Out of Control By Design

Embracing Radical Transparency and Workplace Democracy to Build the Virtual Networked Business Modules of the Future

Author’s note: Below is my 2007 “thesis” at Columbia Business School. I present it to you here without alteration, but reserve the right to someday go back and delete the parts that have turned out to sound foolish in hindsight.

Your customers are in control. The Web has taught them they can get whatever they want, exactly the way they want it, when they want it. And they want it NOW. Tomorrow is too late.

Customers “pulling” the specific products they want represents a radical departure from economic models of the past. Since the dawn of the industrial revolution, corporations have been in the business of producing huge quantities of product X and then “pushing” that product to customers through expensive sales and marketing efforts. Everything about today’s organizational structures was designed to serve this model.

Economies of scale were king in the push economy: Huge factories pumped out standardized products as cheaply as possible; broad retail distribution networks put products in front of consumers wherever they shopped; marketing departments created print, television and radio advertisements to interrupt customers with their messaging; sales people knocked on doors and made phone calls to do the same; and MBAs were hired to optimize the entire process.

These organizational structures have not always been with us, however. Rather, they emerged in response to economic paradigm shifts of the past. Thomas McCraw, author of Creating Modern Capitalism, has identified three distinct industrial revolutions. The first arrived with the advent of steam and water power in the 17th and 18th centuries. Business ceased being a family affair as companies organized machines under the roofs of ever-larger factories, filled with hundreds or thousands of employees.

The second industrial revolution came about with the rise of electric utilities in the early 20th century. No longer requiring their own generators, factories could situate themselves closer to customers and labor supplies. Organizations adapted to the economics of cheap, plentiful power by organizing themselves around the assembly line, resulting in dramatic productivity gains.

The third industrial revolution came about with the rise of mass communications and containerization in the aftermath of World War II. By spending huge amounts on television, radio and print advertisements, companies found they could create demand for the standardized products they churned out en masse. Successful firms began to organize around brands and global distribution networks. Those who were too slow to embrace the trends of branding and globalization quickly became inconsequential.

To execute global strategies behind standardized brands, companies needed new mechanisms of control. Much like the human body, businesses have traditionally organized around a central nervous system (the c-suite) that disseminates market intelligence and commands down to the corporation’s muscles (line employees). Decisions are made at the top and executed at the bottom.

In Growing Pains, Eric Flamholtz and Yvonne Randle, identify three pure forms of organizational structure that have thrived in the push economy: (1) the functional structure, (2) the divisional structure, and (3) the matrix structure (Flamholtz, 190). Each of these structures greatly enhances top management’s ability to control an organization.

Indeed, the central theme of Flamholtz and Randle’s work on organizational structures is the need for managers to wield control. In this classical view, rational analysis by highly trained managers is the best way to allocate a firm’s resources. Meanwhile, their arguments against more market-centric approaches like those found in the matrix organization center on the difficulty of coordination. Yet the rise of the empowered consumer demands that we push control all the way to the bottom—indeed, even outside the organization into the hands of customers, suppliers and other stakeholders. To do this, we need structures that provide for increased collaboration even at the expense of managerial control.

Throughout the three industrial revolutions, successful businesses of one era rarely made the transition to the next. More often the old companies gradually (or rapidly) faded into irrelevance as new businesses built upon new organizational structures rose to the forefront.

The rise of empowered consumers demanding exactly what they want, when they want it, represents a paradigm shift on the same order of magnitude as McCraw’s three revolutions of the past. According to Seth Godin, “just ten years after the birth of the Web, New Marketing [i.e. the pull economy] has so fundamentally changed the dynamics of production and growth that the rules of the third revolution are no longer dominant” (Godin, 44). The traditional model of centralized control cannot adapt fast enough to meet the unique demands of so many individual customers.

Revolutionary new organizational structures—indeed, entirely new conceptions of the firm—are demanded. What might these new structures look like? One inspiring example can be found in a the structure developed at SEMCO, a Brazilian manufacturing and services firm headed by Ricardo Semler.

Semler asserts that traditional businesses are built on “formats that are basically legacies of military hierarchies.” Even the language we employ—words like strategy, mission, and corporate battles—are borrowed from this military tradition. In Semler’s view, these structures neglect or deny the power of human intuition and democratic participation.

“We all find democracy to be a fundamental issue in our lives,” he says. “We will send our sons anywhere in the world to die for it. We will not participate in a society where we can’t choose our own [leaders]…but, I’ve never seen a democratic workplace. So it’s very important for our lives, except where we spend 60% of our time.”

