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

by Salim Ismail

6Ds: Digitized, Deceptive, Disruptive, Dematerialize, Demonetize and Democratize.

There must be a better way to organize ourselves. We’ve learned how to scale technology; now it’s time we learned how to scale organizations. This new age calls for a different solution to building new business, to improving rates of success and to solving the challenges that lie ahead. That solution is the Exponential Organization.

An Exponential Organization (ExO) is one whose impact (or output) is disproportionally large—at least 10x larger—compared to its peers because of the use of new organizational techniques that leverage accelerating technologies.

Archimedes once said, “Give me a lever long enough, and I’ll move the world.” Simply put, mankind has never had a bigger lever.

That is the very definition of a paradigm shift. There’s an important and foundational lesson illustrated in each of these anecdotes, which is that an information-based environment delivers fundamentally disruptive opportunities.

when you shift to an information-based environment, the pace of development jumps onto an exponential growth path and price/performance doubles every year or two.

Key Takeaways The experts in many fields will project linearly in times of exponential change. The explosive transition from film to digital photography is now occurring in several accelerating technologies. We are information-enabling everything. An information-enabled environment delivers fundamentally disruptive opportunities. Even traditional industries are ripe for disruption.

When you think linearly, when your operations are linear, and when your measures of performance and success are linear, you cannot help but end up with a linear organization, one that sees the world through a linear lens—as did even multi-billion dollar, technologically cutting-edge Nokia. Such an organization cannot help but have many of the following characteristics: Top-down and hierarchical in its organization Driven by financial outcomes Linear, sequential thinking Innovation primarily from within Strategic planning largely an extrapolation from the past Risk intolerance Process inflexibility Large number of employees Controls own assets Strongly invested in status quo

But each of these changes comes at great cost, because the flip side of size is flexibility. However hard they try, large companies with extensive facilities filled with tens of thousands of employees scattered around the world are challenged to operate nimbly in a fast-moving world.

Rapid or disruptive change is something that large, matrixed organizations find extremely difficult. Indeed, those who have attempted it have found that the organization’s “immune system” is liable to respond to the perceived threat with an attack. Gabriel Baldinucci, Chief Strategy Officer at Singularity University and a former principal at Virgin Group’s U.S. venture arm, has observed that there are two levels of immune responses. The first is to defend the core business because it’s the status quo; the second is to defend yourself as an individual because there’s more ROI for you than for the organization.

What makes traditional companies highly efficient at expansion and growth as long as market conditions remain unchanged is also what makes them extremely vulnerable to disruption.

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.

We have even found a simple metric that helps to identify and distinguish emerging Exponential Organizations: a minimum 10x improvement in output over four to five years.

Two key factors enabled Waze to succeed, and those two factors hold true for all next-generation ExO companies: Access resources you don’t own. In Waze’s case, the company made use of the GPS readings already on its users’ smartphones. Information is your greatest asset. More reliably than any other asset, information has the potential to double regularly. Rather than simply assembling assets, the key to success is accessing valuable caches of existing information.

the real, fundamental question of our exponential age is: What else can be information-enabled?

The key outcome when you access resources and information-enable them is that your marginal costs drop to zero. Quite possibly the granddaddy of information-based ExOs is Google, which doesn’t own the web pages it scans. Its revenue model, the butt of many jokes ten years ago, has enabled Google to become a $400 billion company, a milestone it reached by essentially manipulating textual (and now video) information.

This search for new sources of information that can underpin new companies and businesses is at the heart of the revolution often labeled Big Data. By combining vast stores of data with powerful new analytical tools, there is an opportunity to see the world in a new way—and to turn the resulting information into new business opportunities.

Key Takeaways Our organizational structures have evolved to manage scarcity. The concept of ownership works well for scarcity, but accessing or sharing works better in an abundant, information-based world. While the information-based world is now moving exponentially, our organizational structures are still very linear (especially large ones). We’ve learned how to scale technology; now it’s time to scale the organization. Matrix structures don’t work in an exponential, information-based world. ExOs have learned how to organize around an information-based world.

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

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.

In this chapter we will look at the Massive Transformative Purpose and the five external attributes that comprise SCALE.

if a company thinks small, it is unlikely to pursue a business strategy that will achieve rapid growth. Even if the company somehow manages to achieve an impressive level of growth, the scale of its business will quickly outpace its business model and leave the company lost and directionless. Thus, ExOs must aim high.

