by Rob Paterson
July 31, 2011 at 6:31 am
· Filed under Adoption
Joe wrote this week about how Iceland is using the web to Open up its democracy and then asks the big question – what about corporate life? Will corporations follow?
Geoffrey West’s research suggests that they had better – because it shows that the ultra controlled approach that is the Command and Control Normal now – kills corporations early. They are dying sooner and sooner.
Are corporations more like animals or more like cities? They want to be like cities, with ever increasing productivity as they grow and potentially unbounded lifespans. Unfortunately, West et al.’s research on 22,000 companies shows that as they increase in size from 100 to 1,000,000 employees, their net income and assets (and 23 other metrics) per person increase only at a 4/5 ratio. Like animals and cities they do grow more efficient with size, but unlike cities, their innovation cannot keep pace as their systems gradually decay, requiring ever more costly repair until a fluctuation sinks them. Like animals, companies are sublinear and doomed to die.
The issue is that using a machine model – is that friction builds as well as cost as the corporation scales. The costs rise with revenue. So in the mature part of the cycle, you cannot innovate – you can only manage the numbers/ratios. For example, 10 years ago, Shell set up Shell Renewables. Shell was going to become a leader in non oil energy. Makes sense right? The top people know about Peak Oil better than most and wanted to find a place in the next energy sector. What ruined this experiment was its success. Being a very large organization, Shell did new projects at scale. With two of the largest new Wind Farms online – the CFO and the CEO saw the trap – saw why they had to retreat back into OIL ONLY. Shell had to make the numbers even if by doing so meant that Shell could not position itself to be a leader in New Energy.
Wind farms that do well have an ROI of about 8% they are a utility – like owning a bond. But the Oil business has embedded costs that are linked to the returns on OIL that are much higher than wind. So if Shell did a lot more of these mega wind projects, the ROI of Shell would be reduced and Shell would have an earnings problem. The more wind farms they installed, the more their earnings would drop but their costs could not. They were trapped!
This dooms Shell and all mature companies. We saw that is Big Steel when smaller local mini mills ate into the lower ROI parts of the business until there was nothing left? We see this now with media.
The costs of a press or a studio – are so great that all the majors can do is to defend their existing platform. The New York Times can only hide behind the paywall for a period of time. The studios can only hold off web distribution of video for so long. But their battle to keep the status quo is not stupid – they are stuck with the costs. It is the model of how we do business that is the problem. For in the mature phase, the CEO has to make the ratios and the costs are embedded. In the final phase all the CEO can do is to milk the system.
For all true innovation HAS to start with a modest revenue line. So if you have a large enterprise with high revenues you have also high costs. So a web based news alternative CANNOT earn the revenue that you need to run the Times. So you cannot go there. But of course a new competitor – Huffington? Can and will and in the end will take enough revenue off your top line to kill you.
So are corporations doomed? Well with a sample of 22,000 West makes a good case that the current model does doom you, if you are traditionally organized. So what then is the way out?
West makes the case that Cities live much much much longer. The core of why is the core idea for corporations to study and apply.
“It’s hard to kill a city,” West began, “but easy to kill a company.” The mean life of companies is 10 years. Cities routinely survive even nuclear bombs. And “cities are the crucible of civilization.” They are the major source of innovation and wealth creation. Currently they are growing exponentially. “Every week from now until 2050, one million new people are being added to our cities.”
Cities are much more open as systems and networks. They are much closer to being alive than corporations that rely too much on command and control.
As I write this I am thinking of how Wordpress works. At the core of Wordpress is a for profit organization – but also one of the tasks of Automattic is to ensure the health of an ecosystem that is the larger Wordpress ecology in which thousands of independent developers who do not work for Automattic make a living. I think of Wikipedia. At the core of Wikipedia is a set of rules about how Wikpedia has to work and how people in Wikipedia have to behave. Surrounding this core is a cadre of “White Blood Cells” AKA editors – that ensure that this DNA is kept healthy. I see no way now that Wikipedia will not be here in 50 years.
Why my confidence?
If you look at Wordpress and Wikipedia you will see the key. In a network that really is a network – like Wordpress and Wikipedia – the costs go up in a shallow linear curve while the outcomes rise exponentially. The margin grows so that any bump in revenue along the way – which is of course natural for nothing in Nature runs on any form of straight line – does not take down the organization. But in a traditional organization, the costs rise in direct concert with the revenue and outcomes. This means that once the business approaches maturity, the leadership have to force the numbers, meaning that in the mature phase, the only real focus are the numbers themselves. Not the underlying purpose of the business. The focus becomes defence and self referential. The organization is now doomed. Doomed to suffer a bump in the market or to a new competitor. Look at the case of RIM. Can RIM come back?