For the past 25 years, Semler and his firm have embarked on a bold experiment in self-organization that eliminates hierarchies, organization charts, job titles, required meetings, corporate headquarters and many other trappings of traditional corporations. Employees select their own leaders—not in a required voting system, but through open discussions at voluntary meetings. They also choose their bosses and set their own salaries. In effect, he says to his workers:

“Don’t cross town and get out of bed to come [to our offices]. We don’t want to know how many hours you work. Let’s contract for something you can do, and you do it anytime you can, anyhow you can. But it is a free market system, and it’s unforgiving in some respects. Every six months, you’ve got to latch on to somebody’s payroll. Everybody in the business unit together will write down the names of the people they think they need, and if you’re on that list for enough people you have a job.”

In addition to its employees on payroll, SEMCO also has more than 1,400 people in its business units who do not work for the firm, including 19 who work for their direct competitor. By putting the creative forces of self-organization and natural selection to work within the company, the firm has unleashed productivity gains that would be the envy of any business.

The net result has been 27% annual growth for the past 25 years during a period in which Brazil went through various cycles of inflation and hyperinflation, economic boom and bust. Semler recently told an audience at MIT Sloan, “The military legacy and…the analytical approach to management in a pyramidal structure is finished. That is anachronistic and if it’s going to take 10, 15, or 40 years to go away, it doesn’t matter, but it will be during your lifetime.”

Semler’s remarkable achievement is his willingness to abandon his need for control. By setting his people free to collaborate with whomever they feel is useful to their specific task, whether inside or outside the firm, he has tapped into a wealth of human intuition and creativity unavailable to traditional firms.

Although SEMCO’s democratic workplace remains the exception, examples abound of companies that are experiencing explosive growth as a result of giving up control over their products and processes.

Take Threadless.com, an online retailer of t-shirts. In the traditional push model, a t-shirt company—even one operating online—would hire a talented artist to design great shirts and then spend extensively to generate demand for these products. Instead, Threadless has created a platform for aspiring designers to submit their designs, and put these to a vote by customers. If your design wins, you get paid $1,500 and your t-shirt is produced. The company has quadrupled sales every year since 2001, reaching more than $20 million in 2007 (Godin, 61). They did this by embracing customer control and building an organization that empowers them even further.

A more well-known example of giving up control comes from the Google search algorithm. In the early days of the web, the primary way to find content was through manually edited directories run by firms like Yahoo. Then two Stanford engineers realized that by downloading the entire web onto their servers, and then analyzing all the links between the various web sites, they could actually turn every webmaster into a voter in a popularity contest. If a website received a lot of links from other websites, Google considers it important and ranks it highly.

In fact, Google has taken user participation in its search algorithm at least one step further, by incorporating the behavior of searchers themselves into the results. For example, if a large enough proportion of searchers for a particular term choose the 2nd result instead of the 1st, Google readjusts its rankings to reflect user preferences.

Like traditional media companies, Google earns its revenues by delivering advertisements. However, Google is very different in that each advertisement is tailored to the precise search term a customer types into its engine. In a sense, customers are “pulling” advertisements relevant to their needs in a particular moment.

Just as interesting, Google has taken steps to embrace worker self-organization through its human resources policies. Every employee is permitted to spend 20% of their time on any project they want, even in a completely different field or, in some cases, outside the firm altogether. At the same time, the company has created powerful tools for workers to share ideas about new projects and get feedback from their peers. The ideas that get the most votes attract resources, at first in the form of people’s voluntary 20% time. If a project shows significant potential, management may decide to formalize the project with greater financial and engineering resources.

The company’s leadership openly acknowledges that they don’t know what direction the firm is heading. Instead, they just give their people the tools to develop great products and then get out of the way.

As soon as you give up your need for managerial control, outsourcing work to your customers makes an incredible amount of economic sense. Indeed, many traditional businesses are employing their customers without even knowing it. Kevin Kelly, founder of Wired magazine, points out that every time you track a package on FedEx.com, you are actually doing work that used to be done by FedEx employees (Gibson, 256).

Meanwhile, Amazon’s customers generate thousands of product reviews every single day, each of which enhances the shopping experience of other customers—-people they don’t even know. The result is increased customer loyalty and soaring revenues. And they are doing it for free because Amazon empowered them do so.

