In general I am big supporter of “small is beautiful”. People perform best in contexts that they can relate to and where they know people. A famous example is the 50 employee limit of the old BSO cells. This is especially important in healthcare… being a personal and social branch. However, there is an important exception: Big DATA. Continue reading
A couple of years ago I read the book “De eeuw van mijn vader” (“My father’s century”) from Geert Mak. In this book he describes how the Dutch society has changed from 1900 to 2000. One of the passages that struck me most was his statement that the majority of people in 1900 were not an employee at a firm. Many people were self employed as sail maker, baker, carpenter and other craftsmanships. Other were employed on a temporary basis as day laborer. For many people this independence meant of course mainly insecurity and near starvation.
It did open my eyes that the big Firm as a way to organize work is something relatively recent and started around that time. Before the Firm work was done by many individual and small informal companies, afterwards much of the work is done in large companies with often an emphasis on management and control. At the same time there was the shift from mainly local transactions to global transactions.
These days we again see a move towards smaller size of companies and and more informal contacts to coordinate work. Most important example is of course the explosion of Independent Professionals. But also many examples of small companies that supply a specific service, often on a global scale, like BasecampHQ, Evernote and others. My conclusion is that the Social Media and Cloud and the themes they bring forth put pressure on the size of Firms. Big is beautiful nor efficient anymore.
In 1936 (Nobel price winner) Robert Coase wrote the artikel “The nature of the Firm”. In this (very famous and often cited) article he states that the size of a Firm is based on the difference in transaction costs between the market (buying the service) and organizing the service yourself. He describes the relation between transaction costs and size as follows. The firm grows when:
- the less the costs of organizing and the slower these costs rise with an increase in the transactions organized.
- the less likely the entrepreneur is to make mistakes and the smaller the increase in mistakes with an increase in the transactions organized.
- the greater the lowering (or the less the rise) in the supply price of factors of production to firms of larger size.
Transaction costs in this are all costs associated with a transaction: communication, contracts, delivery, etc. If we compare these with the themes Scalability, Communication, Cooperation, Anyplace and Anywhere and Transparency it is clear that these themes are lowering the external transaction costs dramatically.
Scalability: the advantage of the Firm has always been that within the Firm it is easier to share resources over several activities. Now many operational costs have become variable costs in relation to turnover this advantage of size is not valid anymore. The risks of major investments in infrastructure is therefore also largely diminished. Due to the high level of automated processes there is less advantage in high volumes of purchasing
Communication and Cooperation: Finding people has become easy, contacting them has become easy and exchanging information on specifications and expectations has become easy. This means that transaction costs go down. This holds mainly for external costs since internally searching and working with people was enabled by the Firm.
Anytime, Anywhere: The Firm creates a context where it is easier to know what to expect from others and has a management structure to enforce compliance to this context. Social technology now enables us to contact everybody from everywhere at any moment. A natural advantage of the firm was that it was easier to do business within the Firm on a global scale. Now small companies can do the same in a virtual enterprise.
Transparency: We now see reputation mechanisms to build trust without previous experience with that person of service. We see reviews of previous experience of others that are similar to us. We know we are looking at the same data stored in the cloud. I know where you really are because of location based services. This transparency drives down risk immensely.
From all of the above it follows that due to social and cloud technologies Firms will shrink in size. Small will be more efficient. This also has a lot of impact on middle management whose role it was to coordinate work in the Firm. This coordinating role of management will evaporate and thereby create flatter organizations: Pancakes!
Fractals create fascinating pictures. On the one hand they look very structured and symmetrical but when you look closer you see that the pattern is repeated in a different way on every level. There is order and there is chaos simultaneously. The math behind fractals is surprisingly simple. The trick is that the factors in the equation repeat themselves in a recursive way (meaning that the formula calls itself withing the formula).
For example, the formula for the fractal on the right is “(1 − z3 / 6) / (z − z2 / 2)2 + c” (for more info on these fractals go to: http://en.wikipedia.org/wiki/Julia_set). Many of natures most beautiful expressions are based in Fractals, e.g. leafs , trees and flowers. Here the relatively simple codes in the DNA create fascinating structures in the organism.
The mechanism is similar with the effects of new technology on our way of living and working. At the moment we see many fields of business changing in very profound and different ways. Often due to wide spread implementations of new developments like Cloud technologies (that impacts how business interact) and Social Media (that impacts how people interact).
However, the driving forces behind this change are relative simple. The basic variables that are impacted by this change in technology are:
- Unlimited Scalability: Technology and processes become scalable. IT costs become a variable costs. This means that a company can start small and grow evolutionary. Communities can be scaled up from a few to hundred thousands of people in a short period. This flexibility gives rise to new competitors and new services that had not been possible before.
- Ubiquitous Communication: (Social) Technology makes it possible to find the person with the right knowledge instantaneously. Communication channels are easy to access for broadcasting to targeted audiences as well as direct interaction.
- Seamless Cooperation: We have now been given the freedom to work and cooperate everywhere. Where in the past closed systems made it difficult to work together it is now made possible by standardized tools in the cloud. Sharing data, sharing tools and sharing contacts is now possible.
- Anytime, Anywhere: Instead of real-time communication in a specific place we are now free to interact wherever and whenever. Many of our tools support direct communication (chat) as well as a-synchronous communication (e-mail). Changes made in an online document are always seen directly by all so they can be reacted upon. In many ways we overcome the limitations that a physical world imposes on us
- Maximum Transparency: With the use of Cloud technology information can be visible to all and often is. In the past systems were closed by default since databases could be accessed only from a few places. Now all you need is an Internet connection and a browser. Also by sharing much of our thoughts, activities and trivialities a sometimes unexpected amount of transparency is achieved, though sometimes accidentally.
All these themes create tremendous opportunity but also unexpected risks and consequences. As society and as businesses we have to learn how to optimize these themes to create good and sustainable outcomes. The differences between MySpace and Facebook were small at the start …
Last few weeks I have been trying to integrate a lot of ideas I have been working on in the last few years. Partly in research programs on SaaS, partly and several project around the adoptation of technology and partly from my own company. Below is the (extend) set of sheets I have made out of this. Next period I will be writing a bit about the different parts of it.