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role of knowledge in value creation makes the foundations of economics and our thinking around firms badly outdated.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.

The importance of SLUSH

The creative era we live in is an age of unprecedented possibility compared with the industrial age. Totally new opportunities are systematically being created. One of the best examples of this is the SLUSH event that took place in Helsinki on November 13^th and 14^th. SLUSH is a two-day startup conference, a meeting point and a coming together of roughly 6000 people belonging to the international startup ecosystem. There are entrepreneurs, investors, startup founders, employees and students taking part.

The democratization of technology that is taking place at the moment does not determine social and organizational change, but does create new opportunity spaces for new social practices. Some things are becoming much easier than before and some things are becoming possible, perhaps for the first time. The vibrant startup culture proves this point.

There are very few isolated geniuses. But there are many bright people who have continued and improved the work of others. Capable people always have capable peers, people who act as filters connecting them with people and connecting them with high quality information. The goal of SLUSH is to “gather the connections that startups need to thrive on the global stage.”

In a sense, creative people are more remixers of other peoples’ ideas than inventors. Technology and development are not isolated acts by independent thinkers, but a complex storyline, where the storytellers and curators, are more important than the heroic inventors, if there ever were any.

Creative, connected learning is at the core of the startup business. SLUSH is a huge learning festival and the biggest concentration of positive energy I have seen in a long time. Businesses and non-profits like SLUSH, more than government, seem to be driving the changes in education that are required for the knowledge-based economy. The government-run education systems are lagging behind the transformation of learning that is evolving.

Learners are teachers and teachers are learners during the two hectic days of SLUSH. Creating learning connections is more valuable today than creating learning content. Information is becoming a process of continuous iteration and networked negotiation. Information networks are the architecture of work and a valuable, shared resource. These networks are the new commons. In the new commons people with many ties are better informed and have more signalling power, while those outside the commons and with few ties may be left behind.

The real forte of SLUSH is that as we engage in new relationships, we are creating new potentials for action. Every human relationship, every connection, serves as a model for what is possible. The Internet era has proven that we are capable of working together competitively/cooperatively and building social communities that some time ago many would have dismissed as impossible dreams.

Thus we don’t yet have a good idea of what cannot be done by connected people working together in new ways. Perhaps “We can walk on water” as @pvesterbacka from Rovio says in a very compelling way.

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Thank you Miki Kuusi, Ilkka Kivimäki, Peter Vesterbacka, Inka Mero and the whole team! And yes, Supercell! It was a great party!

More on commons.

People, purposes and participation

The quantity and quality of knowledge workers output is correlated with the amount of well-being they get form their work. For this reason the quality of working life has received increased attention lately. We were asked to study well-being in the context of knowledge-work and social business technologies.

The most important thing that came up was that participation in relevant decision-making needs to be increased at the same time as social technologies are introduced. If this is not done successfully, other changes, such as improving generic communication practices, are only temporary and less effective. At every level of the organization, the quality of a person’s working life is proportional to that person’s participation, first and foremost, in the making of decisions by which she or he is affected.

The need for such participation is unsurprisingly also related to the age, competence and educational level of the individual. The younger the worker is, the greater the need to participate is.

Managers cannot be successful anymore unless they understand the difference between “power over people” and “power with people”. Power over was seen as the ability to get people to do things they would not do voluntarily. It is thinking that is based on the outdated and false motivational theory of rewards and punishments.

Everybody we interviewed recognized examples of decisions that were diluted or compromised because those who had to do the implementing did not buy into the rulings. Educated people do not respond well to commands or to somebody who tries to exercise dominance through the power their position gives them. Hierarchy does not work that well any more. Managers must depend on the willingness of their subordinates to act voluntarily. Managers who want authority for its own sake do not fit well into knowledge-based organizations.

Power with is different. It is the ability to connect people, purposes and participation. It is about co-creation and cooperation: doing meaningful things, with meaningful people, in meaningful ways.

In industrial settings, and in principal–agent hierarchy structures in general, this did not matter. Subordinates were dependent on the managers, never the other way round. As a consequence many managers now lack support from their subordinates resulting in low productivity, dismal creativity and slow learning.

Just as subordinates can make their managers look bad, they can also make them look good. This means that managers cannot hold their positions without the approval of both their bosses and their subordinates.

In modern work, leaders create the followers, and, at the same time, followers create the leaders. It is about power with. Equality and efficiency are not opposites; in fact, they become more and more closely connected as the educational and competence level of the workforce increases and as knowledge work becomes the norm.

The social revolution continues. This revolution, as many before it, may be about equality.

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On power and status. “Power over and power with“.

