Exponential Organizations by Salim Ismail

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Salim Ismail wrote the book Exponential Organizations to teach us how companies whose impact is at least 10x larger than their peers think differently than the rest of us.

As angel investor David S. Rose once said,

“Any company designed for success in the 20th century is doomed to failure in the 21st.”

This is your roadmap for preparing your business for what’s to come.

Understanding Moore’s Law and its Corollary

Moore’s Law basically states that the performance of computation will double about every eighteen months. This has held true for the last six decades.

Ray Kurzweil has noticed an interesting corollary to this law, that this doubling pattern applies to any information technology.

Basically, when you shift to an information-based environment, the pace of development jumps onto an exponential growth curve, much like Moore’s Law.

The challenge in the business environment is that most experts will project growth linearly in times of exponential change. This becomes a problem in an environment where everything is being information enabled, including your industry.

The good news is that information-enabled environments deliver fundamentally disruptive opportunities. There are 2 fundamental drivers of this change:

– Some aspect of the company’s product has been information enabled and thus, can take on the doubling characteristics of information growth;

– Thanks to the fact that information is liquid, business functions can be transferred outside of the organization – to users, fans, partners or the general public.

Let’s now move on to what the authors suggest we do about this transformation.

Have a Massive Transformative Purpose

One of the things that the authors found in each of the Exponential Organizations was the presence of a Massive Transformative Purpose – the aspirational purpose of the organization.

They give examples like TED, whose MTP is “Ideas worth spreading”, and Google, whose MTP is “Organize the world’s information.”

The most important thing to keep in mind is that your MTP should be something that creates what John Seely Brown calls the “Power of Pull” – the ability to create a movement around the work that you do.

External Characteristics: SCALE

There are 5 external characteristics of an Exponential Organization, which when you put together create the acronym SCALE.

1. Staff on Demand.

In an information-enabled business, a large internal staff seems increasingly unnecessary, counterproductive and expensive.

Freelancers and contractors used to be difficult to find and manage, but since the cost of finding them and tracking them now falls to zero, no argument can be made against using them. You can get almost anything done in your business through the combination of oDesk, Elance, TaskRabbit and any of the other “on-demand” platforms that exist today.

Consider this – by 2020 the world will have five billion people online who are available to work via smartphones, tablets or at Internet cafes, whenever and only if you need them.

2. Community & Crowd.

Chris Anderson, the former editor of Wired Magazine and now the head of a community called DIY Drones (with 55,000 current members), points out that “If you build communities and you do things in public, you don’t have to find the right people, they find you.”

According to the authors, there are three steps to building a community around an Exponential Organization:

– First, use your MTP to engage early members, all of which will have similar passions.

– Second, nurture the community. Anderson spends three hours every morning attending to the DIY Drones community. This includes listening and giving back.

– Third, create a platform to automate peer-to-peer engagement. Github has users rate and review each other’s code. Uber has drivers and passengers rate each other.

The people you will attract will include employees, customers, vendors, partners, users and fans. If these are the people in your community, the people in the crowd is everybody else.

One of the most obvious use cases for the crowd is to get those people to work for you. As Silicon Valley visionary Bill Joy famously said, “The smartest people in the world don’t work for you.”

This will lead to an organization that is not only much more agile, it will be better at learning and unlearning due to the diversity and volume of the flexible workforce.

3. Algorithms.

Machine learning may sound scary, but it’s the future of business.

Google revenues in 2002 were less than a half-billion dollars. In 2012, they were generating that much every three days. At the core was the PageRank algorithm, which ranks the popularity of web pages.

There are two types of algorithms that are driving the next wave of growth:

Machine Learning: the ability to accurately perform new, unseen tasks, built on known properties learning from training or historic data, and based on prediction.

Deep Learning: a new and exciting subset of Machine Learning based on neural net technology. It allows a machine to discover new patterns without being exposed to any historical or training data. It operates in much the same way that a baby learns first sounds, then words, then sentences, and even languages.

Deep Learning algorithms can even play video games by figuring out the rules of the game and then optimizing performance. What’s coming is the disruption of white collar jobs that will eventually be replaced with machines.

Don’t believe it?

An analysis by the American Psychological Association of seventeen studies on hiring practices found that a simple algorithm beat intuitive hiring practices by more than 25 percent in terms of successful hires.

4. Leveraged Assets.

The main idea here is to own only what’s critical to your business, and outsource the rest.

