Many thanks to Thomas Vanderwal for the many conversations that inspired this post.
The average life expectancy of a human being in the 21st century is about 67 years. Do you know what the average life expectancy for a company is?
Surprisingly short, it turns out. In a recent talk, John Hagel pointed out that the average life expectancy of a company in the S&P 500 has dropped precipitously, from 75 years (in 1937) to 15 years in a more recent study. Why is the life expectancy of a company so low? And why is it dropping?
I believe that many of these companies are collapsing under their own weight. As companies grow they invariably increase in complexity, and as things get more complex they become more difficult to control.
The statistics back up this assumption. A recent analysis in the CYBEA Journallooked at profit-per-employee 475 of the S&P 500, and the results were astounding: As you triple the number of employees, their productivity drops by half (Chart here).
This “3/2 law” of employee productivity, along with the death rate for large companies, is pretty scary stuff. Surely we can do better?
I believe we can. The secret, I think, lies in understanding the nature of large, complex systems, and letting go of some of our traditional notions of how companies function.
THE COMPANY AS A MACHINE
Historically, we have thought of companies as machines, and we have designed them like we design machines. A machine typically has the following characteristics:
1. It’s designed to be controlled by a driver or operator.
2. It needs to be maintained, and when it breaks down, you fix it.
3. A machine pretty much works in the same way for the life of the machine. Eventually, things change, or the machine wears out, and you need to build or buy a new machine.
A car is a perfect example of machine design. It’s controlled by a driver. Mechanics perform routine maintenance and fix it when it breaks down. Eventually the car wears out, or your needs change, so you sell the car and buy a new one.
And we tend to design companies the way we design machines: We need the company to perform a certain function, so we design and build it to perform that function. Over time, things change. The company grows beyond a certain point. New systems are needed. Customers want different products and services, so we need to redesign and rebuild the machine to serve the new functions.
This kind of rebuilding goes by many names, including re-organization, reengineering, right-sizing, flattening and so on. The problem with this kind of thinking is that the nature of a machine is to remain static, while the nature of a company is to grow. This conflict causes all kinds of problems because you have to redesign and rebuild the company while you also need to operate it – an idea dramatized in an EDS commercial from a few years ago: Building an airplane in flight.
THE COMPANY AS AN ORGANISM
It’s time to think about what companies really are, and to design with that in mind. Companies are not so much machines as complex, dynamic, growing systems. As they get larger, acquiring smaller companies, entering into joint ventures and partnerships, and expanding overseas, they become “systems of systems” that rival nation-states in scale and reach.
So what happens if we rethink the modern company, if we stop thinking of it as a machine and start thinking of it as a complex, growing system? What happens if we think of it less like a machine and more like an organism? Or even better, what if we compared the company with other large, complex human systems, like, for example, the city?
Cities are large, complex, systems, but we don’t really try to control them. In Stephen B. Johnson‘s book Emergence: The Connected Lives of Ants, Brains, Cities, and Software
Cities have no central planning commissions that solve the problem of purchasing and distributing supplies… How do these cities avoid devastating swings between shortage and glut, year after year, decade after decade?
And cities aren’t just complex and difficult to control. They are also more productive than their corporate counterparts. In fact, the rules governing city productivity stand in stark contrast to the “3/2 rule” that applies to company productivity. As companies add people, productivity shrinks. But as cities add people, productivity actually grows.
A study by the Federal Reserve Bank of Philadelphia found that as the working population in a given area doubles, productivity (measured in this case by the rate of invention) goes up by 20%. This finding is borne out by study after study. If you’re interested in going deeper, take a look at this recent New York Times article: A Physicist Solves the City.
Okay, you say, but cities are fundamentally different than companies. Just because this works for cities doesn’t mean that it will work for companies. Right?
THE LONG-LIVED COMPANY
Actually there’s some interesting data there too. Back in the early 1980’s, right after the revolution in Iran, Shell Oil was concerned about the future of the oil industry. What might Shell look like after oil, they wondered? So they commissioned a study with some very interesting parameters:
1. First, they looked only at large companies with relative dominance in their industries, such as Shell had.
2. Second, they looked only at companies with very long lifespans – 100 years or more.
3. Third, they looked at companies who had made a major shift from one industry or product category to another.
In other words, they looked at the immortals: the companies that didn’t die.
The study was never published, but the findings were detailed in a book: The Living Company
Interestingly, these companies had a lot in common with large cities:
Ecosystems: Long-lived companies were decentralized. They tolerated “eccentric activities at the margins.” They were very active in partnerships and joint ventures. The boundaries of the company were less clearly delineated, and local groups had more autonomy over their decisions, than you would expect in the typical global corporation.
Strong identity: Although the organization was loosely controlled, long-lived companies were connected by a strong, shared culture. Everyone in the company understood the company’s values. These companies tended to promote from within in order to keep that culture strong. Cities also share this common identity: think of the difference between a New Yorker and a Los Angelino, or a Parisian, for example. At the Dachis Group we like to call this common culturehivemind.
