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Thomas Malone: Perspective

Thomas Malone is a management professor at the MIT Sloan School of Management. He is also the founder and director of the MIT Center for Coordination Science and was one of the two founding co-directors of the MIT Initiative on “Inventing the Organizations of the 21st Century.” What follows is a partial transcript of his Supernova presentation: Let me start by asking you a question that I sometimes ask my classes. How many of you are happy this morning?

Thomas Malone is a management professor at the MIT Sloan School of Management. He is also the founder and director of the MIT Center for Coordination Science and was one of the two founding co-directors of the MIT Initiative on “Inventing the Organizations of the 21st Century.” What follows is a partial transcript of his Supernova presentation:

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Let me start by asking you a question that I sometimes ask my classes. How many of you are happy this morning? This looks like a very happy crowd. How many of you are not happy this morning. Two of you. I’m happy to be here this morning. What I’m going to try to explain is why I think decentralization is not just a cool thing for technologists. Decentralization is the next stage in a progression of human organization thats been going on for thousands of years.

We are now in the early stages in an increase of human freedom in business that may in the long run be as important a change for business as the introduction of democracy was for governments. New technologies allow us to have the economic benefits of large organizations as well as the human benefits of small organizations. The reason that’s possible is that technology is reducing the cost of communication to such a level that everyone in even huge organizations can have all the information they need about the big picture to make decisions without waiting for someone above them to tell them what to do. What will change things, though, is not the technology. It’s what people want. We need to think more deeply about what we humans really want.

Let me give you a couple of examples. The first example is the Wikipedia, an open content encyclopedia that anyone in the world can look at for free. But anyone in the world can also change it. How could that possibly work? The way it works is that there’s a list of recent changes, and frequent contributors are always watching that list. If people think a change is wrong or questionable, they immediately flag that page. Over time, it gets better and better. It’s probably not as good as the Encyclopedia Britannica, but it’s very, very good. This illustrates the themes of freedom and scale. Freedom because anyone in the world can contribute, but there’s also global scale in the pool of people contributors can draw upon.

You may be thinking, what does this strange little encyclopedia that’s not a business and doesn’t make money have to do with business? Let’s look at another example: Ebay. What most people don’t know is that 150,000 of its sellers make their full-time living on Ebay. If those people were employees of Ebay, it’d be one of the largest employers and retailers in the world. But they’re not employees. They’re independent store owners, and they have all the freedom independent store owners have. Coupled with that, they also have global scale.

Why do these examples mean this is going to happen in more places? This is the next logical stage in a very common pattern in the evolution of human organizations. This pattern happened first in the ways humans organized their societies. People made their living hunting and gathering, and they lived in small, decentralized, egalitarian groups called bands. Then we saw the rise of larger and larger human societies ruled by centralized leaders called emperors and kings. Then, 200 years ago, with the American Revolution and the French Revolution, we saw the emergence of democracy.

What explains this change? There are lots of factors involved, but surprisingly, a single factor can explain all three stages: the declining cost of communication. When communication was expensive, the only thing you could do was have small, face-to-face decision making groups. With the development of the first information technology, writing, it became possible to organize people in larger groups. It took another information technology, the printing press, to make the third way of organizing societies feasible.

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That’s pretty interesting. What’s even more interesting is that this pattern is playing out again on a much more rapid time scale in business. For most of history, businesses were organized as small, family, local affairs not too different than the bands of our hunting and gathering ancestors. Then, with the introduction of the telegraph and telephone, it was possible to work on a larger scale. This was the main story in the 20th century, the rise of the kingdoms of the business world. And the Internet now makes it possible to have far more people involved in making decisions. It’s now possible to enter the third major stage of how businesses are organized.

Just because it’s possible doesn’t mean it’s desirable. But it turns out that there are a bunch of good things that happen when people make their own decisions. They’re more motivated, creative, flexible, and often just plain like it better. Those benefits of decentralized decision making aren’t always important. And in some places, where communication is more expensive, we can still see centralization. But the critical qualities of success are exactly those things that come from decentralization. That’s why I think we’ll see more decentralization in more parts of business.

If that’s true, what will it look like? There are three main ways large groups of people can make decentralized decisions: loose hierarchies, democracies, and markets. A loose hierarchy means that there are still bosses, but lots of important decisions get delegated. Consultancies, research universities, and R&D are organized like this. But my favorite example is a company called AES. They give huge amounts of responsibility to low-level employees. They don’t have to get approval, but they do have to get advice. And the more important a decision, the higher up you have to go for that advice.

The next way is with democracies. We already use democracies at the very top of most big companies, the board of directors. And most managers use a loose form of democracy when they poll people. But there will be more and more places where we use more formal modes of democracy. There’s a company in the Basque region of Spain called the Mondragon Cooperative Corporation. They don’t yet make heavy use of information technology, but each person who’s been with one of the co-ops for a couple of years becomes a member. As a member, the workers get to elect the equivalent of the board of directors. They have that repeated in 22 industry groups as well as the top of the corporation.

The third major way is with markets. There are basically two main kinds of markets: external and internal. An external market just means outsourcing things that might have been done instead inside the boundaries of a company. This leads to the “e-lance” economy. With internal markets, we can have many of the benefits of decentralization inside the boundaries of a single company. My favorite example of how that might work is with a scenario we ran with Intel about how they could figure out their product scheduling. The basic idea is that they could do that by having an internal futures market in which a manager would sell the rights to have certain products available. As the expectations of plant managers and sales managers change, the prices in this internal futures market could continually adapt.

What does all this mean for business? First, it highlights the importance of having lots of ways of giving individual people at the center of their universes, access to all kinds of information about other people to make business decisions for themselves. But most of all it highlights the possibility of a new layer of design. The next layer up is the organizational layer. And the biggest challenge will be how to design human organizations and business organizations in ways that can take advantage of information technology, give people more information, and give people more freedom and decision making power.

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The more we do that, we’ll be able to foster more motivation, creativity, flexibility, and happiness.