the coming of
Orange Labs SF
The origins of this research project lay in conversations embedded with questions: why do we sequester ourselves in big buildings when more and more of the information we need is outside in the world of customers, partners, and a growing collective pool of knowledge on the web? In a global moment that gave us “too big to fail” what is the advantage of big? And in a global generational sea-change, where GenY talent collectively knows and shares more than the embedded ‘senior’ management hierarchy, how much knowledge – tacit and explicit – pouring through the realtime Web can be leveraged in traditional hierarchical corporate 1.0 structures?
Our journey was illuminated by the glare of exploding business models. The turbulent world surrounding economies and work is showing its irresistible influence as we attend the enterprises’ difficulty to keep up with changes and remain relevant and meaningful to customers and employees. On the other hand, observing how people work in the Silicon Valley and how we engage within the community, reveals to the research team the changing nature of what matters now in the work equilibrium.
This study was executed in Silicon Valley, which serves as a paradigm for the porous marketplace – a region that proceeds on the basis of Talent sharing tacit knowledge through both online and offline flows of knowledge exchange. Because of this location, we were able to interview thinkers, as well as GenY startups and others, which are compiled in an accompanying short video documentary. Many of the quotes in this report are drawn from those interviews.
The model of the Porous Enterprise which we describe here in a series of monographs, is emergent. But it has been developed by practitioners. The contributors to this work have ‘day jobs’ involving use cases that exemplify the model: building best practices for the use of Facebook and Twitter in customer service; constructing collaboration platforms for internal crowd-sourcing of market intelligence; developing service provider solutions for vendor relation management practices; not to mention realtime semantic analysis of today’s burgeoning social media platforms.
What seems to be happening is a shift not only from information to knowledge but from knowledge to creativity. Indeed, given the power of networks, knowledge is slowly becoming a commodity. What is becoming precious is the authentic purpose from management that drives employee engagement and passion.
As we look with new eyes at a transformed landscape that has featured collapses over the past two years, we see fundamentally hopeful signals that the Firm as we have known it for the last 150 years is shape-shifting, re-centering around a new functional model of what is ‘core’ and opening its boundaries into a more porous way to better connect and engage with competitors who want to collaborate, communities that require accountability, consumers who expect innovation, employees who demand authenticity and meaning, and technology that waits for no one.
Georges Nahon, CEO, Orange Labs SF
Mark Plakias, VP Strategy, Orange Labs SF
The Road to the Porous Enterprise
Production has always been a collaborative activity. There exists a distant resonance in our shared genetic memory of individual hunters combining to bring down mastodons to produce food for their village. Any trade or barter that may have occurred to augment the basic act of hunting, given the limitations imposed by distance, remained local and line of sight based. This is the most basic sense of the aggregative nature of production: the combining of raw labor power to achieve an end. It is thus that production is especially sensitive to changes in factors that enhance or constrain collaboration.
Things stayed fairly static until the development of the Medieval guild system. Individual merchants and craftsmen came together to create a collectivity for ensuring fair trade, enforcing trade agreements, and in the case of craftsmen
guilds, set quality standards for its members and in some cases manipulate the prices of inputs. Guilds allowed development of non-local trade and exchange because they provided a “brand” that could be trusted. For example if a member of a guild reneged on a contract, the injured party could collect compensation from the guild.
The Industrial Revolution, which began roughly in 1750 and ended in 1870, was a landmark event for several reasons, not the least of which was the emergence of a new form of production which spawned the organizational model of the firm that has held sway for more than a century and a half. It engendered specialization which in turn created the notion of process management and spurred the development of management methods as well as technologies to optimize these production methods. The Wealth of Nations, published in 1776 catalogued, described, and codified many of the emerging practices. While the fruits of production were disposed of through market processes, production was achieved through non-market methods, specifically command and control. Smith observed that one person working alone, could perhaps make one pin in a day, but through division of labor, non-linear advantages result and the output of pins is multiplied significantly.
Birth of Assembly Line
The period between 1900 and 1930 saw the rise in the first wave of professionalizing management and spawned the “Efficiency Expert” who would roam the factory floor and optimize the work flow. Key figures were Frederick Winslow Taylor in the US and Henri Fayol in France. Taylor published in 1911 Shop Management and is credited with being the father of modern management. Fayol wrote in 1918 Industrial and General Administrations which clearly codified the hierarchical nature of management through 14 principles which included: Unity of Command, Unity of Direction, Scalar Chain of Command, Order, and Centralization. This clearly delineated the difference between decentralized market-like and centralized command methods in production.
Age of Cybernetics
By the 1950’s, the enterprise’s processes, decision- making, and management had begun to be mathematically restated through the application and development of Systems Theory and Operations Research. Taken together this made management a science and in so doing further accentuated the firm’s centralized nature. Up to this point in the development of the enterprise there was no real questioning that the enterprise needed to be managed and its decision taken centrally. Certainly, it turned to market processes to acquire commodities and certain services, but the core of its work was done through non-market means.
Ronald Coase, published in 1937 a seminal paper. The Nature of the Firm, which contributed to his being awarded a Nobel Prize, which posited that the size of the firm and in fact its very existence was due to transaction costs associated with relying on market mechanism to procure commodities core to the firm. Coase argued that using markets are not frictionless, there are a number of transaction costs associated with using markets. The cost goes beyond the simple price of the resource and include costs of search and information, negotiation, disclosure agreements, due diligence, as well ensuring contractual compliance and legal proceedings. In many cases, the firm can avoid these costs and obtain what they need through internal production.
Today the pendulum is swinging back towards market methods over centralized
ones. Factors have come into play that have overcome many of the market’s weaknesses such as contract costs, information asymmetries, fraud, information costs, localized monopolies, moral hazard, and adverse selection. One of the biggest of these factors is the Internet. This is because it brings us so close to those conditions prescribed by models of general economic equilibrium. For example, it solves the problem of coherent aggregation of the decentralized buying and selling signals (of finished goods, raw and intermediate materials, labor, and capital) that are constantly emitted throughout a given economy. The efficiency or lack of thereof of the systems aggregating and decoding these signals is largely responsible for the market dysfunctions listed above.
We believe with the fixed and mobile Internet and the myriad applications
and networks it has enabled, the friction involved in matching offers and demands has been reduced to an unprecedented degree. For example, offers
of employment are aggregated and indexed and offers of services are similarly organized, so that either buyer or seller of employment can readily obtain knowledge of what is available, thereby reducing search times. The availability of goods and commodity suppliers and buyers is similarly organized. More importantly, this centralized information has been responsible for eliminating the asymmetry in the knowledge of price and quality between buyer and seller.
This has led to a significant reduction in the transaction costs associated
with resorting to market means of acquiring resources, and services by enterprises. The result has been to greatly reduce the perimeter of the enterprise’s walls within which activities are pursued. More importantly, the facility with which knowledge is also made available with almost no friction has led to very different ways of working with entities outside the walls of the enterprise. This fundamental change in has decidedly shifted the balance in activity from “make” towards “buy.”
Taken together, these two developments have contributed to the emergence of the Porous Enterprise and what follows is a detailed exploration of the many facets and implications of this new exciting corporate form.