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September 21, 2009
Haydn Shaughnessy, Partner, email@example.com Ted Shelton, Partner, firstname.lastname@example.org
Open Management Page | 1
Over time certain theories of management have had a profound impact on the way enterprises are perceived, organized and managed. Taylor’s Scientific Management and Porter’s Competitive Advantage are classic examples. But much of the intellectual work of developing organizational structures and management techniques has addressed only one specific set of challenges posed by the industrial revolution, efficiently scaling an organization of semi‐skilled laborers engaged in repetitive tasks. While efficiency in the management of labor remains important today, over the past few decades a new set of imperatives have been forcing their way onto the management agenda. An increasing amount of the productive capacity of our economies is now dedicated to tasks that engage the intelligence of our workers ‐‐ not just their bodies. Furthermore, in virtually every industry the role of innovation has profoundly changed the competitive landscape. We believe these two challenges call for accelerated change in the governance model for organizations of every size and type. The idea of open management encapsulates better than anything else what that change should be. In this paper we examine the underlying shifts in our economy and explore practical illustrations of how specific organizations are grappling with this change. In particular we look at how technology is changing both the nature of our work and social dynamics in our workplaces and as a result is altering the manner in which we must organize, manage, and reward employees. We also seek to understand how these shifts are also breaking down walls between “employees” and “customers” and create entirely new models of activity across all of our business processes. Our consistent thesis is that a more participatory and more engaged leadership style is needed for post‐industrial organizations in which the nature of work has forever shifted away from repetition and drudgery. In this new model where creativity and collaboration are needed from every employee, companies must transform their policies, philosophies, and organizational models to succeed. That is ultimately the objective of what we call open management.
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It would be relatively easy to assume that the challenges your business is facing have nothing in common with those facing Google. After all, Google has grown faster in terms of employees and in its geographic scale of operations than any other organization in history. And the business is entirely driven by the logic of the Internet, with its end product wholly digital, its customers connecting electronically from every part of the world, and its employees mostly highly skilled and well educated. And certainly the characteristics of the web (on which Google’s organizational structure is based) – its speed, transparency, and inclusiveness – do seem to be at odds with the traditional characteristics of organizations; deliberative, structured and often secretive. But perhaps it is those characteristics that are holding organizations back from achieving the growth and profitability of which they could be capable. If there is something to learn from Google and other businesses that are adopting similar methods, the starting point is to understand the ways in which our businesses are similar to Google and thus are facing the same problems. The two ideas that we will examine are (1) the shift from manual to intellectual work and (2) the innovation imperative.
Throughout history, individual intelligence and collective labor have been the defining elements of our organizations and societies. Economic systems, political structures, and individual organizations have all grappled with the challenge of providing a single individual or a small group of individuals with the power to make decisions and transmit the authority of those decisions to a vast number of others who would then carry them out through their physical activities. As civilizations have grown more complex and more populous we have required increasingly more sophisticated structures and processes to allow this model of top down decision making to scale across ever‐larger organizations. In the second half of the twentieth century two technological trends began to transform the nature of work. The first was the increasing pace of development of information systems that transformed a wide array of organizational functions, introducing a new class of worker into organizations. Sometimes called “knowledge workers” these employees were engaged in the creation, manipulation, and dissemination of information through these new systems, necessarily increasing the intangible “intellectual” content of products and services. Open Management Page | 3
Secondly, automation (and increasingly robotics) is transforming labor altogether, significantly reducing the number of people engaged in the manual components of business processes, thereby simultaneously reducing the “labor” content of these products and services. The phenomenon of manufacturing activities moving to cheaper labor markets such as China is the result of a temporary advantage of low cost human labor (not to mention weak industrial pollution laws and enforcement). Over the long run, the cost for human labor will exceed the cost of robotic labor for virtually every type of physical activity. This transfer of value from physical labor to intellectual content is transforming the people, activities, and management styles of our organizations and forcing revaluations of where firms will find competitive advantage in the years ahead. Thus there is an emerging advantage of collective intelligence over individual intelligence across a wide range of business activities. And in all cases a significant part of the new agenda is innovation.
Businesses are typically engaged in one or more of three distinct activity categories, each of which has an associated relevant set of processes and people. Consultant and author Geoffrey Moore calls these three groups “inventors, deployers, and optimizers.” Ultimately business ecosystems require all three categories to in order to succeed, whether those all exist in the same company or whether they can be found in different firms which then forge relationships with one another. While just one of these categories of activity is tasked formally with “invention,” Moore points out that innovation (as distinct from invention) has become critical across all three activities. At the tail end of product life cycles, optimizers innovate on methods for extracting the most value from well‐understood products and markets. Products in rapidly expanding markets require workers who can adapt and develop new methods and strategies for fueling rapid adoption and the development of new market opportunities (the group Moore calls the deployers). And finally future business opportunities require research & development (R&D) activities or start‐up cultures to fuel invention.
