Posts Tagged ‘ronald coase’

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

Social Media in Education, Disorganizations and the Lifecycle of Emergence

Tuesday, April 27th, 2010

5 years ago a small group including me and Teemu Leinonen formed the Finnish Association of Free, Libre and Open Source Software in Education (FLOSSE). Although we did some great things the effort didn’t last because the people involved were not that interested in running a traditional association. As in Robert Putnam’s book Bowling Alone: America’s Declining Social Capital, internet enables individualization of leisure time via the Internet and as a result, participation in traditional formal associations is in a decline.

As Clay Shirky outlines in his book Here Comes Everybody: The Power of Organizing Without Organizations, as the transaction costs (in reference to British guru on economics Ronald Coase) for cooperative work drops as a consequence of internet enabled mass collaboration, things tend to happen in a decentralized way without the need for centralized formal organizations. There are many examples of such forces at play, e.g. Wikitravel or OhMyNews.

In Finland we have witnessed the emergence of a decentralized virtual organization called Sometu (sosiaalinen media oppimisen tukena – social media in support of learning). This (dis)organization consists of over 3000 teachers, researchers and other people interested in social media in education. Sometu was formed in the end of 2007 and has grown rapidly since. Their main tool is Ning, but they use a wide variety of other social media tools to carry out educational experiments.

Now that Ning is going more commercial and social media conversation is becoming more overheated and tiring on the educational sector, people like Teemu Leinonen (at ITK-conference) and Tarmo Toikkanen have started to question the aim of Sometu and its mission. Sometu has started to live a life of its own as an echo chamber for educational social media fanatics with their own little experiments with a questionable degree of impact. With a more clear purpose such a (dis)organization could become much stronger and meaningful force in transforming the educational sector. Will it be capable for this?

With great interest I read Dave Pollard’s post on the Lifecycle of Emergence. He talks how intrigued he is of “flow” models depicting the dynamics and cyclic nature of complex systems. He talks about the details of his discovery of Meg Wheatley and Debbie Frieze’s (Berkana Institute) model of Lifecycles of Emergence and explains the model with the following picture:

lifecycleofemergence1 Social Media in Education, Disorganizations and the Lifecycle of Emergence

The Lifecycle of Emergence. Illustration: Dave Pollard, original by Chris Corrigan

When I saw this picture Sometu network immediately came to my mind. As I see it, it was set up by pioneers who named the network. Then it started rapidly evolving as a network as other enthusiasts joined, eventually emerging as a community of practice for using social media in educational practice. A lot of attention and success stories were built, illuminating the (dis)organization’s activities. As more newcomers joined and as the activity and transparency of the group’s activities grew, it became a major system of influence for educational transformation – until someone said that the emperor wears no clothes.

As with anything, technology is like a chair without two legs if the cultural transformation underlying it is missing or unclear for the user. If things get technologically driven – as Sometu seems to be too much so for some people – the question then becomes what is the cultural innovation behind the scenes. This could be concentrated as a mantra, mission or vision for such an organization, but such statements may become empty in meaning.

Influencing real change in education is exceptionally hard. Networks like Sometu need to carefully examine the real competencies they have and focus on those to avoid decline and jump to a new cycle of opportunities. This will be hard, especially if even the originating founders don’t know themselves what would be the forces that will keep their vague network together in the future – simple interest in tools for education is not enough.

Just as Bruce Sterling said to mobile developers at the Mobile Monday Amsterdam:

“I want you to think real hard about the values you are going to save and stop worrying about the plastic”.