Those Two Enemies Of Innovation – Organization And Process – Are Being Defeated.
In the twentieth century, the business world developed techniques and structures of organization and process that were instruments of power and control. The heroes of this era include Alfred P. Sloane, Peter Drucker, Michael Hammer and Jay Galbraith. There was some contribution from the military, who perfected the implementation of hierarchical control to the point where front-line soldiers would follow a general’s orders, transmitted through multiple managerial layers, to their death. That’s exemplary management! Hierarchical implementation of processes was the model for control.
Then there was a new reinforcement that entered via software. Processes could be automated so that there was no possible deviation – what Jorge Sanz has likened to “pouring concrete”, so that the path of process was followed faithfully without deviation. Business Process Engineering became the revenue stream of choice for many global consulting firms.
The power of organization and process was embraced by government, and this led to the stifling expansion of the administrative state. Government administrative processes are now so copious, so lengthy, and involve so much organizational apparatus that they can starve initiative to death before it can get going. Consider this example from Greece:
Yianna Balafouti, an entrepreneur in Athens, decided that doing business here isn’t worth the effort. Bureaucracy, along with economic depression and the absence of bank credit led her this year to shut down her delicatessen.
For years while she ran her business, authorities didn’t know how to categorize it. Her applications for approval of different food products were frequently returned because civil servants couldn’t figure out which regulatory codes to use. In the end, she said, she felt powerless to fight, lost all pleasure in running her business and closed it.
An emblematic investment under the bailout program was supposed to be the redevelopment of Athens’s former airport, now disused. But the project, planned since 2012, has been held up by one public body after another, including the authorities for archaeology, forestry and land registry, as well as slow-moving judicial proceedings to consider challenges from local residents.
Bureaucracy, unclear property rights, and political and judicial obstacles have impeded Greece’s attempt, at Germany and other lenders’ behest, to privatize some €50 billion ($57.7 billion) of state-owned land and other assets. Only around €6 billion of privatization revenue has been collected since the privatization drive was launched in 2011. “Bureaucracy is more powerful than people understand,” said Christopher Egleton, chairman of U.K.-based tourism company Minoan.
But we’d be remiss to pin the errors of organization and process only on government. They are also the reason why big corporations can’t innovate. Innovation is not a process, and it can’t be ordered into existence by a hierarchy. We now know, in fact, that innovation is a result of spontaneous order, emerging from interconnectedness and social conversation rather than process. Doing the right things in the right order can get you nowhere in innovation, while interconnectedness can lead to unexpectedly favorable outcomes.
Organization and process have a lot to answer for in holding back innovation. But there is hope. A new software revolution is developing, and this one is not pouring concrete. It’s liberating consumer sovereignty.
Steven A. Cohen and Matthew W. Granade call the new revolution “model driven businesses” which employ new forms of software to
put continuously learning models, built on “closed loop” data, at the center of what they do. When built right, they create a reinforcing cycle: Their products get better, allowing them to collect more data, which allows them to build better models, making their products better, and onward. These are model-driven businesses.
Cohen and Granade omit one important point. What makes products “get better” is consumer sovereignty. The consumer (or the customer for a B2B model) determines what is successful in the marketplace, what products are purchased, which services garner high ratings and user loyalty, and which producers and service providers make a profit. The authors hints at this in describing Tencent, the Chinese social media giant.
“We are the only company that has customer data across social media, payments, gaming, messaging, media, and music, and we have this information on [several hundred] million people. Our strategy is to put this data in the hands of several thousand data scientists, who can use it to make our products better and to better target advertising on our platform.” That unique data set powers a model factory that constantly improves user experience and increases profitability—attracting more users, further improving the models and profitability.
Those “people” the Tencent executive was referring to are consumers. Software executives refer to them, obtusely, as “users’, which misses the point but does not invalidate it. Consumers now have a much more powerful weapon in their negotiation with corporations over the quality and value of products and services: the creation of data. Every click, search, web-page visit, minutes spent on site, purchase, rating, product return and social media post is now a driver of an algorithm in a “model-driven business”. They should be called consumer-driven businesses. The old military and corporate hierarchies could not respond to consumer input; they were designed to give consumers orders, not to let them run the show. The old processes, set in concrete, were not designed for consumer sovereignty.
The new model-driven business has no organization and no process. It has data, algorithms and models, continuously learning and improving based on consumer input, without the hands or preferences or slow decision-making of managers and executives or the concrete pathways of business process software getting in the way. The future points to the elevation of consumer sovereignty over managerialism, which can only be good for freedom and individualism.