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Figure 1: Categories of business activity in relation to innovation challenges
Competitive advantage across the entire business cycle increasingly comes from innovation and thus from the intellectual contributions of our employees. But building organizations in which innovation is a central part of the culture requires significant changes in the way we think about the structure and process of those organizations.
Google’s CEO Eric Schmidt states the new organizational imperative simply: “…smart people want to work with smart people and they want to be informed.” (Gary Hamel interviewed Eric Schmidt in May, 2008 for Management Lab) But a free flow of information poses a threat to traditional hierarchical organizations. Think of this as a tension between two extremes, in which each has advantages and disadvantages. Open Management Page | 5
In the traditional organizational model we prize hierarchy and structure as serving the objective of operational efficiency. In this model it is assumed that one cannot anticipate that the average employee will make a valuable contribution to decision making because he cannot be expected to have the necessary intellectual skills. Plus the cost of communication is too high to provide sufficient information to inform leadership opinions or to collect and evaluate contributions from the mass of employees. But Google recognized that the Internet vastly reduced the cost of communication, the single largest cost in business coordination, nearly to zero. And in Google’s business, the workforce was already highly educated and thus could be expected to have the intellectual skills to do something with this information. In what we might call the Google model, in contrast to traditional structure and hierarchy, the organization prizes empowerment and develops mechanisms (mediated by technology) to exploit the resulting chaos. In this model there is an expectation that every important decision must be debated and that the role of a leader is not to make decisions but to ask questions that raise objections and foster debate so that the group arrives not at common outcomes but in the best outcomes – all within the limits of a deadline. As Schmidt dryly notes, “Without time limits the model looks like a university” – ultimately the difference is that businesses must operate with speed, requiring deadlines for decisions. The organizational model that Google is consciously evolving embraces the characteristics of the web – speed, transparency, and inclusiveness, which Schmidt labels “porousness.” And far from believing that the applicability of this model is limited to Google, Schmidt observes that this is a characteristic of any high performing organization today.
In 2007, in the US electronics retailing market, two companies stood above the rest in the scale of their operations, Circuit City and Best Buy. The way in which these two companies each approached the challenges of a long‐term shift in consumer buying behavior and the immediate challenge of an economic downturn provides a useful non‐Internet example of the value of porousness. While many differences between these two businesses can be cited for their eventual divergent fates (Circuit City declared bankruptcy in 2008), we will look only at their contrasting approaches to labor. Facing significant margin decay, Circuit City attacked the cost equation for their business by terminating 3400 of the most experienced (and thus most expensive) members of their sales Open Management Page | 6
staff. Reducing costs had a short‐term positive impact, but was immediately noticed by regular customers who could no longer expect to receive qualified assistance in the selection of products in Circuit City stores. From an article at the time in the Washington Post: "I think even though sales were soft in March, this is clearly why April sales were worse. They were replaced with less knowledgeable associates," said Tim Allen, an analyst with Jefferies & Co. In particular, the televisions showing disappointing results are "intensive sales" requiring more informed employees, Allen said. "It’s a big‐ticket purchase for somebody. And if they feel like they’re not getting the right advice or are being misled by someone who doesn’t know, it would be definitely frustrating. They will take their business elsewhere." In contrast by 2007 Best Buy was busy rolling out “Blue Shirt Nation,” a social network for their employees. Rather than look at labor as a cost that could easily be reduced by terminating the most experienced employees, Best Buy’s approach was to invest in and celebrate their staff, creating ways for their most experienced sales people to gain recognition and respect in the organization by sharing their own ideas and experiences. Blue Shirt Nation has become an engine for innovation within Best Buy, allowing distant employees who perform similar tasks, but never would have come in contact with each other, to exchange ideas (and complaints!) about their working environment and the company as a whole. The results are manifold, with increased morale, efficiency, service innovation, and profits, all coming from expanding the role of employees as contributors to the business.