People, machines and the future of work

I took part in a high-level workshop on technological intelligence and the future of work. One of the questions raised was: “If machines can replace people’s minds in knowledge work as well as machines replaced their muscles in manual work, what will ultimately be left for human beings to do? Are we going to run out of jobs?” My answer was that this concern is based on a totally incorrect assumption. Working life does not consist of a finite number of problems and opportunities to which the human mind and human effort can be applied.

The challenges that confront us are unlimited. Every solution to a problem generates several new problems and also new opportunities. No matter how many problems are solved, there will always be an infinite number ahead of us. Although modern technology has reduced the number of things that in the past had to be dealt with by human beings, it increases the complexity of the challenges that require our attention now and in the future.

Technology: robotics, machine intelligence and cognitive computing do change what people should be doing and how organizations come to be what they are. This is why we need to revisit and rethink our conceptualizations of work.

When the Industrial Revolution began, the dominant Newtonian worldview meant that what was happening in the world was thought to be understandable without any reference to the environment in which things happened. Physical laws described what things following a linear, rational causality would do. The dominant view was that there are no significant uncertainties, or unknowns, messing things up. Most academic experiments were constructed accordingly, with the effect of the environment being eliminated. The aim was often to study the effect of one known variable on another.

Business enterprises were consequently thought of as machines. Enterprises conceptualized as machines, like all machines, didn’t have a will of their own. They were serving the intentions of their creator, the owner. The principal purpose was to obtain a return on the investment. Employees were, of course, known to be human beings, but their personal intentions were seen as irrelevant. People were retained as long as they were needed to fulfill the intentions of the employers.

The biological, meaning a systemic and cybernetic conceptualization, then replaced the notion of an enterprise as a machine. One, often overlooked, reason for this was the changing structure of ownership. When a firm went public, its creator disappeared. Owners were seen as anonymous, and too numerous to be reachable. The Industrial Revolution turned into the Managerial Revolution we are still living through today.

The Managerial Revolution changed the thinking around the purpose. Like any biological entity, the enterprise now had fitness and longevity as raisons d’être of its very own. Profit came to be thought of as a means, not an end in itself. Success came to be measured by growth. It was seen as essential, just like in nature.

The systemic view was a profound change in thinking compared with the mechanistic view. A biological organism is not goal-oriented in the sense of serving external purposes or moving towards an external goal. The movement is toward a more fit or more mature form of itself in a particular environment. An organism can adapt, but cannot choose to be something else.

But humans are creative and humans can choose.

Things are changing again. The sciences of uncertainty and complexity have helped us to understand that organizations are patterns of interaction between human beings. These patterns emerge in the interplay of the intentions, choices and actions of absolutely all the parties involved. No one party can plan or control the interplay of these intentions. But even without being able to plan exact outcomes, or control what others do, people accomplish great things together.

The thing is that people can only accomplish their work in the necessarily uncertain and ambiguous conditions through ongoing conversations with each other. This is why the next revolution is dawning.

The social revolution, the next industrial revolution, is about deeply rethinking the value of human effort. An increase in value can only occur if the parts of a “system” can do something in interaction that they cannot do alone. Social business may be more about complementarity and coordination than collaboration and working towards the same goal.

An enterprise that is conceptualized as a social business should serve the purposes of all its constituents. It should enable its parts to participate in the selection of both the ends and the means that are relevant to them personally. If the parts of a system are treated as purposeful, they must have the freedom to choose and to act. This means that the defining characteristic of a social business is the increased variety of behaviors that is available. It is not necessarily about common goals or shared purposes any more.

The way our organizations are conceptualized has a great effect on what people do, and what they do affects the way organizations are conceptualized. Enterprises have always consisted of people who have ideas, intentions, creativity and purposes of their own.

This, in the end, is what makes people different from machines.

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Background:

Kevin Kelly: “dream up new work that matters”. The Atlantic: “The Robot Will See You Now”. Russell Ackoff on Systems Thinking. David C. Aron on Systems Thinking, Complexity Theory and Management. Changing the social contract of work. Gary Hamel on the invention of management. McKinsey Quarterly: “The next revolution in interactions”. MIT Technology Review: “The brain is not computable and no engineering can reproduce it”. Race against the machine by Brynjolfsson and McAfee. Greg Satell blog post. Ross Dawson and John Hagel on the humanization of work.

The core of the social business

We are in the midst of a shift from the industrial system of supply and demand to social, co-production models. The customer is now seen as being directly and actively involved in the key moments of value creation as opposed to passively consuming value. There are profound implications that result from this change of thinking. Products and services are not reproducible as such any more. Solutions are by default contextual and personalized, but they can be starting points for someone else to create value.

