My colleague Dave Gray has written a wonderfully insightful and important post about the decreasing lifespan of companies and their apparently declining productivity at scale. The piece is getting some much-deserved attention – it is not every post that Tim O’Reilly offers to turn into a book o/ – and it is great to see an idea he shared with me on the back of a bus a few weeks ago take shape as a cogent blog post.
I especially I like the way Dave compares what makes for successful companies and cities alike: strong ecosystems, strong identity and adaptability / active listening. These characteristics give organisms a kind of evolutionary potential, in my view, and this is a crucial ingredient for success that set them apart from machines, optimised to meet yesterday’s threats and opportunities.
There are good reasons why many large companies should continue to thrive in the Twenty-First Century, and many industries in which scale is necessary; but Dave points to something most people in large firms realise already, which is that ‘machines’ of this kind do not scale well:
The problem comes with scale. As the number of employees grows, the profit per employee shrinks. It’s a game of diminishing returns. Efficiencies of scale are balanced out by the burdens of bureaucracy. Divisions become silos, disconnected from each other. Overhead costs increase with size. The resulting need for control, and the inability to achieve it at a reasonable cost, is what eventually kills a business.
The conditions that led to the rapid growth and development of large corporates are no longer pertinent today. Global communications, logistics and management no longer require the process-driven management and compartmentalised structure of the railroad builders. But even more important is the fact that many of the low-hanging fruit of corporate scale have been picked already. As John Hagel points out, U.S. companies’ return-on-assets (ROA) have dropped steadily to a quarter of their their 1965 levels, despite rising workforce productivity, and it is largely the leverage of complex financial instruments that has masked this underlying decline in returns.
In a way, this reminds me of the British economist Will Hutton’s recent review of Tyler Cowen’s book The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better. Cowen argues that the low-hanging fruit of early Twentieth Century industrialisation have been picked, and the benefits of cheap land and rapid increases in education are plateauing. Instead, recent productivity gains have come from outsourcing and cheap credit. Hutton sees this as a slightly negative viewpoint, and makes the case that increasing innovation is the magic dust that can and will drive a new generation of business. Instead of deregulating and waiting for market forces alone to solve problems, Hutton suggests we should design markets and institutions that are geared towards accelerating and amplifying innovation, rather than just maximising short-term profit without generating value, as we have seen in banking.
So, if it is harder for large firms to break new ground and reach scale as rapidly as we saw in earlier periods of industrialisation, and if the corporate structures we have been using tend to result in lower productivity at scale, how can we help companies evolve into more adaptable, less expensive organisms, rather than the optimised-for-yesterday machines that are under such strain?
As Dave points out, this is actually a very fertile area for the application of a more holistic approach to social business design, which offers us a better way of thinking about how we organise business, labour and value inside large firms:
… thanks to social technologies, we finally have the tools to manage companies like the complex organisms they are. Social Business Design is design for companies that are made out of people. It’s design for complexity, for productivity, and for longevity. It’s not design by division but design by connection.
Design by connection. Ecosystems + passion/strong identity + active listening and adaptation. These are not rocket science, but they are notable in their absence from much current business strategy. Incidentally, Dave Gray and John Hagel will be part of our Social Business Summit in London on March 24th, so why not join us (and other thinkers about the future of business, such as JP Rangaswami and Jeff Dachis) in what looks like being a very interesting discussion.
This post originally appeared on the Headshift blog.