These new organizational forms need not be constrained to for-profit enterprises. For example, the open source Linux and Apache operating systems now power the majority of web servers, the computers that send web pages to your browser every time you visit a web site. These programs were developed by ad hoc communities of software developers working for free because they found meaning in the work.

Wikipedia has similarly created the world’s largest encyclopedia on the backs of user contributions. By giving up editorial control, Jimmy Wales and his team harnessed the knowledge of millions of readers, who collectively know far more than any team of experts.

Kiva.org has raised millions for microfinance organizations by enabling donors in rich countries to provide micro-loans to entrepreneurs in the developing world. They did this without a marketing department, offices in the countries they serve, or direct contact with their donors. Rather, they let entrepreneurs tell their own stories, which are more authentic and inspiring than anything a corporate marketing department could put out.

In each case we see a blurring of the lines between organizations and their customers, suppliers, and competitors. As these boundaries become less clear, a new conception of the firm is needed, one that can account for the dynamic, interconnected nature of the business world.

To prepare for the complex world we face, we must replace the militaristic perspective, where a company has firmly established boundaries and engages in open-field battle with competitors, must be replaced with a biological systems perspective, with the firm as biological organism, exchanging resources through permeable membranes in a networked ecosystem. The firm as biological system is not a metaphor; Composed of human beings, businesses are biological systems in the literal sense.

As with any living system, companies are open systems that do more than simply take inputs from their environments and turn them into outputs. Much like biological organisms, as they process inputs and generate outputs, businesses are simultaneously creating their environments. In the natural world, it is meaningless to refer to competition between two organisms without taking into account the environment in which they exist. The winner will depend as much upon its inherited characteristics as upon the external factors provided by the environment. Those external factors, in turn, are co-created by all the various organisms within the network. What you have, then, is a competition between networks, rather than between organisms. And to understand biological competition, we must turn to evolutionary frameworks.

Evolutionary competition is characterized by mutation and natural selection, where random mutation results in lots of lightweight, low-risk experiments, and nature selects the most fit to be reproduced. Successful organizations will be those that can rapidly assemble team members and resources as project work demands, adapt that work in to create ever more value for customers. They will be flexible enough to quickly scale up to take advantage of opportunities or overcome challenges, and adaptable enough to scale down before cost pressure eliminates profitability.

As with successful genes in the natural world, successful business modules will be copied and spread widely, tested in new market environments and gradually adapted to local conditions. Unsuccessful modules will die out, though perhaps stored in somebody’s mind (or computer database) for use in another place and time.

In this biological model of the organization, there is no need to worry about whether a resource lies inside or outside the formal boundaries of your firm. What matters is whether they lie within your network where they can be brought together on short-notice when they are required.

Biological systems at all levels of complexity—from single-celled organisms to entire ecosystems—take on a life of their own with properties distinct from their constituent parts. These emergent properties arise as the result of the many local interactions of the system’s components. In this light, corporate culture itself can be seen as an emergent property resulting from the countless interactions taking place between the members of an organization and its outside world.

While useful for developing a theoretical view of the firm, the biological systems view also generates actionable insights into creating high-performance cultures. To that effect, Robin Good and Ken Thompson have undertaken a systematic study of biological “teams” such as ant colonies and immune systems. These living systems manage to achieve incredible levels of coordination and productivity without advanced intelligence or centralized control. In the “Bioteaming Manifesto,” they present a list of these characteristics, along with recommendations for how they can be applied to virtual networked business teams.

Most executives will acknowledge that technology often fails to provide promised productivity gains. Instead of the oft-heralded benefits of always-on connectivity, technology often becomes a time waster. Good and Thompson place blame a lack of norms, behaviors and beliefs properly adapted to the nature of virtual teams. They have therefore outlined twelve rules and seven beliefs that “bioteams”—biologically inspired virtual business teams—can adopt to achieve unheard of levels of coordination and productivity.

Unlike the rules of a traditional business environment, however, these cannot be driven from the top-down. Rather, they must emerge naturally from the bottom up collaboration of team members. Managers are no longer in control. Instead leaders—that means us!—will naturally emerge from within a team because of their ability to exert influence on team behaviors. We can do this in many ways, but the most likely candidate is, as always, leading by example.

Indeed, the first attribute itself is to “stop controlling.” Good and Thompson argue that team members should communicate “situational information to team members who are trained to judge themselves what they should do in the best interests of the team.” No more command and control. Communicate what needs to be done and let them decide how.