Creative, connected learning is at the core of the social business.

It is not learning related to meeting the requirements set by someone else, but learning that is motivated and expressed through personal, situational needs. As a result, a new meaning of education and learning is emerging.

Business, more than government, is driving the changes in education that are required for the knowledge-based economy. The government-run education systems are lagging behind the transformation in learning that is evolving outside schools. Businesses are even coming to bear the primary responsibility for the kind of education and learning that is necessary for a country to remain competitive in the future.

Gutenberg’s printing press broke the monopoly of the church on what was taught and by whom. Today’s social technologies are doing the same to schools and universities. The learners decide what is taught and by whom. The new technologies are perhaps not making teachers and schools obsolete, but are definitively redefining their roles and breaking local monopolies.

A learning business is not the same as the learning organization made popular by Peter Senge and many others. It is not about systems thinking, or learning how to use technologies and data.

A learning business is one that leverages the economic value of knowledge.

Producing more value than is used is the characteristic of productivity. True learning businesses must therefore be teaching businesses. This means communicating to customers the additional value of learning in the context of the services and products offered. Learners are teachers and teachers are learners. Creating learning connections is more valuable than creating learning content.

Inside an organization, all people must take responsibility for information and communication. Each person needs to take responsibility for his or her own active contribution. Everyone needs to learn to ask three questions continuously. What information do I need? What information do I owe others? With whom should I communicate?

Each level of management and each process step is a relay. That was OK when the speed of learning was not an issue. It was also OK that businesses were hierarchy-based, because transparency was not possible. In a learning business each relay means cutting the potential for learning in half and doubling the noise. Hierarchy used to speed things up, now it slows down.

The most important principle of a social, learning business is to build the organization around information and communication instead of around a hierarchy.

There is a debate going on that focuses on the distinction between ethical and practical education. There are people who emphasize moral values and those who underline the practical reasons for education. There are voices that are concerned that business-driven learning would mean less moral and ethical education than under government-led learning. But there are also people who stress that in order for any business to thrive in the new economy, it needs to show a new, intense and honest interest in values and sustainable ethics. Some people I know inside the church have been surprised that leading corporations dedicate more time to education about values than they, or schools do.

We have moved to a new economy, but we have yet to develop a new educational paradigm.

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Andrew Ng on the importance of universal access to education. Clayton Christensen on disrupting the education industry. Joi Ito on formal vs. informal education. Clay Shirky on social reading. Paul Graham: “Large organizations will start to do worse now because for the first time in history they are no longer getting the best people“

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.

Network design

In a typical large organization everybody is a long way away from everybody else. As a result the individual perception of the world is narrow and confined to a small group of immediate acquaintances.

That did not matter in factory-type of settings because physical tasks could be broken up. Bigger tasks could be divided by assigning people to different, smaller, fairly independent parts of the whole. Hierarchies made sense as a way to modularize work. The worker did not need to communicate with many people. The downside was a lack of flexibility. Reconfiguring a hierarchy always created a mess for a long time. And if you had a lot of interaction going on in a hierarchical structure, with many steps going up and down, it was slow and prone to misunderstandings.

For intellectual tasks, it is much harder to find parts that make for an efficient division of labor. Intellectual tasks are by default linked and complex creating an increased need to interact. Knowledge workers are often put in a position where they have to negotiate some understanding of what they face. The same event means different things to different people. The cognitive opportunity lies in the fact that as we don’t all select the same things, we don’t all miss the same things. If we can pool our insights in a creative, enriching way we can thrive in the complex world we live in.

New technologies give an organization the ability to reconfigure its form any way it desires. We are not confined to any one structure any more. The smartphone revolution has changed the logic of the network. The Web is no longer about linked pages but about connected purposes. We want to do something – with the help of information and other people. Often this means wanting to learn and respond in a situation.

Most often we seek two things: information and interaction.

For information the best structure would be a random, contextual network. A random network has the shortest possible path lengths. An example of this is performing a search. The key measure here is path length. That indicates how far everybody is, on average. The path length measures how many steps a piece of information has to go through between people. To create short path lengths in a typical hierarchical or process based structure you would need to know almost everything and everybody included in the hierarchy/process chart.  You would need to have access to information that we typically don’t have. Hierarchies and process charts are thus not efficient ways to organize knowledge work. They are not transparent enough.

For interaction, the challenge is engagement. Widening the circle of involvement means expanding who gets to participate. It is about inviting and including relevant, new and different voices. The measure is built on the social graph: how many of your friends know each other?

The network design principles successful organizations follow are: ( 1 ) shortening the distance between two randomly picked files/nodes/people; ( 2 ) getting more people who you know personally, to know each other.

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