This site has been a place where many of us have tried to see the future for business. We could all agree that more Command and Control would not help. We could all agree that more Social Media used to open up the organization would help. But what we are seeing now is that for an enterprise to thrive over time – it must become alive! Only a true network can enable this to take place. The few true networks that we can see now, give us a working model of the new enterprise.
Stuart Baker and I are working on what this might be and in the fall we will be posting our ideas.
Our proposition is this. In the 1800’s most business was small, local and unique. The great shift in the 20th century was to consolidate into the enterprise as we know it. This was how to create wealth then. All who stayed back in the small, local and unique died. The efficient machine had to be the model you used. Now we enter a new phase. For the limits of the efficient machine have been reached. The new winners will be those that can adopt the model of the real network.
We all know about how to organize the machine. How to organize the network is all new and mainly unknown. That then is the challenge and the opportunity. Good luck to all of us.
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Let me get this straight…
“Are corporations more like animals or more like cities? They want to be like cities, with ever increasing productivity as they grow and potentially unbounded lifespans. Unfortunately, West et al.’s research on 22,000 companies shows that as they increase in size from 100 to 1,000,000 employees, their net income and assets (and 23 other metrics) per person increase only at a 4/5 ratio. Like animals and cities they do grow more efficient with size, but unlike cities, their innovation cannot keep pace as their systems gradually decay, requiring ever more costly repair until a fluctuation sinks them. Like animals, companies are sublinear and doomed to die.”
…there is actual research that shows just how much more inefficient corporations are? Does this make a case that business concentration carries the seeds of it’s own destruction?
At any rate, decentralizing sources of information via the internet has already begun to spell doom for the big conglomerates who have set up too many barriers to entry for the little network start ups.
I say these corporations deserve it.
I normally never comment, but this article got me good (successful troll is successful?). Copypasta from a thread elsewhere on the interwebs:
Plus the obvious point that if a corporation dies, its building is left behind and another can move in, no problem, where as a City can’t exactly evacuate its position, leaving room for another city. Furthermore a City/Town/Whatever is more about its location – when a town becomes abandoned, it’s still considered to be that town – it’s just a ghost town. If a bunch of people decided to move back into that ghost town, it would still be the same town regardless of its history. That’s something that can’t really happen to corporations – there’s no such thing as a “ghost corporation”.
In fact, I’d argue corporations are networks – think of a network of friends, a network of attendees of a social club or activity club, or an office network of colleagues – those change constantly and rarely survive four or five years in any form resembling their original. They pursue some kind of goal (for your network of friends, it’s socializing, for a corporation, it’s profit.) That goal can’t really change, without fundamentally changing/destroying/splitting the network – if you and your friends were to work together politicize the group and to promote some cause, it would fundamentally change that friend network (and perhaps destroy it.) If a corporation stops pursuing profit as its goal, it’s not going to be the same corporation, and, well, it will fail or be completely changed. Of your social/activity/work groups/networks from five years ago, how many can you name that are still around, or that you’re still a part of? In the same way a corporation can/will change due to the people and ideas within it being in flux until it is unrecognizable or falls apart completely – as they often are/do. [nasty multi-tense sentence, I'm such a crappy writer] 
Cities are closer to being geography, like rivers or mountains, than animals or machines or any other shoe-horned analogy twisted to take a shot a corporate culture (and I’m not defending corporate culture, this is just one crappy argument against/pot-shot at it). And like the geography, they’ll outlast us all. Sure there are tons of things going on within the city – economies, culture, etc. – but those are in constant change, without affecting the identity of the city as itself, or its identifiable lifetime. Cities have “ecosystems,” but that doesn’t mean they necessarily are just that. Steel-mill Detroit isn’t motor-city Detroit, nor is it modern Detroit, but they’re all still Detroit. Cities are so large as to become historical (pre/post-Katrina New Orleans) and can change completely without “dying” (Mt. St. Helens, before and after). I’m actually having a hard time thinking of a modern city that has “died” – though there are a lot of good examples of ancient cities that gradually withered, or were razed to the ground.
This: “For all true innovation HAS to start with a modest revenue line,” is just ridiculous and is assumed and completely unargued-for (except circularly or axiomatically). When you capitalize “HAS to”, you’re saying “always, without exception,” and that’s easily disproved by counter-example: Google does a ton of innovation, at scale, and it’s a bloody corporation just like the rest of them. Not always successfully, mind you, but innovation doesn’t have to be successful to be truly innovative, and cause massive changes elsewhere. (For instance, Wave may have failed, but you better believe it was a large inspiration for real-time editing, collaboration and sharing elsewhere in the web.)