One of the biggest examples is Amazon Web Services, which allows companies to lease on-demand computing that scales on a variable cost basis. This completely transformed the technology landscape in ways that were previously unimaginable.

Right now there are competitors to your business springing up that previously would have needed hundreds of thousands of dollars just to begin operation that are now able to start for a few dollars charged to a credit card.

The most famous example is Uber, which doesn’t own any of the mission critical assets it employs. All of the cars used to transport millions of riders around the world are owned by the drivers themselves.

Non-ownership is the key to owning the future, except when it comes to scarce resources or assets. When the asset in question is rare or extremely scarce, then ownership is a better option. But if your asset is information-based or commoditized, then accessing it is better than owning it.

5. Engagement.

User engagement techniques like sweepstakes and airline miles have ben around for a long time. But now that these techniques have been information-enabled and socialized, the power of engagement is being multiplied.

The key attributes of any engagement program include:

– Ranking transparency

– Self-efficacy

– Peer pressure

– Eliciting positive rather than negative emotions to drive long-term behaviour change

– Instant feedback

– Clear rules, goals and rewards

– Virtual currencies or points

These types of programs can be used to engage all of your stakeholders – including employees, your community and the crowd.

Internal Characteristics:

There are 5 internal characteristics of an Exponential Organization, which when you put together create the acronym IDEAS.

1. Interfaces.

These are algorithms and automated workflows that route the output of SCALE externalities to the right people at the right time internally.

For example, Uber uses interfaces and automated workflows to manage its army of drivers. Most critically, it’s algorithm matches the best/closest driver to a user location to ensure the best possible customer experience.

The best way to think about Interfaces is that they help to manage abundance. When you have to manage tens of thousands (or even millions) of external partners, you need a way to manage everything so it doesn’t fall apart.

Without these interfaces the Exponential Organization cannot scale.

2. Dashboards.

Now that there is so much information available, you need a new way to measure and manage the organization – a real-time, adaptable dashboard with all essential company and employee metrics, assessable to everyone in the organization.

Scientific studies in neuroscience, gamification and behavioural economics have shown the importance of both specificity and frequent feedback in driving behavioural change and having an impact.

So, tracking the critical growth drivers of your business in real time is critical to your success. This allows you to minimize exposure from error because of short feedback loops.

An example of how shortening feedback loops is so critical comes from Sears/Kmart and Walmart. In the early 1990’s, Sears and Kmart would batch up all point-of-sale transactions on a daily basis, and the results would only find it’s way to the head office after several weeks. Walmart, on the other hand, built a real-time inventory system that it used to crush Sears and Kmart, and they have never fully recovered.

3. Experimentation.

As John Seely Brown notes, all corporate architectures are set up to withstand risk and change. All corporate planning efforts attempt to scale efficiency and predictability, which means they work to create static.

In order to get to ideas that can help shape the future of your organization, you need to fail fast and fail often, while eliminating waste.

Basically, you research the needs of your customers, and the conduct an experiment to see if a proposed product meets those needs.

As Eric Ries says, “the modern rule of competition is whoever learns fastest, wins.”

For example, Adobe uses a corporate innovation process called the 5x5x5x5 method. Five corporate teams with five complementary team members compete for five weeks (one or two days per week), spending no more than $5,000 to produce one innovation.

After that time, each team presents their product and findings, and the most promising projects move on to get more funding.

4. Autonomy.

Give your employees the room to do their best work.

Teams with Autonomy are self-organizing, multi-disciplinary and operating with decentralized authority.

Valve Software is a great example – they have 330 staff, but no classic management structure, reporting lines, job descriptions or regular meetings.

Instead, the company hires talented, innovative self-starters, who decide which projects they wish to join. They are also encouraged to start new projects, as long as they fit the company’s MTP.

A growing trend in Autonomy is called Holacracy, which is a system of organizational governance where authority and decision making are distributed through self-organizing teams rather than being vested in the top of a hierarchy.

A famous example of this is Zappos.com, which has 4,000 employees and is an online retailer geared towards shoes and clothing. Everybody in the company is encouraged to make decisions on their own, and to always make them with the best interest of their customers in mind.

5. Social Technologies.

J.P. Rangaswami, the chief scientist at Salesforce, views social technology as having three key objectives:

1. Reduce the distance between obtaining information and decision making;

2. Migrate from having to look up information to having it flow through your perception;

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