The next attribute of high performance virtual teams is that all members take responsibility for identifying threats and opportunities. Team intelligence will be distributed, not driven from above. They argue that successful virtual teams must eliminate the “layers of permission” used by traditional teams to protect themselves from team member mistakes. “The only permission structures kept in place by a bioteam are those needed to protect the team against the potentially critical mistakes which would threaten the bioteam’s own mission.” In a virtual networked team, transparency and reputation are the basis for accountability.

Next the authors exhort us to “treat external partners as fully trusted team members.”

Partners should be chosen very carefully, but once admitted to a team, they should be granted full transparency and trust. Here they draw the analogy between the porous membrane of an organism, which accepts energy and useful inputs but keeps out poisonous toxins.

In a traditional team, the number of team members is decided in advance, and the group quickly scales up to achieve this optimal figure. Bioteams, on the other hand, acknowledge that they will never be able to calculate the optimal number in advance, and instead allow the growth of the team to rise or fall naturally as circumstances allow. The team should always be on the lookout for useful new members. Here the authors contend that successful teams must acknowledge their own lack of certainty, preferring to learn through “experimentation, mutation and team review” rather than through analysis.

While the lessons outlined above provide clear benefits to any virtual networked business team, Good and Thompson are also careful to acknowledge the key differences between human teams and other biological systems. Indeed, the differences themselves provide lessons that may be just as valuable in creating the dynamic business networks of the future.

The first difference is obvious to anybody who has compared ants and humans: We are much smarter than our six-legged counterparts. The important thing, according to Good and Thompson, is that “team members be able to self-select when to utilize personal ‘intelligence’ and critical thinking and when to rely on team intelligence before acting.” While no team can achieve perfection in this area, trust built on experience working together, transparency, reputation and talent are key to achieving this level of self- and team-awareness.

The second critical difference is the subject of many religious tomes: between stimulus and response, humans are given free will. Because each team member can choose our response to a given set of circumstances, there is far more autonomy in the system, which may lead to less predictable results. Acknowledging that the actions that team members choose are the direct result of their beliefs, Good and Thompson identified the seven beliefs at the core of successful virtual cultures.

The beliefs shared by high performance virtual teams include clear and public accountability, trusted competency, give and take, total transparency, shared glory, meaningful mission value, and outcome optimism. Without these beliefs, virtual teams cannot succeed in mimicking high performance biological teams. However, with these beliefs in place, we can exceed the performance of even the best of today’s human teams.

You don’t have to be a dot com superstar to take advantage of the attributes of biological teams to build a virtual networked business module. For example, in just four years, Wasauna.com has grown to be one of the leading suppliers of luxury bathroom fixtures—yes, toilets—in the U.S. In 2007 the firm sold more than $6 million of toilets, bathtubs, sinks and other “old” economy products. They did this entirely through the Internet. Without showrooms or a strong dealership network, the firm is running circles around big name competitors like American Standard and Kohler.

How do they do it? Wasauna’s management team has created a porous organizational membrane that can quickly assimilate team members with expertise the founders do not possess. They acknowledge their own core competency in search engine marketing and seek outside team members—whether employees, contractors or vendors—for everything else.

The result is a series of live controlled experiments that tighten the feedback loop with its market. As in natural selection, when a product is a hit, the company redoubles their efforts behind it. When a product is a dud, they learn from the lesson and move on—quickly.

In traditional corporations, on the other hand, analysis and optimization still rule. But while you can continue to optimize your products and processes, unless you are continually experimenting with radically new concepts, you are unlikely to make the shift to a paradigm-shifting new way of doing things. You may spend all your time climbing higher and higher, only to find you’ve reached the top of an ant hill, while Mount Everest looms on the horizon. Successful business modules are those that constantly send scouts to feel out the landscape, testing new products, processes and ways of organization. While most experiments will fail, the success of one or two may give the company a chance to continue exploring.

The days of the military-inspired corporate pyramid are numbered. Markets are changing so fast that the commands coming down from the top start to bear little resemblance to the reality faced down below. The result is corporate dizziness. While many traditional corporations are taking advantage of the new forms of organization inspired by biological systems, far more will fail to make the shift. Extinction is a natural—indeed, necessary—part of evolution, so we should not lament their fall.

Instead, let this be a call-to-action for today’s generation of entrepreneurs. The era of blundering corporate giants thriving on the production of average products for average consumers is rapidly coming to a close. To be sure, many good jobs will be lost in the process. But let historians find someone to blame for this. There is, in other words, no time for sympathy. We’ll be too busy building new businesses, creating new jobs, and reinventing the very meaning of work.

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