by Gary Hamel

In Part One of this posting, I argued that the Web has the power to turn management-as-usual inside out. Now let’s consider five of the built-in “design flaws” that limit the performance of traditional bureaucratic organizations, and imagine briefly how the Web might help forward-thinking companies to overcome these deficits.

Design flaw #1: Share of voice equals share of power. In hierarchically arranged companies, the farther down employees sit in the organization, or the more unconventional their views, the harder it is for them to get a hearing. In contrast, the views of senior executives are often assigned a lofty “coefficient of credibility” simply because those folks sit higher up in the hierarchy.

A potential Web-based solution: A democracy of ideas. The Internet is a thoughtocracy, and as such, it has decisively destroyed the power of the elites to determine what gets published and who gets heard. The result? A torrent of online opinion, comment, advice, and insight. Unfortunately, the explosive growth of “citizen media” hasn’t been matched by equally dramatic changes in the market for ideas inside most large companies.

If you want to dramatically increase the quality of dialogue—and decisions—in your company, you have to think boldly. What if your company encouraged people to write critical in-house blogs (and allowed them to do it anonymously if they so wished)? What if it tracked the number of responses each blog posting generated (its “authority index”) and then required senior executives to respond to those that garnered the most feedback? What if it appointed an employee jury to award a monthly prize for the best blog posting—as a way of rewarding the most thoughtful, amusing, or courageous contributors? Sure, there will be objections and downsides. Attacks might get personal. Internal criticism may leak outside. All of this is possible—no, probable. Yet one must weigh these costs against the price that is paid for pushing dissent underground, for missing opportunities to improve the quality of key decisions, or of wasting the intellect of employees who don’t feel free to speak out on issues they care about.

Design flaw #2: Creative apartheid. In many companies, innovation is seen as the responsibility of the “creative types” who work in R&D or in new product development. Everyone else is viewed as peripheral to the task of innovation. This sort of “creative apartheid” denies “ordinary” employees the chance to fully exercise their imaginations, and thereby limits a company’s overall innovation performance.

A potential Web-based solution: Distributing the tools of innovation. Make no mistake, your company is filled with video bloggers, mixers, hackers, mashers, tuners, and podcasters. Like everyone else with a computer, they have been using Photoshop, TypePad, GarageBand, Final Cut Express, ProTools, VideoStudio, Home Designer Pro, and thousands of other creativity-boosting applications to give vent to their artistic urges. The question is what is your company doing to help all of these ingenious people become fully empowered business innovators? Has your company given every employee access to a comprehensive suite of business innovation tools? Do associates have unrestricted access to a global database of customer insights and competitor intelligence? Can they download detailed financial models in order to explore the profitability implications of changes in pricing, promotional spending, staffing, or other variables? Do they have online access to comprehensive maps of key business processes so they can analyze opportunities to reconfigure workflows? Does every employee have the chance to mock up new product designs using computer-aided design software? Is there an internal Web site that helps individuals garner peer feedback on their creative ideas? If not, your company isn’t really Web-enabled.

Design flaw #3: Under-informed decisions. Hubris, unchallenged assumptions, and inattention to competing viewpoints often lead to poor decision-making at the top. In a recent large-scale study, senior executives judged nearly a quarter of their decisions to have been wrong. (An independent audit would probably have put the figure higher.) Another study found that misplaced confidence frequently leads CEOs to seriously over-pay for acquisitions. The fact is, it’s virtually impossible for a small cadre of senior executives to accurately estimate the costs and benefits of a complex strategic decision.

A potential Web-based solution: A market for judgment. The Web is a great tool for collating the views of hundreds—or even thousands—of individuals and has spawned a wide variety of “opinion markets.” Suppose, for a moment, that your company created an internal “market for judgment” that aggregated the views of a broad cross section of employees with the goal of establishing the odds that a particular project will meet its intended return. For every big new project, employees would have the chance to buy a security that would pay out only if the initiative achieved a predetermined rate of return. These securities would be launched while the project was still in the planning stage, and the price of the security would reflect a wide range of opinions on the project’s likely success. Imagine, for example, a security that pays out $1,000 after 5 years if a specified project delivers an internal rate of return of 15% or better. If 6 months prior to breaking ground the security is selling for $100, it’s obvious that most employees are highly skeptical about the project’s prospects. Senior executives could still green-light the plan, but they would have a lot of explaining to do if the initiative ultimately failed.

Design flaw #4: A monopsony for new ideas. While an entrepreneur in Silicon Valley often has the chance to pitch a business plan to a half a dozen or more venture capitalists, in the average Fortune 500 company an employee with a new idea has only one place to go for funding—up the chain of command. This is often a substantial barrier to lining up capital and talent behind new ideas.

