Are markets the future of firms?

Amazon has joined Uber, Lyft and many others in redrawing the lines between independent contractors and employees. On March 30th Amazon announced an expansion into the “on-demand” economy. Amazon Home Services is a service marketplace that connects customers with builders, plumbers, cleaners and even teachers. Amazon has successfully made it very easy to buy books and goods. It now plans to do the same for professional services. It does so through (1) standardizing offerings so that prices can be agreed in advance, through (2) promising that the workers are trustworthy. Amazon scrutinizes workers through searches, interviews and reference checks and (3) providing a great interface experience for employers to a world that is very cumbersome: one-click hiring of workers and easy payments through Amazon.

Businesses are concluding more and more often that there are no reasons why certain activities should be performed by employees rather than contractors. The skills of these workers are seen as generic, making it easy for non-permanent workers to fit in quickly. This has created the Internet-based service platforms, the new job markets and the huge trend of on-demand work.

But hold on. A firm is essentially about creating long-term contracts when short-term contracts are too costly, or don’t make sense for other reasons. So is there a place for long-term contracts in the world of the Internet and these new markets? Is there a role for the firm, as we have known it?

One way to understand a firm is as a contracting mechanism between providers of financial capital (the principals) and managers (the agents). Principal-agent models are still extremely influential in corporate governance and  in reality continue to form the basis of mainstream compensation structures up to this day. In principal-agent thinking, employees are viewed as generic labor and agents for the managers. The managers are understood as having firm-specific skills and are viewed as agents of the shareholders.

The economist Brian Arthur from the Santa Fe Institute argues that the ever-increasing role of knowledge in value creation makes the foundations of economics and our thinking around firms badly outdated. Likewise, Peter Drucker predicted that “knowledge may come to occupy the place in the society which property occupied over the last three centuries.” As early as 1964 Gary Becker coined the term “human capital” to refer to the fact that many of the skills and knowledge required to do knowledge work could only be acquired if “some investment was made in time and resources”.

In his seminal work, Becker also considered the implications of the fact that some of the knowledge and skills acquired by employees have a much higher value in some relationships, some contexts, than they do in others. The labor services of employees with specialized skills thus cannot be modeled as undifferentiated generic market inputs, for which wages and quantity, the number of people, and the number of hours of work are determined. With context-specific human capital, the creativity and productivity of a particular individual depends on being part of a particular group of people engaged in particular assignments. Knowledge work is relation-specific and contextual.

More importantly, once acquired, knowledge and skills that are specialized are assets that are at risk following the very same logic as that by which financial assets are at risk. In practice, this would mean that knowledge workers should explicitly bear the long-term entrepreneurial accountability for the success or failure of the company, and additionally benefit from any possible upside, just as shareholders do today. From the point of view of corporate governance, it would mean that companies should be run in the interests of all their investors.

In firms where employees embody the critical capabilities, they must be encouraged to make creative decisions about how to act, interact, learn and innovate. One way to do that is to give them sufficient claims on the long-term returns, in other words to give them ownership rights and responsibilities.

The puzzling thing about the on-demand trend is that when it comes to actual work practices, there is really nothing new despite the powerful technologies and great new interfaces. It is a replication of the industrial model that separated labor, management and shareholders. If we believe Gary Becker, the big societal problem we are about to face is that on-demand work limits the value potential of human effort.

But there is an alternative conceptualization. Knowledge work is defined as creative work we do in interaction. The price of technology is going down rapidly and the cost of starting a company has decreased dramatically. These trends give knowledge workers more power relative to employers. If knowledge is more important than money, it gives human capital more power relative to financial capital, potentially changing the concept of the corporation.

The future of capitalism depends on whether firms create a much larger number of capitalists than they do today. Everybody will benefit if, in the future, a larger number of workers think like owners and act like long-term investors. A sense of ownership could be and should be the difference between firms and markets.

We should use the Internet to create the new, not to repeat the old.

Disrupting Unemployment

The concepts that govern our thinking and language in relation to work are not just semantic entities, but influence what we perceive and what we think is possible or not possible. Usually we are not aware of how these concepts prime our thinking. We simply think and act along certain lines.