Active listening: Long-lived companies had their eyes and ears focused on the world around them and were constantly seeking opportunities. Because of their decentralized nature and strong shared culture, it was easier for them to spot opportunities in the changing world and act, proactively and decisively, to capitalize on them. At Dachis we sometimes call this dynamic signal (watching and listening) and metafilter (information leading to decisive action).
DESIGN BY DIVISION
Historically we have designed companies like machines – by division. We constructed the org chart to divide the big chunks of work and separate them from each other: Finance, Sales, Operations. We designed the work flows that process inputs into outputs: raw materials into products, prospects into customers, complaints into resolutions.
As we design this kind of company – the divided company – we need to separate functions, which means people may not always have a sense of the larger thing they are working on. They get very good at one of the tasks but lose touch with the larger picture. So we have to design rigid policies and procedures, so people will function efficiently and so they won’t interfere with each others’ work.
The problem comes with scale. As the number of employees grows, the profit per employee shrinks. It’s a game of diminishing returns. Efficiencies of scale are balanced out by the burdens of bureaucracy. Divisions become silos, disconnected from each other. Overhead costs increase with size. The resulting need for control is what eventually kills a business.
DESIGN BY CONNECTION
Although we tend to design companies like machines, we instinctively and intuitively understand that, in the end, companies are not made of cogs, levers and gears. In the end they are made out of people. For top management, it would be wonderful if we could put our business strategy into the machine, push a button and wait for the results. But it doesn’t work that way. You have to put your strategy into people.
And today, thanks to social technologies, we finally have the tools to manage companies like the complex organisms they are. Social Business Design is design for companies that are made out of people. It’s design for complexity, for productivity, and for longevity. It’s not design by division but design by connection.
To design the connected company we must focus on the company as a complex ecosystem, a set of connections and potential connections, a decentralized organism that has eyes and ears everywhere that people touch the company, whether they are employees, partners, customers or suppliers.
Social Business Design is a new discipline but some basic rules are already emerging. And these emerging rules have less in common with traditional business design and more in common with urban design and city planning. It’s not about design for control so much as design for emergence. You don’t control a complex system, but you can manage its growth. Here are a few of those emerging practices that signal excellence in design by connection:
Understand the culture: A company is like a city in many ways. First and foremost, a city is about the people who live and work there; it’s an expression of their collective culture. And before you can start your path to the connected company, you first need to understand the culture (or cultures) that are already there, so you can look for ways to enhance and strengthen that shared identity.
Start small. Urban designers might look at maps or aerial views as they make their plans, but the life of a city happens at street level. As you initiate social programs, think of them as if you are designing a city street. A successful street, first and foremost, is filled with people. The last thing you want is a whole bunch of large, urban areas with no people in them. So start small, because the smaller the space is initially, the faster it will fill up with people. A good way to start is with an organization-wide project or initiative that requires participation from a number of people across the company. This gives you a cross-section of ideas and perspectives to look at as you plan the next stage.
Spaces need owners. Again, think of the city street: every business or building has an owner. The sidewalks have owners – typically every business at street level “polices” their stretch of sidewalk. And even the street has owners – the street sweeper, the cop on the beat. In the same way, make sure that every online space you create has someone positioned to take care of it, to keep it safe and clean.
Every person needs a place. In the same way that public spaces need caretakers, every person needs a place to live; somewhere they can put their stuff. As you build your social business, make sure that every single person has a place where they can see their stuff: their projects, the links they want to get back to, the documents they have created, their role, qualifications, expertise and so on.
Jumping-off points. A good city street offers opportunities that are unanticipated but serendipitous. The promising side-street. The sound of music coming through an open door. As you design for connection, think about how you might create those unexpected, but delightful, surprises. Every time someone visits an online space, there’s an opportunity to offer them an opportunity to explore something new.
Watch, listen, adjust and adapt. Design by connection is not a top-down activity so much as bottom-up. Complex systems just don’t work that way. In a complex system, you need to pay attention to small things and make little adjustments along the way. Pay attention to the culture, and watch how people react to the tools you provide. Are they using something in a different way than you expected? Find out why and see if you can enhance that. And what are they ignoring? If they’re not using something you expected them to use, go talk to them and see if you can figure out the reason.
The typical company has a very short life, from 15 to 50 years. But cities – and some companies – live much longer lifespans: from hundreds to thousands of years. Wouldn’t you like that for your company? I know I would.
If you have thoughts I would love to hear them. Please take a moment and leave a comment.
Some great and challenging thoughts here, Dave.
I think that the most important one from my point of view is the analogy of companies to cities.
For a way of peeking into the complexity and dynamics of the entity we call a city, check out Richard Saul Wurman’s project 19.2..21 http://www.192021.org/ and imagine the way we might make such “maps” of companies.
To me, the power of the analogy to cities lies in the complexity of moving parts, from public works to the ethos of the life in a city’s parks. The diverse sources of activity and material that together constitute the city are neither completely planned nor completely unplanned. Consider New York’s Central Park, which from the beginning was made on a plan that by definition had the unplannable element of the organic at the heart of its design.
One of the things missing from your perspective here, Dave, is the most important idea from Steven Johnson’s most recent book, Where Good Ideas Come From. Johnson calls attention to the crucial (and often unconsidered) fact that complex phenomena play out on multiple scales. This is the “dimensional” aspect of complexity, which leads to multi-layer, and multi-speed causality.