So I wrote way more than I intended, because this kind of article just annoys me. But the point is, it’s complete nonsense to compare the lifetimes of corporations and cities in any way shape or form, or what they are most “like”. You may as well compare the lifetimes of ice cream and rhinoceros. I’m not saying that I disagree with corporations being doomed, or cities outliving us all. I’m just saying this comparison between the two is meaningless, beyond saying, “Well, they both involve humans…” A city is a city. It doesn’t need to be compared to an animal or a machine or any other crappy analogy or metaphor (despite my own comparisons to networks or geographies). Likewise for a corporation. Both can be understood in their own, separate terms, meanings, contexts, behaviors, etc., etc. That’s all.
Rob, your confidence in Wikipedia’s longevity is based on what are largely myths that are put forward by the Wikimedia Foundation PR team as truths. People who know how Wikipedia actually works understand that eventually, probably sometime soon, the deceit and treachery that bogs down nearly every important content matter on the site will ultimately cause it to fail to a better-governed competitor.
I get your point and you’re basically right but cities, towns and villages do die.
Look at history. It has happened repeatedly. In fact, on our land there was an entire village long ago (1700’s, 1800’s) and all that is left is our old farm house. It was perhaps the first house here and it is the last. All the others got gradually abandoned, fell down, burned, etc. Times changed. The mini-ice age over a century ago decimated the town, as it did much of our state.
There are other towns I know of that also vanished. In one case, the state put a high way through the town obliterating it. In another case the highway bypassed a town sucking away all the business that used to support the local merchants and the town gradually died. It still lingers a little but there isn’t much left.
These are small, the ones I know of directly but big cities have also died historically. Study archeology. Cities die too.
Hi RJ Miller – West has researched 10,000 companies and yes the data is there. At the heart of their problem is this – in a command and control system you can only grow along a sub exponential slope and your costs rise all along the slope with your revenue growth because you have to invest for every resource using money.
This then means at some point all you are able to do is to manage the spread. Once you take a bump when mature in revenue – you are in the death spiral. You cannot truly innovate – you still have all the costs – see newspapers – so you slash your workforce and the quality of what you offer.
The CEO’s of these large orgs are neither stupid or evil – they are trapped
Bilbo – a few points – how can a command and control organization be a network? There may be and are real social networks inside – that is how they get anything done – but the organization in command and control is a machine that depends on external energy for its resources.
A real network gets most of its resources from its interactions not externally and the more complex it is, the more it gets from itself.
In nature all new growth is on the hockey stick without exception. A long germination followed by sharp ramp up. If you have ever planted a tree, you will see this process. I don’t make the rules. Nature does.
The issue for traditional organizations is when they get mature. When confronted by a novel threat, they cannot respond because their costs and structurer get in the way. Google may not be there yet but please think of any mature business and think how you could for instance make the web and the Times really work. The Times is still caught by its old costs base. Look how the media hates and fights the real innovation. Look how Big Steel failed to beat Nucor.
The point about cities and corps is resiliency and so longevity. The average life of a corp is much less than city – less than the life of most people. Why is that? I and West are saying because of how we plan and run them. With high fixed costs, a bump and they are gone.
Think of the US now? Think of the average person with high debt and commitments – no room for error – but we live at a time when the risks are greater than ever before.
Until recently cities grew organically. You can see that more clearly in Europe where the cities are older and you can see that that their core grew organically. There was no plan for Amsterdam’s first 800 years.
So with this base in nature, cities up to now been able top suffer many shocks. Yes some do die Babylon comes to mind. But many ancient cities are still here.
I see new risks for them though. 100 years ago they were relatively small. 80% of Americans lived in rural settings. The jobs that Corporations have pulled us to the city. And in so doing broke the organic growth pattern and set in motion the trap that is emerging.
If you live in a big city YOUR costs are very high. What if there are no more high paying jobs? What when the food system that depends on Cheap Oil has very expensive oil. What kind of place will big cities be then?
We know the answer to that as well. In 400ad Rome had 700,000 people. In 500 it had 20,000. Rome was no larger than 35, 000 for the next 1,000 years. Without a global food system, big cities cannot support themselves from the local region.
I am saying in a long winded way that our system is just another system and that it has reached its limits and will have to go away. It will be replaced as all systems are in time by a new one that woreks better. This is how evolution works
Gregory – you may be right – but Wikipedia is still a natural system with a purpose, a core, a set of rules and an army of people who are attracted to it.
So is any insurgency. I make no comment on any of the people but am looking at the system. Britannica failed and cannot win back.
Did you know that the Oxford English Dictionary was crowd sourced? It too had a tough set of editors that were fed slips of paper with words and comment – a form of Wiki back in the 19th century – it could not have been completed in any other way
Gregory – I don’t think I said that cities don’t die – I said that they live a very long time and are very resilient. They live much longer than any corporation.