A seminal concept related to how we perceive work is the division of labor, the notion of work as activities separated from other activities, as jobs. The industrial management paradigm is based on the presupposition that activities are the independent governing factors of creating value. The organizational structure of jobs comes first. Then an appropriate system of co-ordination and communication is put into effect. The scheme of interaction conforms to the planned division of labor as a secondary feature.

What if the increasing global competition, the Internet and the huge advances in communication technologies made it possible, or even necessary, to think differently? What if interaction was seen as the governing factor? The smartphone has now become information technology’s key product. Surely, then, it has an impact on the way we work. As jobs and communication are mutually dependent, it means that if there are changes in interaction, so the activities will change.

In the mainstream conceptual model of communication (Shannon & Weaver 1948) a thought arising within one individual is translated into words, which are then transmitted to another individual. At the receiving end, the words translate back into the same thought, if the formulation of the words and the transmission of those words are good enough. The meaning is in the words.

Amazingly, our conceptualization of value creation has followed the very same model. Companies transform ideas into offerings that are delivered to customers. At the receiving end, the products translate back into the same value that the company has created. The meaning is in the product.

Management scholars have lately made interesting claims saying that although the product is the same, different customers experience the value potential of the product differently. They say that it is in fact wrong to say that companies create value. It is the way the offering is contextually experienced and used that creates value, more value or less value. The bad news is that our present conceptualizations of work make it very hard to do anything about it. The good news is that for the first time in history we can do something about it. Companies can connect with users and be digitally present when and where their products are used.

But we need a new conceptualization of communication if we want to have a new conceptualization of work. Luckily, there is one. A completely different approach to communication exists. The alternative view is based on the work of George Herbert Mead. This model does not see communication as messages that are transmitted between senders and receivers, but as complex social action.

In the social act model, communication takes the form of a gesture made by an individual that evokes a response from someone else. The meaning of the gesture can only be known from the response, not from the words. There is no deterministic causality, no transmission, from the gesture to the response. If I smile at you and you respond with a smile, the meaning of the gesture is friendly, but if you respond with a cold stare, the meaning of the gesture is contempt. Gestures and responses cannot be separated but constitute one social act, from which meaning emerges.

Gestures call forth responses and products call forth and evoke responses. Value lies not in the product but in the (customer) response. Accordingly, work should then be conceptualized as an interactive process, a social act, because the value of work cannot be known in the separate “job” activity or be understood through the capabilities of the worker.

If we subscribe to this relational view, it means that people and actions are simultaneously forming and being formed by each other at the same time, all the time, in interaction. Perhaps in the future it will not be meaningful to conceptualize work as jobs or even as organizational (activity) structures like the firms of today. Work will be described as complex patterns of communicative interaction between interdependent individuals.

All interacting imposes constraints on those relating, while at the same time enabling those people to do what they could not otherwise do. Enabling and energizing patterns of interaction may be the most important raison d’être of work.

The relational view is a new conceptualization of work, potentially opening up new opportunities to disrupt unemployment. Perhaps it is time to change the focus from creating jobs to creating customers – in new, innovative ways. To quote Max Planck: “If you change the way you look at things, the things that you look at change.”

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Thank you Katri Saarikivi

Social business and the changing theory of management

A manager recently voiced his concerns: “Most employees prefer being told what to do. They are willing to accept being treated like children in exchange for reduced stress. They are also willing to obey authority in exchange for job security.” That is the way we have seen it: managers inspire, motivate, and control employees, who need to be inspired, motivated, and controlled. These dynamics create the system of management and justify its continuation.

If we want to meet the challenges of the post-industrial world, this relationship needs to change. The workers changing their role is often seen as a matter of the extent to which the managers are willing to allow it and give up responsibility. In reality it is as much a matter of how much the workers are willing to develop their (management) capacity and take more and wider responsibility.

