Exponential Organizations: Why new organizations are ten times better, faster, and cheaper than yours (and what to do about it)

by Salim Ismail

The concept of the Exponential Organization (ExO) first arose at Singularity University, which I co-founded in 2008 with noted futurist, author, entrepreneur-turned-AI director at Google, Ray Kurzweil. The goal was to create a new kind of university, one whose curriculum was constantly being updated. For that reason SU was never accredited—not because we didn’t care, but because the curriculum was changing too fast. SU would focus only on the exponentially growing (or accelerating technologies) that were riding on the back of Moore’s Law. Areas like infinite computing, sensors, networks, artificial intelligence, robotics, digital manufacturing, synthetic biology, digital medicine and nanomaterials. By design and desire, our students would be the world’s top entrepreneurs, as well as executives from Fortune 500 companies. Our mission: to help people positively impact the lives of a billion people.

Salim’s vision of the Exponential Organization is a powerful one. Potent forces are emerging in the world—exponential technologies, the DIY innovator, crowdfunding, crowdsourcing, and the rising billion—that will give us the power to solve many of the world’s grandest challenges and the potential to meet the needs of every man, women and child over the next two to three decades. These same forces are now empowering smaller and smaller teams to do what was once only possible via governments and the largest corporations.

Three billion new minds will join the global economy over the next half-dozen years. The relevance of this is twofold. First, these three billion people represent a new population of consumers who have never bought anything before. Consequentially, they represent a long tail of tens-of-trillions of dollars of emerging buying power. If they are not your direct customers, fear not; they are likely your customer’s customers. Second, this group—the “rising billion”—is a new entrepreneurial class powered with the latest generation of Internet-delivered technologies—everything from Google and Artificial Intelligence, to 3D printing and synthetic biology. As such, we will see an explosion in the rate of innovation, as millions of new innovators begin to experiment and upload their products and services and launch new businesses.

Now, in 2014, we are hard-pressed to identify any industry that hasn’t been fundamentally disrupted. And not just businesses, but jobs as well. As David Rose, a leading angel investor and founder of Gust, says, “Every single job function we can identify is being fundamentally transformed.” Even “old” industries such as construction are in the throes of disruption. Mike Halsall, a construction company executive, told us that significant disruptions to his industry include: Increased collaboration (making an opaque industry more transparent and substantially more efficient) Ever-more sophisticated design software and visualization 3D printing Halsall estimates that the sum of these disruptions could reduce the number of people working in construction by more than 25 percent within ten years. (The construction industry, by the way, represents a $4.7 trillion industry annually.) In the corporate travel industry, Russ Howell, EVP of Global Technology at BCD Travel, notes that 50 percent of the transactions at telephone-based call centers moved to the Internet in less than a decade. Furthermore, he expects 50 percent of those to move to mobile smartphones within three years. As this new information-based paradigm causes the very metabolism of the world to heat up, we’re increasingly feeling its macroeconomic impact. For example, the cheapest 3D printers now cost only $100, which means that within five years or so most of us will be able to afford 3D printers to fabricate toys, c...

Most large organizations use what is called a matrix structure. Product management, marketing and sales are often aligned vertically, and support functions such as legal, HR, finance and IT are usually horizontal. So the person handling legal for a product has two reporting lines, one to the head of product, who has revenue accountability, and the other to the head of legal, whose job it is to ensure consistency across numerous products. This is great for command and control, but it’s terrible for accountability, speed and risk tolerance. Every time you try to do something, you have to get authorization from all the muckety-mucks in HR, legal, accounting and so on, which takes time.

Of course, not all industries are “going lean.” One industry headed in the opposite direction is pharmaceuticals—to what we believe will be the industry’s regret. Once the low-hanging fruit of blockbuster drugs began winding down around 2012, instead of breaking into smaller, more flexible units, Big Pharma chose to pursue the consolidations and mergers that seemed to make Wall Street happy. We believe that increased size will reduce the flexibility of pharmaceutical companies even further, thus increasing their exposure to disruption.

Internet companies have changed the way we advertise and market. They have transformed the world of newspapers and publishing. And they have profoundly changed the way we communicate and interact with one another. One reason for that change is that the cost of distributing a product or service, particularly if can be converted almost entirely to information, has dropped almost to zero. It used to require millions of dollars in servers and software to launch a software company. Thanks to Amazon Web Services (AWS), it now costs just a tiny fraction of that amount. Similar stories can be found in every department in every industry of the modern economy.