A potential Web-based solution: An internal “band of angels.” A new breed of online peer-to-peer banks, such as Zopa and Prospect, are helping lenders and borrowers to find each other and do business without the overhead of, well, bankers. These social markets provide a model for how your company might create more funding options for employees eager to experiment with new ideas. In most of the companies I work with, there are somewhere between a few hundred and few thousand individuals who control a budget of more than $100,000 per year. Imagine that each of these budget holders was given permission to invest up to 55% of their discretionary resources in any idea, anywhere across the company that they deemed attractive. Suddenly, internal entrepreneurs would have the chance to appeal to dozens of potential “angel investors.” No longer would a new idea die simply because it didn’t fit the prejudices or priorities of one’s boss.

Design flaw #5: Persistent misalignment between power and competence. Companies get into trouble when the mental models of key business leaders depreciate faster than their political power. Given the fact that it is politically difficult to reassign power in large organizations, since doing so typically involves firing or demoting a senior executive, there is often a substantial time delay between when an executive’s value-add starts to decline and a formal realignment of authority. The price paid for this time lag: an organization that fails to adapt to fast-changing circumstances.

A potential Web-based solution: Reverse accountability. An ideal management system would be one in which power was automatically redistributed when environmental changes devalued executive knowledge and competence. You may find it hard to imagine an organization in which authority is a fluid commodity, flowing smoothly toward leaders who add value and away from those who don’t, yet this is how the Web works today. In the online world, power and influence are the product of de facto leadership, rather than de jure appointments. Hierarchies get built from the bottom-up, rather than from the top down. In this sense they are natural rather than proscribed.

While the value of hierarchy as an organizing tool will wane in the years to come, it will never disappear. Some people, at certain times and on certain issues, will always wield more authority than others. Yet embedded in this pedestrian fact are some crucial questions: How is that authority gained? Under what circumstances is it lost? And what limits the ways in which it can be exercised? Consider the case of Linus Torvalds, the chief custodian of the Linux open software community. Torvalds has no formal power. He wasn’t appointed by a board and he has no direct reports. Torvalds’ power is granted from below, unbuttressed by formal positions and titles. His influence rests on his ability to recognize, balance, and serve the interests of the Linux development community. Every developer has the freedom to ignore Torvalds’ views on the evolution of Linux and “fork the code.” In this sense, Torvalds’ power is always open to challenge. As a servant leader, Torvald’s power is also constrained by the necessity for consultation and transparency—he can’t afford the luxury of making capricious decisions, and must extend “due process” to every well-intentioned idea. The moment Torvalds stops adding value, or starts making parochial, self-serving decisions, his power will start to erode. Companies everywhere should be looking for ways to apply this principle of “reverse accountability” in their own organizations—as it may be the best possible insurance against the fast-rising costs of organizational maladaptation.

It is difficult to think of any radical changes to the way companies organize and manage that don’t involve a dilution of executive power—this is hardly surprising, since the ultimate power for setting strategy and direction in most companies is still concentrated, Soviet-like, in the hands of a few senior executives. Given this, we shouldn’t be surprised if it takes a few years, or a few decades, for the outlines of Management 2.0 to fully emerge. Turkeys don’t vote for Thanksgiving, and senior vice presidents are unlikely to vote for a dramatic redistribution of authority. Nevertheless, the companies that take an early lead in webifying their management models are likely to enjoy even greater long-term rewards than companies which, like Amazon, pioneered new Web-based business models, or, like FedEx, have used the Internet to transform their operating model.

So here are a couple of questions for you: Can you think of other design flaws that limit the ability of large bureaucratic organizations to innovate, adapt, and get the very best out of their people? If so, do any of the Web’s nascent social technologies seem to offer the potential for a design fix? Please share your thoughts with all of us on this blog who are working to build Management 2.0.

by Gary Hamel

Over the last decade, the Internet has dramatically transformed the world of business. It has enabled real-time, globe-spanning supply lines, 24/7 customer service, and the digital distribution of many products and services. It has reduced the costs of coordination across geographic and organizational boundaries, and made it easier for companies to arbitrage wage costs via outsourcing and off-shoring. Just as significantly, the Web has allowed a swarm of upstarts to circumvent long-standing entry barriers in industries as diverse as publishing, music, travel, retailing, and insurance. Whether it’s incumbent companies overhauling old operating models, or newcomers blowing up time-worn business models, the Internet’s impact on business has been pervasive and profound.

Yet when it comes to the management models that predominate most companies—the methods and processes used to create strategies, set goals, make critical decisions, allocate resources, and align human effort—the Web’s impact has been comparatively modest.

While e-mail, Intranets, webcasts, and a burgeoning array of online collaboration tools have helped to make management more efficient, there’s little evidence that the Web has dramatically altered the responsibilities of business leaders, or fundamentally changed the way in which they do their jobs—at least thus far. Looking forward, though, there’s every reason to believe that the Internet will change the work of management just as thoroughly as it’s changed every other facet of commercial life. Why? Because the Internet is an immensely powerful tool for multiplying human accomplishment—a goal that is central to the work of every manager and the design of every management system.