The dysfunctional relationship between managers and employees creates a self-fulfilling prophecy and a systemic failure in creative, knowledge-based work. What is tragic is that neither side normally understands the predictability of what is going on. The pattern is a mutually reinforcing self-destructive process that manifests itself as a steady decline in the authority of management and productivity of work.

A few researchers have started to dispute the assumption that the present system of management is a fact of life that will always be with us. It may be time for us to question whether the recent problems created by bad management are isolated and should be tolerated. Or to ask whether the fault is in the system itself and not in individual managers?

Luckily, management theory and practice are slowly starting to catch up with the dramatic changes brought about by the loosely coupled, modular nature of creative work and the ideals of social business.

A social business does not behave in the way our dominant management thinking assumes. What is it, then, that has changed?

Organizations are always assemblies of interacting people. The reason for an organization to exist is to simplify, support, and enrich interaction.

At present, there are three types of organizational cultures depending on the type of management and the alternative mechanisms for the coordination of tasks. The different task interdependencies accordingly place different and increasing burdens on our communication practices .

I call these the administrative culture, the industrial culture and the creative, social culture.

The administrative culture, which is found in most governmental organizations is about function-specific independent activities. Two functions or tasks are independent if it is believed that they don’t affect each other. The most important communication exists between the employer and the employee, the manager and the worker. The principle is that the execution of two independent tasks does not require communication between the tasks. The architecture consists of black boxes that are not coupled directly, but in an indirect way by higher-level managers, who coordinate the work. Work as interaction is mainly communication between hierarchical levels.

The industrial culture of process-based organizations is about dependent and sequential activities. Manufacturing work is about dependent tasks. Being dependent means that the output of one task is the input of another. The reverse cannot normally take place. In sequential dependence, those performing the following task must comply with the constraints imposed by the execution of the preceding task. Since the process architecture is typically quite clear, management coordination is mostly about measuring and controlling whether the execution conforms to the planned requirements. The architecture consists of tightly coupled tasks and predetermined, repeating activities. Work as interaction is a sequential process with one-way signals.

A creative, social culture is different. It is about loose couplings and modularity, about interdependent people and interdependent tasks. Two people/tasks are interdependent if they affect each another mutually and in parallel. Interdependent tasks call for peer-level responsiveness and coordination by mutual adjustments, not coordination by an outside party such as a manager.

Most of the information that is relevant will be discovered and created during the execution of the task, not before. As a result it is not always possible for a manager and a worker to agree on a coherent approach in advance. Nor is it normally possible to follow a predetermined process map.

The basic unit of corporate information in creative, social work is not content in the form of documents but interaction in the form of conversations. Knowledge is perpetually constructed in interaction. Work as interaction is complex, situational communication between loosely connected nodes of the network! The structure of work resembles the structure of Internet.

The three cultures and corresponding architectures differ in the degree to which their components are loosely or tightly coupled. Coupling is a measure of the degree to which communication between the components is fixed or not. In most creative work, and always in a social business, any node in the network should be able to communicate with any other node on the basis of contextual interdependence and creative participative engagement.

As organizations want to be more creative and social, the focus of management theory should shift towards understanding participative, self-organizing responsibility and the equality of peers. It is a systemic change, much more than just kicking out the bad managers and inviting new, better managers in. It is not about hierarchies vs. networks, but about how all people want to be present and how all people want to communicate in a way that was earlier reserved only for the people we called managers.

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Eric Brynjolfsson video on TED. Steven Johnson video on peer networks. Gary Hamel interview.

The ten commandments of digital work

Lately I have had a series of conversations with a group of leaders of global high-tech companies. It became very clear during my conversations that their vocabulary reflected a fresh, new way of thinking about work. The executives emphasized that the key to success in the new digital economy is likely to be a new position for knowledge professionals and a wide social acceptance of more sustainable values.

What could this new position look like?

Once acquired, knowledge and skills that are specialized to a given enterprise are assets that are at risk in the very same way that financial assets are at risk. If one can’t continue for some reason, the value of context-specific knowledge and competencies may be much lower somewhere else. Human capital then follows very much the same logic as financial capital and should be treated accordingly.

