to run on the phone, keep the number of features (apps) to the minimum and let users innovate and personalize through an App Store. In comparison, Nokia thinks they know their users and load the phones with apps that in general are underused by typical users. The same logic goes with most user-friendly web services (e.g. anything that comes from 37Signals): if you do not know what features your users need, release a limited version, open up the APIs and listen to your customers.

This is exactly how you achieve collaborative edge to provide best services to your customers: in case of doubt, tear down the firewalls and listen. Turn your organization into a complex adaptive system.

On September 11, 1973 (notice the date), Stafford’s dreams came to an end as Salvador Allende’s government was overthrown in a military coup with the support of the United States government. Along with Allende, the project went into grave. How unfortunate, how typical.

My question is, why haven’t we done it yet?

See my presentation here:

Browse the slides:

See also Stafford Beer’s lecture about Cybersyn (vintage, 1974). Memorable quote about the opsroom chairs:

No paper – there is an ashtray. There is room for a drink and there is a place for a creative session.