The Wealth of Networks
In his 2006 book “Wealth of Networks” Yale Law Professor Yochai Benkler provides an argument that ad‐hoc groups can be more efficient than for‐profit enterprises when engaged in certain kinds of productive activities, focusing on ones in which there is a large intellectual contribution. Similar to how Adam Smith in his 1776 work “Wealth of Nations” explored the newly emerging ideas of the industrial age, Benkler describes a set of dynamics that he similarly proposes will have enormous and radical implications for the way in which work is organized, performed, and rewarded. Open Management Page | 7
Calling this new form of activity “social production,” Benkler explores how the combination of cheap and widely accessible computation, the connecting tissue of communications networks, and the development of software to provide facilitation and coordination will transform the way our civilization produces goods and services. But while Benkler is particularly interested in the way in which these ad hoc groups provide alternatives to the activities of commercial efforts (such as the development of Linux as an alternative to Microsoft’s operating systems) our experience shows that this “wealth of networks” is also transforming the methods and organizational structure of for‐profit businesses. Companies as varied as Google and Best Buy have discovered that social technologies create a new set of dynamics in the common processes of their businesses. While threatening to individuals invested in old power structures or accustomed to existing work patterns, when embraced these new models make significant contributions to productivity.
For most organizations, the first part of their activities to be impacted by the rising chaos of these new models is in the marketing and communications departments. The logic of the web is already transforming media and with it the ways in which our products and brands are promoted and understood by customers. The marketing professionals promoting our businesses today were educated in an era of one‐way market communications. Develop high level messages, buy advertising, brief journalists – most of our hard won knowledge of what works when building markets is limited to these broadcasting models. But the web is demanding two‐way engagement and is drawing in our employees with or without our consent. The average marketer struggles with multiple channels of communications and with the idea of using everyday voices via blogs, microblogs and social networks to communicate about their product and brand. In many respects that challenge is internal to marketing – weaning imaginative people off large creative budgets and focusing them on many more but smaller challenges. But an important part of the resistance comes from the perceived loss of control that these new mediums bring. Open Management Page | 8
The rise of the fourth estate has long posed a challenge to the hegemony of corporations in constructing their own stories in the marketplace. “Porousness,” (see explanation above) was already accelerating the capabilities of media companies in the 1990s as improving communications networks made it ever easier for employees and customers to offer the market alternative perspectives to company sanctioned views. Dropping the cost of communications to virtually zero has made every individual into a kind of media outlet, creating a cacophony of competing perspectives around every company. Control, if it ever actually existed, has been thoroughly lost (or is in the process of being lost) by every organization. Marketing and communications professionals must embrace open communications strategies in order to engage with these vibrant marketplaces. But in so doing they will bring change into their organizations as well.
Figure 2: Emergent organizational change
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Once an organization begins to recognize the power (and challenges) inherent in open communications, the content of those communications will begin to impact every business function from product development to customer service. External pressure on specific company activities or product aspects will empower internal activists, eager to transform company‐market relations. Customers will suggest product features or improvements, challenging the belief that new product development should be done in secrecy. Product support will occur in ad hoc public exchanges, threatening the notion that customer service communications occur in private between the company and its customers. Company activities that raise quality, ethical, or legal issues will be debated openly, bringing new pressures on how organizations conduct themselves. While some companies, like Best Buy, will embrace these changes and learn to turn them to their advantage, others will try to pick and choose amongst the various elements. But an underlying logic binds these new practices together and demands an overall revision of management philosophy, organizational structure, and business practices.
Figure 3: An evolving model of enterprise relationships
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Open management is a term we use to describe new processes that allow companies to create organizational responsiveness, innovation and growth in the timescales that our current economy demands. In the beginning of the twentieth century, Frederick Winslow Taylor gave a name to the newly evolving techniques of the time needed to manage industrial scale businesses. Calling his new discipline “scientific management,” Taylor’s ideas seemed radical in his day. Scale required the development of forms of management that have become the legacy problem of the 21st century – command and control, dissociative hierarchy, strict adherence to financial objectives, and rigid reporting procedures. The open management hypothesis is that peer to peer communication and collaboration which uses increasingly cheap and accessible computer networks will break down the command and control structure, re‐associate distributed members of an organization previously separated by hierarchy, and even provide alternatives to rigid reporting procedures, but nonetheless allow organizations to achieve or exceed the same objectives. In addition to a shift in thinking, in order to succeed the enterprise needs to introduce technologies that support this more productive organizational model. These need to be backed by incentives, both emotional and financial, that help overcome cynicism and relationship roadblocks. Those technologies include: • internal social networks that support collaboration and which blur corporate and social boundaries • innovation platforms that create the innovation engine to frequently redefine core business community platforms where corporations can take a lead or simply participate eco‐system platforms and open APIs to consolidate rapid fire innovation and create open marketing channels that deliver to irrational markets prediction markets that reveal the crowds view of progress Open Management Page | 11
ideagoras to foster a sense of open ideation where ideas are more integral to corporate culture social media tools such as blogs and tweets to enable communications with customers across the company Open data platforms to collate data and insights from the opinion and sentiment stream of the web.