There is, however, one major difference. Human capital is by definition always social and contextual. The capabilities of the members of a team are worth more together than when applied alone. With context-specific human capital, the productivity of a particular individual depends not just on being part of a community, but on being part of a particular group engaged in a particular task. The contextual and social aspects of business matter much more than we have understood.

The ten principles of digital work, the new standards, that the leaders acknowledged:

1. informed free choice, rather than compliance, is the basis for decisions
2. active participation, rather than passively accepting instructions, is the basis of growth and development
3. work activities are carried out within a framework of personal responsibility and goals for self-direction rather than direction from outside
4. activities are carried out in a transparent way with the goal of distributing the cognitive load of work rather than work being based on reductionist principles and social isolation
5. one is responsible for one’s own actions rather than being responsible to someone else
6. a worker is engaging in complex, responsive activities with others in contrast with engaging in closed repetitions of the same activity
7. the network, rather than offices or organizational hierarchies, is the main architecture of work
8. productivity is a result of creative learning rather than doing more of the same. Increasing the quality and speed of learning matter more than increasing the quantitative output of work
9. knowledge work can be understood as investments of human capital following the same logic we have used to understand financial investments. Workers should share the responsibilities and possible upsides that used to belong only to the investors of financial capital.
10. knowledge work is about interdependent people in interaction. Intelligence, competence and learning are not any more about the attributes and qualities of individuals but about the attributes and quality of interaction

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The impact of technology on industrial jobs.

The future of ICT?

Industrial work clearly determined the tasks that had to be done. The machine and the ways to work with the machine were given. People served the machine. Workers did not need to be concerned and feel responsible for the results. They just did what they were told.

Knowledge work is very different. The first thing for a knowledge worker is to try to answer these questions:  What am I here for? What is my responsibility? What should I achieve? What should I do next? Key questions for a knowledge worker have to do with how to do things and what tools to use. This time, the machines, the tools, need to serve the worker. It is, in fact, a change from only following instructions to also writing the instructions.

Historians claim that the invention of the printing press led to a society of readers, not a society of writers despite the huge potential of the new technology. Access to printing presses was a much, much harder and more expensive thing than access to books. Broadcasting systems such as radio and television continued the same pattern. People were not active producers, but passive receivers.

Computer literacy or the idea of being a digital native still often follow the same model. In practice it means the capability to use the given tools of a modern workplace – or a modern home. But literacy to just use, to be the consumer of, the technologies and the programs is not what we need. The perspective of the consumer/user was the perspective of the industrial age. Success meant learning how to behave in the way the machine needed you to behave.

That should not be the goal today.

As a result of Internet-based ICT we have learned how to speak and how to listen; we have learned how to write and how to read. But in the digital world, it is not enough if we know how to use the programs, if we don’t know how to make them.

We are typically always one step behind what technology can offer. We can now participate actively through tweets, status updates and profile pages, but the thing to remember is that somebody else has made the programs that make it possible. And often the real goal of that somebody is to create a new advertising model. Nothing wrong with that.

The underlying capability of the knowledge era is programming, not reading or writing. It is a change from using things to making things. Creating things for yourself and sharing them.

I have met many people who think that programming is a kind of a modern version of a working-class skill. It can well be outsourced to some far-away, poor nation while we here do higher value things. Nothing could be further from the truth, more wrong, and more dangerous for us. Today the code is the main domain of creativity and innovations. It is a new language. Writing code is the number one high leverage activity in a creative, digital society.

The primary capability of the knowledge era is not using computers, but programming computers. It is not using software, but writing software.

Mitch Resnick talks about the new challenge: “After people have learned to read they can read to learn. And after people have learned to code, they can code to learn.”

It is time for a human response to technology.

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Thank you Mika Okkola

More on the subject: On software productivity. The Finnish ICT 2015 report. How to start learning programming. Codecademy. Linda Liukas. The Estonian approach. On GitHub. On data democracy.

Productivity revolutions and the most misunderstood man in history

Few figures in the history of management have had a greater impact than Frederick Winslow Taylor. The irony is that there have also been few who have been so greatly misunderstood and so gravely misquoted.