TED: “Ideas worth spreading.” Google: “Organize the world’s information.” X Prize Foundation: “Bring about radical breakthroughs for the benefit of humanity.” Quirky: “Make invention accessible.” Singularity University: “Positively impact one billion people.”

It’s important to note that an MTP is not a mission statement.

The most important outcome of a proper MTP is that it generates a cultural movement—what

That is, the MTP is so inspirational that a community forms around the ExO and spontaneously begins operating on its own, ultimately creating its own community, tribe and culture.

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?

A strong MTP is especially advantageous to “first movers.” If the MTP is sufficiently sweeping, there’s no place for competitors to go but beneath it. After all, it would be very hard for another organization to pop up and announce, “We’re also going to organize the world’s information, but better.” Once companies realize this singular advantage we can expect a land grab of genuine MTPs in the near future.

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).

Now that we understand the meaning and purpose of the Massive Transformative Purpose, it’s time to look at the five external characteristics that define an Exponential Organization, for which we use the acronym SCALE: Staff on Demand Community & Crowd Algorithms Leveraged Assets Engagement

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.

The reality is that most of the world’s smartest people don’t have the right credentials. They don’t speak the right language. They didn’t grow up in the right country. They didn’t go to the right university. They don’t know about you and you don’t know about them. They’re not available, and they already have a job.

“If you build communities and you do things in public,” he says, “you don’t have to find the right people, they find you.”

Typically, there are three steps to building a community around an ExO: Use the MTP to attract and engage early members.

Nurture the community.

Create a platform to automate peer-to-peer engagement.

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.

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

Deep Learning is 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.

We believe it’s just the beginning, and that many more algorithm-focused ExOs will pop up in the coming years, harnessing what Yuri van Geest calls the 5P benefits of big data: productivity, prevention, participation, personalization and prediction.

To implement algorithms, ExOs need to follow four steps: Gather: The algorithmic process starts with harnessing data, which is gathered via sensors or humans, or imported from public datasets. Organize: The next step is to organize the data, a process known as ETL (extract, transform and load). Apply: Once the data is accessible, machine learning tools such as Hadoop and Pivotal, or even (open source) deep learning algorithms like DeepMind, Vicarious and SkyMind, extract insights, identify trends and tune new algorithms. Expose: The final step is exposing the data, as if it were an open platform. Open data and APIs can be used to enable an ExO’s community to develop valuable services, new functionalities and innovation layered on top of the platform by remixing the ExO’s data with their own. Examples here include the Ford Motor Company, Uber, Rabobank, the Port of Rotterdam, IBM Watson, Wolfram Alpha, Twitter and Facebook.

As with Staff on Demand, ExOs retain their flexibility precisely by not owning assets, even in strategic areas. This practice optimizes flexibility and allows the enterprise to scale incredibly quickly as it obviates the need for staff to manage those assets.

Non-ownership, then, is the key to owning the future—except, of course, when it comes to scarce resources and assets. As noted above, Tesla owns its own factories and Amazon its own warehouses. 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 at all, then accessing is better than possessing.

Key attributes of Engagement include: Ranking transparency Self-efficacy (sense of control, agency and impact) Peer pressure (social comparison) Eliciting positive rather than negative emotions to drive long-term behavioral change Instant feedback (short feedback cycles) Clear, authentic rules, goals and rewards (only reward outputs, not inputs) Virtual currencies or points

Properly implemented, Engagement creates network effects and positive feedback loops with extraordinary reach. The biggest impact of engagement techniques is on customers and the entire external ecosystem. However, these techniques can also be used internally with employees to boost collaboration, innovation and loyalty.

“Human beings are wired to compete.”

“Gamification should empower people, not exploit them. It should feel good at the end of the day because you made progress towards something that mattered to you.”

To be successful, every gamification initiative should leverage the following game techniques: Dynamics: motivate behavior through scenarios, rules and progression Mechanics: help achieve goals through teams, competitions, rewards and feedback Components: track progress through quests, points, levels, badges and collections Gamification is not only used to tackle challenges and problems with the help of a community, it can also be used as a hiring tool.

An incentive prize creates a clear, measurable and objective goal, and offers a cash purse for the first team to reach that objective.