To achieve this scalability, new ExO organizations such as Waze are turning the traditional organization inside out. Rather than owning assets or workforces and incrementally seeing a return on those assets, ExOs leverage external resources to achieve their objectives. For example, they maintain a very small core of employees and facilities, allowing enormous flexibility as margins soar. They enlist their customers and leverage offline and online communities in everything from product design to application development. They float atop the existing and emerging infrastructure rather than trying to own it. And they grow at incredible rates precisely because they aren’t dedicated to owning their market, but rather to enlisting it to their purposes. A great example is Medium, which is disrupting the magazine business by relying on its users to provide long-form articles.

Today, it is almost impossible to find a single startup that doesn’t use AWS.

As we saw with Waze in Chapter Two, there are two fundamental drivers that enable ExOs to achieve this level of scalability. The first is that some aspect of the company’s product has been information-enabled and thus, following Moore’s Law, can take on the doubling characteristics of information growth.

The second is that, thanks to the fact that information is essentially liquid, major business functions can be transferred outside of the organization—to users, fans, partners or the general public. (We’ll revisit this concept later.)

They include a Massive Transformative Purpose (MTP), as well as ten other attributes that reflect the internal mechanisms and externalities they’re leveraging to achieve exponential growth. We use the acronym SCALE to reflect the five external attributes, and the acronym IDEAS for the five internal attributes.

The right brain manages growth, creativity and uncertainty, while the left brain focuses on order, control and stability.

At first glance, these statements may seem to align with the trend in recent years to rewrite corporate statements to be shorter, simpler and more generalized.

The biggest imperative of a worthy MTP is its Purpose. Building on the seminal work by Simon Sinek, the Purpose must answer two critical “why” questions: Why do this work? Why does the organization exist?

Martin Seligman, a leading expert on positive psychology, differentiates between three states of happiness: the pleasurable life (hedonistic, superficial), the good life (family and friends) and the meaningful life (finding purpose, transcending ego, working toward a higher good).

Research shows that Millennials—those born between 1984 and 2002—are showing an orientation towards seeking meaning and purpose in their lives. Worldwide, they are becoming increasingly aspirational and, as such, will be drawn as customers, employees and investors to equally aspirational organizations—that is, to companies that have MTPs and live up to their tenets. In fact, we expect to see individuals coming up with their own MTPs, which will juxtapose, overlap and symbiotically exist with the organization’s MTP.

For any ExO, having Staff on Demand is a necessary characteristic for speed, functionality and flexibility in a fast-changing world. Leveraging personnel outside the base organization is key to creating and running a successful ExO. The fact is, no matter how talented your employees, chances are that most of them are becoming obsolete and uncompetitive right before your eyes.

As John Seely Brown has noted, the half-life of a learned skill used to be about thirty years. Today it’s down to about five years. In his recent book, The Startup of You, LinkedIn founder Reid Hoffman notes that individuals will increasingly learn to manage themselves as companies, with brand management (MTP!), and marketing and sales functions all brought down to the individual.

Staff-on-demand initiatives similar to Gigwalk are springing up everywhere: oDesk, Roamler, Elance, TaskRabbit and Amazon’s venerable Mechanical Turk are platforms where all levels of work, including highly skilled labor, can be outsourced. These companies, which represent just the first wave of this new business model, optimize the concept of paying for performance to lower customer risk.

As we conducted research for this book, it quickly became apparent how easy it is to outsource anything and everything. In fact, Timothy Ferris, author of the bestselling 4-Hour Workweek, has pioneered many new ideas around this topic.

ABA establishes metrics for each board member (for example, three phone calls per month to open doors) and then tracks those metrics. If a board member is not performing, and a difficult conversation is needed to push that member out, ABA handles it, relieving pressure on the CEO.

Nurture the community. Anderson spends three hours every morning attending to the DIY Drones community. Elements of nurturing include listening and giving back.

While similar, there is a distinct difference between Crowd and Staff on Demand. Staff on Demand is hired for a particular task and usually via a platform like Elance. Staff on Demand is managed—you tell workers what it is they have to do. Crowd, on the other hand, is pull-based. You open up an idea, funding opportunity or incentive prize…and let people find you.

Creativity, innovation and the overall process of generating, developing, and communicating new ideas can be accomplished through the use of tools and platforms. Some platforms to aid this process include IdeaScale, eYeka, Spigit, InnoCentive, SolutionXchange, Crowdtap and Brightidea.

As a result of both Staff on Demand and Community & Crowd, the core FTEs of an organization become smaller and its flexible workforce larger.