Frederick Winslow Taylor was born in 1856 to a wealthy family in Philadelphia. Poor eyesight forced the very talented young man to give up on the idea of going to Harvard and becoming a lawyer like his father. Instead, almost by accident, he went to work in a pump-manufacturing company whose owners were friends of the Taylor family. At that time, industrial work was far beneath the attention and interest of wealthy and educated people. Taylor, very exceptionally, started as a manual worker and gained shop-floor experience. He experienced the factory conditions personally and saw from the inside what was going on. As a result, he was the very first person to talk openly about poor manual work efficiency. What ultimately started his study of work was not interest in productivity, but his disgust with the growing hatred between employers and employees. Taylor thought, contrary to Karl Marx, that this conflict was unnecessary.

His mission was to make workers more productive so that they could earn more money. In contrast to what many writers claim, Taylor’s main motivation was not efficiency, but the creation of a society in which owners and workers had a common interest.

It did not go very well.

Workers unions at the time were craft monopolies. Membership was often restricted to the sons and relatives of existing members. They required an apprenticeship of many years and had no systematic training. At that time, you were not allowed to write down instructions. Some historians claim that normally there were not even drawings of the work to be done. It was widely accepted that there was a mystique to craft skills. The members were sworn to secrecy and were not permitted to discuss their work with non-members. Before Taylor, people took it for granted that it took years and years of experience before you could turn out high quality products.

Taylor’s crime in the eyes of the unions was his revolutionary idea that there is no skilled work based on some mystique, there is just work. All manual work could be studied and divided into series of repetitive motions that could be taught and learned. Work-related training was a genuine innovation. Any worker who was willing to be educated and followed the “one right way” of doing things should be called a “first-class” worker deserving a first-class pay. This was much more than the worker got during their long years of apprenticeship.

Taylor offended everybody.

He also insulted the owners. Among other things, he publicly called them “hogs”. The biggest insult was that the authority in the plants should not be based on ownership but on something he called superior knowledge. Taylor insisted that the workers should also benefit from the increased productivity that his scientific management produced. He wrote in 1911: “The principal object of management should be to secure the maximum prosperity of the employer, coupled with the maximum prosperity for each employee”.

He was the first person to demand that managers should be educated. He thought that management should be a profession and managers should be professionals. This led the owners’ associations to  attack him bitterly as a socialist and a troublemaker. Again he was seen as a criminal!

But he was right! The application of knowledge to manual work created a tremendous boost in productivity. By the 1940s Scientific Management had swept the industrialized world despite the early resistance. As a result the workers, rather than the capitalists were the true beneficiaries of the industrial revolution that was changing society.

The working class largely became transformed  into a new social structure and true social innovation, the middle class.

When Taylor started working, nine out of ten people were manual workers. Today, nine out of ten people are knowledge workers. We ask some of the same questions, but the world is totally different. Taylor’s revolutionary ideas are over 100 years old. His thinking was based on Newtonian mechanics and his ways of understanding human behavior are not up to the task any more.

Scientific Management as a concept is not only unhelpful, but totally outdated.

Still the struggles we face with productivity may be the same. If you look at what the labor unions and employers’ organizations are opposing today, you may find the seeds for the next revolution in productivity.

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Resource library. Peter Drucker on HBR.

Redesigning work

Corporations as we know them arose around 150 years ago. They were modelled on the most successful organization of the time – the army. The army was then, out of necessity, based on a familiar management model: a few well-trained people at the top commanded a very large number of unskilled people, the “employees”, who were drilled in a few repetitive motions.

This organizational model reached its peak around the time of the Second World War. By that time it had become clear that the command and control organization was rapidly becoming outdated, even for the needs of the army. It was actually in the military that the transformation towards the knowledge worker paradigm first began. Contrary to mainstream thinking, there are examples of armed forces developing furthest from being based on command and control to being based on knowledge and responsibility.

Just as industrial society became a society of corporations, it developed into a society of employers and employees. These were two different ways to explain the same phenomenon. An employee is by definition somebody who is dependent on access to an organization, access to an employer.