The world is indeed full of dead cities. The universe is full of dead suns too. Death comes to all things.
What interests me and West is what a puny lifespan corporations have. What intrigues is is why that is so.
Walter – I don’t think I said that cities don’t die – I said that they live a very long time and are very resilient. They live much longer than any corporation.
The world is indeed full of dead cities. The universe is full of dead suns too. Death comes to all things.
What interests me and West is what a puny lifespan corporations have. What intrigues is is why that is so.
Rob – Why does a hierarchical structure exclude a corporation from being a network? In my mind, networks are graphs – and a structured hierarchy is just a graph with weighted edges for the direction of information flow.
I’d suspect, given all of Facebook’s data, you could easily see some people as consumers (employees) – even down-stream chain consumers, and some people as producers (executives). Is that, really, that much different that a command structure?
Your point about the costs of large corporations making them less resilient is probably true – I can accept that – but I would guess that has more to do with the internal economies of corporations than their social structure.
You could just as easily say that corporations with large costs are susceptible fail when confronted with economic “bumps”. That doesn’t necessitate a connection between their organization and this seemingly obvious statement. There is necessarily a correlation between C&C and large costs, because most (all?) large organizations are structured this way. This does not imply causation, which in my opinion, was not demonstrated in any way shape or form.
Although, I’m not saying it isn’t the case either – I don’t know for sure. It may well be that more loosely structured, or non-structured organizations can keep their costs low, but I can’t think of a single one of these that is of the scale of the large corporation.
For example Wikipedia has only 5,000 editors who make more than 100 edits a month (http://en.wikipedia.org/wiki/Wikipedia:Wikipedians#Demographics) – that’s probably something like a part-time job for them, but that’s still an order of magnitude smaller than a large corporation. And 3 orders less than say, Wal-mart. Would Wikipedia be able to scale to 1,000,000 very active editors? I don’t know. It’s also a very different enterprise than Wal-mart – and might not make sense to compare them.
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SvenAugust 2nd, 2011 at 6:56 am |
Wordpress won’t be there for 50 years. Why? Because its core is rotten, its core code is so ugly and badly written that you cannot rely on anything like this. Yes, it works for now. But the same bad code sets the limits to further innovation and development. Wikipedia is totally different animal but I’m not sure about Wikipedia either.
In other words – in order for a city to survive the core rules and regulations and systems must be well established, logical and healthy. Really BIG cities (NY) will collapse under their own weight sooner or later or they will transform to something that is not just a city.
Bilbo – you are right all are networks of a form – I am talking about natural networks. Here the key is where is the locus of control.
In a corporation today – the locus of control is “external” for the employee – we do what we are told in a box that is defined. Worse the purpose of the org in the end boils down to make the ratios.
In a natural network, the locus of control is you – it is internal to you. Think Ben Hur in the galley versus you in an 8 with 7 pals. So the barrier is culture. This is why simply adding blogs and twitter to the NYT does not solve its core problem – that it costs too much to produce the paper but the paper is what the Times thinks it is.
Resources are also at the heart of the difference.
In the natural network, the purpose at the core ATTRACTS not only revenues but RESOURCES. So in Visa, every terminal put in by all the other banks adds value to YOU and you did not pay for it. Your cash outlays scale at a modest linear way while the total value of the network to you scales exponentially. But ATT have to spend their money to add every node for their faux network – see where I am going now?
In a traditional org, ALL the resources have to be paid for by the centre with money. That is why the costs have to grow in tandem with the revenues – for to invest in revenue growth drives these costs.
This sets them up for collapse. To get rid of its real costs, the Times has to get rid of the paper. It cant so it wont last. Maybe it will die and be reborn without the paper? But the paper is killing. Same with IP’s. So long as they pay to install all the infrastructure, they will have to kill the user. In the end they will be caught when a network of local ties up into a national using real network.
Sven – both WP and Wikipedia have room to evolve but mature traditional orgs don’t. There are so many people working on both that the full process of evolution is in play.
But in a planned economy their is too much focus on being efficient and being assured that we know where we are going.Think the USSR!
In a natural ecology nothing lasts for long but in the dying is birth and with new birth comes variation. Nature has no plan other than survival. You Sven are the product of successful parents going back for 4 billion years. On break along that chain and you would not be here.
The single cell you did not last that long but evolved through trial and error to become you.
Mature traditional orgs cannot evolve they can only die
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GregOctober 27th, 2011 at 8:28 pm |
I’ll get this idea:
“Cities are much more open as systems and networks. They are much closer to being alive than corporations that rely too much on command and control.”
The best example of this is the income, is the City if no income the city will always on the way while the corporation if there are no income, they only rely on their products to sold and manufactured, and it should be shutdown…
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