At its essence, “modern” management is nothing more than a technology for “getting more out of people.” Unfortunately, it’s easy to lose sight of this simple truth when one is surrounded by the clanging Rube Goldberg-like machinery of corporate decision making—the never-ending budget wrangles, the elaborately staged planning sessions, the carefully scripted review meetings, and a gaggle of other similarly contentious and time-consuming rituals. Yet to fully appreciate the power of the Internet to transform the work of management, we have to go back to basics, and focus on the two essential tasks that confront anyone who seeks to extend the boundaries of human achievement.

The first task is to amplify human capabilities—that is, to create an environment in which individuals are empowered, equipped, and encouraged to give the very best of themselves. Studies show that fewer than 20% of employees around the world are highly engaged in their work. This is a potentially debilitating handicap for organizations competing in today’s “creative economy.” Disengaged employees may be obedient, industrious, and smart, but they are unlikely to bring their initiative, creativity, and passion to work—even though, as individuals, they may be richly endowed with these high value capabilities. The right tools, a compelling sense of mission, access to information, the freedom to chose one’s work, high caliber colleagues, a stimulating physical environment—these are a just a few of the things that help to amplify individual accomplishment.

The second task of management is to aggregate individual efforts together in ways that make it possible for human beings to do together what they couldn’t do on their own. No single individual can construct a jetliner, build a robust computer operating system, or make an Oscar-winning movie. Once unleashed, human effort must be coordinated, and coordination tasks come in varying degrees of complexity. The simplest involves merely pooling resources—assembling a busload of farm laborers, for example, and delivering them to an orchard that needs pruning. At the other end of the spectrum is the challenge of optimizing the performance of a highly complex production system that requires the sequencing and integration of a varied mix of critical inputs. Improving the yields in a semiconductor factory, or better managing risk in a global bank are examples of tasks that demand high levels of coordination.

One can picture these core challenges on two axes, as in Figure 1. Improving managerial effectiveness entails getting better at both amplifying and aggregating human capability—and it is this challenge that brings us back to the Internet. Over the next decade or two, it is likely that Internet will grow into the most powerful tool that humanity has ever possessed for boosting human accomplishment.

Figure 1: The Essence of Management

Everything about the Internet, its global reach and configurability, its diversity and openness, its community-centric ethos, and anarchic disorderliness, serves to enlarge the scope for human accomplishment. Blogs, podcasts, mash-ups, wikis, folksonomies, opinion markets, discussion boards, and social networks—these technologies have already extended the range of human creativity and collaboration in ways that would have been unimaginable a decade or two ago, and there is much more to come.

While the social technology of management has made an immense contribution to the world’s economic welfare over the past century, it is now a mature technology. Peel away the new-age rhetoric about innovation and teamwork, and in most companies you will find a management model that conforms closely to Max Weber’s bureaucratic ideal. While pundits are already talking about Web 3.0, most companies are still running Management 1.0. Nevertheless, over the coming years, management as currently practiced, will largely be absorbed by, and/or supplanted by, the new social technologies of the Web.

Before the Internet, human beings had only two choices when confronted with the challenge of mobilizing human effort for productive ends—create a market or build a bureaucracy. While markets are great at unleashing initiative and passion—picture the frenzied madness of a Wall Street trading floor or the passionate haggling in an Arab souk—they’re not very good at complex coordination tasks. A market will never build an A380 (a feat that even Airbus finds difficult). Bureaucracies, on the other hand, were invented to aggregate human capabilities—and modern bureaucracies are capable of feats that would have amazed even pyramid-building Pharaohs.

Yet as every victim of red tape, myopic leadership, and organizational inertia knows, bureaucracies aren’t very good at amplifying human capabilities. In a Management 1.0 regime, initiative and creativity nearly always take a back seat to conformance and alignment. In such a setting, individuals with a sense of derring-do are labeled loose cannons; those with a large dollop of creative genius are dismissed as romantic dreamers; and anyone who’s truly passionate is likely to be viewed as slightly delusional. It’s hardly surprising, then, that most large organizations are less lively, less creative, and less adaptable—in short, less human—than the people who work there.

But now, thanks to the power of the Web, there may be an opportunity to transcend the market-versus-hierarchy trade-offs that have long bedeviled human beings. (See Figure 2.) Eventually, the Web may allow each of us to avoid the trade-off between fully exercising our humanity and being a full partner in a grand enterprise, between being enormously creative and enormously productive, between doing the things we love and doing things at scale. Even in its adolescence, the Web gives us reason to believe that such hopes are not entirely naïve.

Figure 2: Markets, Hierarchies, and Networks

Like the stock market, the Web allows individuals to “trade on their own account,” to be free agents in the global economy; yet unlike the stock market, it also allows them to collaborate across time and space to build things of enormous complexity—like a computer operating system. Like a bureaucracy, the Web is filled with mini-hierarchies, where some voices carry more authority than others; yet unlike a bureaucracy, where share of voice is a product of credentials and titles, influence on the Web is a measure of the value one actually brings to the broader community.

If we’re clever, and a bit courageous, the Web may well allow us to overcome some of the systemic pathologies of our long-in-the-tooth bureaucratic management model.

Moving Management Online (Part Two) will appear in two weeks.