Clearly there are elements in companies, as in cities, that can and should be managed and other that must be designed for and with. In either case, the activities of managing and designing must be constant and engaged and at more than one scale.
I think that something else implied by your analogy is that cities that survive and thrive are perpetually unfinished. This to me is the most interesting and important point of your contrast between company as machine vs. company as organism. This relates to the difference in the sense we give to the idea of purpose when we think of a machine. One a machine is built, the die is often cast with respect to its value and uses. An unfinished design, like a city (a company), unfolds over time.
The question for me about both cities and companies, as I suspect it is for you, is how we can increasingly open them up as platforms for design that there citizens/”users” can extend. This has always happened in both companies and cities, but we have interesting new design tools that allow us to play at scales we never could have imagined before.
My last thought is that we should be careful of the either/or hypothesis. We don’t need, in order to take seriously your idea of “design by connection”, to think of companies as being EITHER machines OR organisms. They are both, and in each case, there is more than one kind of each. Cities are grids of electricity, circulatory systems of water and machines of governance from courts to trash collection. They are also made of humans, plants and animals, as well as many other forms of organism at various scales, including the city itself. It is designing for BOTH the machines and the organisms that makes design for emergent systems so challenging and interesting.
I’m grateful and hopeful that you and companies like Dachis are trying to help others struggle with and design for these challenges even while you struggle with them yourselves.
A great thought-provoking article but I didn’t see much mentioned about central planning in cities which does occur and very often, although not all through a single committee. There are separate departments for different city services.
Also think back towards cities that have evolved and lasted 500 years or more–there are no end of issues in terms of inefficiencies of roads, sewage treatment, even obscure legal code. Consider Athens (and most of Greece) where even determining who has legal claim to a house to be able to buy it can be very obscure–sometimes there are multiple documents from multiple landowner registries.
What’s more successful cities have been a combination of many different elements, some natural resources, some procedural, and others simply historical vantage points.
I don’t doubt the need to understand as an evolving organism but city-building analogy falls short.
Yes, cities do need to plan and they do have functions for that. The difference is in the degree of control that a city exerts compared to a company. City plans typically center around zoning for broad categories of activity, and the provision of essential services. This is very different than the way most companies do it.
Let’s take your other arguments:
1. Inefficiencies. There is no question that many cities struggle with inefficiencies as you have noted. Doesn’t that make it even more remarkable that they can still be more productive than companies, in spite of those inefficiencies? Companies also struggle with many inefficiencies, such as redundant, outdated systems, multiple data conflicts and so on.
2. Historical elements and situational advantages. Yes, cities vary widely in history, location and many other situational differences, and yet the research I mentioned indicates that in spite of these natural differences, all cities exhibit very similar characteristics, regardless of their unique differences. In addition, companies are just as much the product of their history and unique situational advantages as cities are.
Hi Dave,
Thank you very much for this great article/insight. I work as a business consultant that has to look at changing business processes (“bpm”) whenever there is a take-over or when companies merge. I have always said that when a big(ger) company takes over a smaller one it does so because of the potential the smaller company has shown, the adaptiveness or just going out on the limb to enter new markets etc. The big company shows a growth with sometimes double figures year after year with this (unsustained method) practice of take overs.
After the initial take-over when they start to merge the companies, the bigger one takes its values and uses it to blueprint the smaller one. I always say that a company has its own identity just like humans. When they have to work with the new guidelines etc that identity changes. The joke I make is that we are again trying to fit a ball into a smaller square. In the end it fits but some loss has taken place. The loss is usually the reason why it was so attractive for the take-over / merger in the first place.
This post wonderfully articulates why companies need to address complexity and underscores why connection and people are such essential elements in managing it. Powerful analogies and excellent points detailing what companies need to do differently. Thank you Dave.
We did some research on the 3/2 data rule.
Simply put, the 3/2 data holds up, but the interpretation of it being an organisation size problem is far too simplistic.
The data does not hold up so well on a sector level, and we also compared it to differing data sets (for example differing countries).
Most of the supposed productivity loss can be explained by the companies being in low cost employee markets.
However the data does show that clearly economies of scale are not significant. This could also be shown by looking at things like return on capital, which don’t rise significantly in large companies. Though the lifespan of a large company compared to a small one still tends to be longer (tho shortening).
It is a very interesting blog, and I don’t want to detract from that. Additionally, it is clear big does not mean big, but the 3/2 rule is just far too simple an interpretation, as such it is misleading.
Another hour of my life gone
Thanks for the comment! I have lots of questions, will follow up by email.
I see this line mentioned “we tend to design companies”, and yet, to my understanding, the article preaches a decentralized approach. It seems to be like a contradiction in terms. Large cities evolve, and evolved over time, having similarities with living organisms. The ones that have good traits, continue to develop, while the ones with not so successful approaches die slowly. In the light of this article, I see one person having in a company the same role as a cell has in an organism. Do we design companies ? Aren’t there other factors that design a company? Are living organisms designing themselves ? Isn’t the environment designing them?