Many people still think that one can only work if there is an organization – a “machine” to operate.

Corporate ICT systems are the machines of today. They are too often used in essentially the same way as machines were used in factories. Machine operators in the factory did as they were told. The machine dictated not only what to do but how to do things. The worker was dependent on the machine and served the machine.

To become a social business and to improve the productivity of work will require very different thinking and big changes to ICT-systems, management, and even, the structure of society. In knowledge work the “machines” necessarily have to serve the workers. It is the knowledge workers who decide what to do next and how to do it.

Economic theory and industrial management practice see workers as a cost. A social business, wanting to increase productivity, has to consider knowledge workers as a capital asset. There is a huge difference. Costs need to be reduced, but assets need to be made to grow.

Our present system of industrial management creates systemic inefficiency in knowledge-based work. It can only be removed if the knowledge worker’s role includes a more active responsibility leading to responsive, agile practices. This cannot be achieved unless our mental constructs and the societal structure of work changes radically.

We should ask whether the current social construct of employers and employees is inevitable for some reason, or whether it is a social artefact that is over 100 years old, and should be redesigned.

The change would mean that employees/knowledge workers would explicitly bear the entrepreneurial responsibility for the success or failure of the company, as they do anyway in the end, and, additionally, benefit from any possible upside, just as shareholders do.

From the point of view of corporate governance, it would mean that companies should be run in the interests of workers, as much as in the interests of their owners. That’s what the change from command and control to knowledge and responsibility really means.

And that’s what is needed to become a social business.

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“Every young person is an entrepreneur now” and a short video presentation by Peter Senge.

The competitive edge of the social business

“In the future, when the history of our time is written from a long-term perspective, it may be that the most important things historians will see are not technological advancements or the Internet, but the fact that for the first time a substantial and rapidly growing number of people had choices.” (Peter Drucker)

The industrial age was about limiting the scope of choices. This was accepted since the need to gather costly information and to communicate with low quality tools was minimized. Furthermore, as the scope of decision-making and action was narrowed, the learning requirements for workers and customers were limited, reducing the transaction costs of work. The efficiency contribution of mass production was in fact derived from these lower information- and communication-related costs.

Today, in contrast to people being content with limited choices, offerings need to be created to meet diverse, unique requirements.

For knowledge workers and customers the task of gaining the input needed for these situations is creating an entirely new environment. Creative learning is becoming the fundamental activity. It is not about consuming pre-determined content, passing tests or something with beginnings and ends. Learning is continuous transformation. It is the foundation for creative action. The ability to meet the needs of a situation better can only exist partially prior to the live moment. You can never be fully prepared in advance: success depends on how you are present and how you communicate.

The new competitive edge comes from interactive capacity: the ability to connect with information and people, as and when needed. What gives the edge is not what is already known by the individual, as much as the ability to solve problems that require real-time learning through live interaction. In increasingly complex environments learning curricula cannot be effectively designed beforehand. Needs and also solutions emerge responsively.

This view focuses attention on the way everyday conversations between people create the future. Organizations are self-organizing patterns of participation and communication through which coherent action and innovation emerge.

The concept of the social business builds on an agile, iterative framework. Learning is not related to meeting the requirements set by someone else, but is motivated and expressed through personal situational needs and aspirations. The idea of interactive competence also reflects the radical change in thinking that is going on. We are leaving behind the Western preoccupation with the autonomous individual and beginning to appreciate the importance of social processes and interdependence.

This understanding of competence suggests that the capability to act is a social process. The primary learning asset for a knowledge worker is interactive, reflective practice. The network is also a means for signalling: making one’s own learning visible not only to oneself, but also to others, thus creating a platform for comments, conversation, and even formal accreditation.

Learning happens in interaction between interdependent people. Competence, the ability to act more purposefully is the emergent phenomena resulting from that interaction. People are simultaneously forming and being formed by each other at the same time – all the time.

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Thank you Riel Miller, Doug Griffin, Stephen Downes, Kenneth Gergen and Ralph Stacey