Figure 4: The evolving enterprise model
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These types of initiatives could be precisely what may bridge the return on assets that many economies currently lack. But they involve leaders renouncing the crown jewels or at least acknowledging that the people you employ and the systems you manage need to be transformed. As we move to open management the job of the manager becomes to lead innovative exercises such as an open content strategy ‐‐ the job is to persuade and lead staff in a way they are not threatened by the rebranding of the organization. That rebranding takes them away from the certainties of hierarchy. We thought a decade ago it would lead them to a non‐ hierarchical organization. We now know it has to lead them to an open, porous organization that exists in a state of flux. Flux is: • An erosion of any brand values that speak to certainty towards a new set of brand values that speaks to communication, connection, reach, experimentation, trial, trust, community, eco‐system. An erosion of internal work processes towards work processes that cross the staff‐market divide whether with suppliers, new entrants, idea generators, or customers. Once crossed, the combined community is inherently network based and needs network technologies that optimize efficacy and capture value. An erosion of internal hierarchies and traditional messaging control towards organizations where the best communicators, advocates and networkers thrive. A transition to innovation processes where dependency switches from internal lab‐based approaches to the eco‐ system; it needs to be accompanied by an “everyone counts” attitude that requires great networking technology and support as well as responsiveness to get it right. The watchword is you don’t know where your best ideas will come from and you cannot afford to miss them. A transition to structures that make organizations proactive in change processes and responsive in communications, i.e. messaging that says, this is our path to the future; intelligence that allows immediate responsiveness to the inevitable critique (and to be manage mistakes openly and honestly).
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New platforms and business intelligence that allow leaders to oversee and lead these new processes and capture value.
Once you become more programmatic about this, rather than saying we will adopt blogging, twitter or social networks in order to sell, then the questions you ask change to: How do we rapidly de‐layer, change attitudes to work roles, create new responsibility centers and new job descriptions, create affinity between employees, suppliers and customers, embrace any bright mind into the product development and marketing process, and allow a wider community to help us ensure we are setting the right goals for our business, community or eco‐system? These are the kinds of questions you might be tempted to ask en route: • How do I retain some degree of control over the things being said about me? • How do I control what my staff are doing? • How can I understand networks the way I understand hierarchy, i.e. what are the reporting procedures? The truth is you do not control staff anyway. Chances are your industry is under‐delivering in critical ways because of HR issues; you cannot control what is said about you – you can only pretend to. Where the future becomes more palatable for executives – who do need oversight facilities – is that computer networks can support much of what we have referenced here, software based communications support and new platforms designed to make the new open and extended organization accountable.
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Figure 5: A threepart approach to change
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For example, platforms that help in the community generation of ideas come with built in metrics. Web conversations are inherently monitorable. All data is there to be mined. Employee’s conversations with your community are part of your record of value creation. Measurement and reporting are not the issues. The issue ultimately is change – how quickly are you prepared to respond to the need for change; how well adapted are you to lead it? The process, in our view, is easily divisible into categories that allow you maximum influence. The modern change processes is roughly divisible into these three categories (See Figure 5). Communications How you communicate new values internally coupled to how you facilitate employees to communicate externally to customers, prospects, existing suppliers and potential suppliers. The sum total should be a new bond of trust between suppliers, potential suppliers, employees, customers and prospects. Knowledge How you capture business intelligence that allows you to be both proactive in communicating your new values to the audiences that matter; and how you are able to respond along the way as change draws criticism your way. The sum total should be a responsive organization. Platforms The support tools you need to optimize communications, generate new ideas, convert ideas into products that your supplier and customer community buy into and that let you realize value – as created by your eco‐system and employees. The sum total is a trust system that allows you to set metrics, monitor progress and generate reports. Open Management Page | 16
We see business and society in need of profound transformation. At the same time we believe the tools exist to make this transformation more profound and more rapid than any we have previously experienced. Business actually thrives on transformation. Organizations can adopt a change‐oriented mindset and begin the process with external communications initiatives, understanding that a rapid feedback loop will carry this change back into the organization in a variety of forms. As Eric Schmidt said when asked whether the lessons he had learned at Google could be applied to any other organization: “Everyone wants the same thing, they want to be heard… if you go to a so‐called boring old company people there want to be empowered too, but the culture doesn’t allow this…” Begin to change that culture and behavioral change will follow.
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