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.

If you think the rate of innovation has been fast in recent years, let me be among the first to tell you: you haven’t seen anything yet.

But the question remains: how can you harness all of this creative power? How can you construct an enterprise that is as quick, adept and innovative as the people who will be part of it? How will you compete in this accelerated new world? How will you organize to scale? The answer is the Exponential Organization.

no current commercial, governmental or non-profit enterprise, as currently configured, can keep up with the pace that will be set by these 6Ds. To do so will require something radically new—a new vision of organization that is as technologically smart, adaptive and encompassing (not just of employees but of billions of people in vast social networks) as the new world in which it will operate—and ultimately transform. That vision is the Exponential Organization.

“The Iridium business plan was locked in place twelve years before the system became operational,” he recalls. That’s a long time, long enough that it was almost impossible to predict where the state of the art in digital communications would be by the time the satellite system was at last in place. We thus label this an Iridium Moment—using linear tools and the trends of the past to predict an accelerating future.

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Exponential Organizations Let’s begin with a definition: 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.

That steady, extraordinary, and seemingly impossible pace led futurist Ray Kurzweil, who has studied this phenomenon for thirty years, to make four signature observations: First, the doubling pattern identified by Gordon Moore in integrated circuits applies to any information technology. Kurzweil calls this the Law of Accelerating Returns (LOAR) and shows that doubling patterns in computation extend all the way back to 1900, far earlier than Moore’s original pronouncement. Second, the driver fueling this phenomenon is information. Once any domain, discipline, technology or industry becomes information-enabled and powered by information flows, its price/performance begins doubling approximately annually. Third, once that doubling pattern starts, it doesn’t stop. We use current computers to design faster computers, which then build faster computers, and so on. Finally, several key technologies today are now information-enabled and following the same trajectory. Those technologies include artificial intelligence (AI), robotics, biotech and bioinformatics, medicine, neuroscience, data science, 3D printing, nanotechnology and even aspects of energy.

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

Although many of the ideas we will present may seem radically new, they have been around, sub rosa, for a decade or more. We first identified the ExO paradigm as a weak signal in 2009, and noticed over a two-year period that several new organizations were following a specific model. In 2011, futurist Paul Saffo suggested to Salim that he write this book, and we have been seriously researching the ExO model for the last three years. To

For example, because mobile phones in the early 80s were bulky and expensive to use, renowned consulting firm McKinsey & Company advised AT&T not to enter the mobile telephone business, predicting there would be fewer than one million cellular phones in use by 2000. In fact, by 2000, there were one hundred million mobile phones. Not only was McKinsey’s prediction off by 99 percent, its recommendation also resulted in AT&T missing out on one of the biggest business opportunities of modern times.

A final example should drive the point home. In 1990, the Human Genome Project was launched with the aim of fully sequencing a single human genome. Estimates called for the project to take fifteen years and cost about $6 billion. In 1997, however, halfway through the estimated time frame, just 1 percent of the human genome had been sequenced. Every expert labeled the project a failure, pointing out that at seven years for just 1 percent, it would take seven hundred years to finish the sequencing. Craig Venter, one of the principal researchers, received calls from friends and colleagues imploring him to stop the project and not embarrass himself further. “Save your career,” he recalls them saying. “Return the money.” When Ray Kurzweil was asked his perspective, however, his view of the “impending disaster” was quite different. “1 percent,” he said. “That means we’re halfway done.” What Kurzweil got that no one else did was that the amount sequenced was doubling every year. 1 percent doubling seven times is 100 percent. Kurzweil’s math was correct, and in fact the project was completed in 2001, early and under budget. The so-called experts had missed the end point by 696 years.

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.

From time immemorial, human beings have worked to own “stuff” and then trade access to it. This behavior started in tribes, was adopted by clans, and then later spread to nations, empires, and most recently, global markets, making possible ever-larger human institutions. Value has always been generated by owning more land, more equipment, more machinery, more people. Ownership was the perfect strategy for managing scarce resources and ensuring a relatively predictable, stable environment.

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

Another major issue Salim has observed with matrix structures is that, over time, power accrues to the horizontals. Often, HR or legal have no incentive to say yes, so their default answer becomes no

Rapid or disruptive change is something that large, matrixed organizations find extremely difficult.

If we had to pick an official ExO origin date, it would be March 2006, when Amazon launched Amazon Web Services and created the low-cost “Cloud” for medium and small businesses. From that date on, the cost of running a data center moved from a fixed CAPEX (Capital Expenditure) cost to a variable cost. Today, it is almost impossible to find a single startup that doesn’t use AWS.

The following shows some ExOs and their minimum 10x performance improvement over their peers: Airbnb Hotels 90x more listings per employee GitHub Software 109x more repositories per employee Local Motors Automotive 1000x cheaper to produce new car model, 5-22x faster process for a car to produce (depending on vehicle) Quirky Consumer Goods 10x faster product development (29 days vs 300 days) Google Ventures Investments 2.5x more investments in early stage startups, 10x faster through design process Valve Gaming 30x more market cap per employee Tesla Automotive 30x more market cap per employee Tangerine (formerly ING Direct Canada) Banking 7x more customers per employee, 4x more deposits per customer

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. Andrew Rasiej, chairman of the New York Tech Meetup, said it best: “I think of Waze as a civics app. It’s collecting information about the movement of cars and people in public places. What else could you do with that data?”

Taking Rasiej’s observation a step further, 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. LinkedIn and Facebook together are worth...

It is our belief that most great new enterprises in the years to come will either build their businesses off new sources of information or by converting previously analog environments into information. And that environment increasingly i...

Most of all, we will explore why, if we are to succeed in business, the Exponential Organization is our destiny.

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.

David S. Rose, author of the bestselling book Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups, sums it up more dramatically: “Any company designed for success in the 20th century is doomed to failure in the 21st.”

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.)

Let’s now examine the major characteristics of Exponential Organizations. Based on our research—which includes the top one hundred fastest growing startups worldwide over the last six years—we have identified common traits across all ExOs. 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. Not every ExO has all ten attributes but the more it has, the more scalable it tends to be. Our research indicates that a minimum of four implemented attributes will achieve the ExO label and have you accelerate away from your competition.

A good metaphor we will use to frame ExO attributes is the two hemispheres of the brain. The right brain manages growth, creativity and uncertainty, while the left brain focuses on order, control and stability.

Massive Transformative Purpose (MTP) Exponential Organizations, almost by definition, think BIG. There’s a good reason for that: if a company thinks small, it is unlikely to pursue a business strategy that will achieve rapid growth. Even

That’s why, when we look at the position statements of existing Exponential Organizations, we encounter statements of purpose that might have seemed outrageous in years past: 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.” 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. But on closer inspection, you’ll note that each of the statements is also very aspirational. None states what the organization does, but rather what it aspires to accomplish. The aspirations are neither narrow nor even technology-specific. Rather, they aim to capture the hearts and minds—and imaginations and ambitions—of those both inside and (especially) outside the organization.

It’s important to note that an MTP is not a mission statement. Consider Cisco’s mission statement, which is neither inspirational nor aspirational: “Shape the future of the Internet by creating unprecedented value and opportunity for our customers, employees, investors, and ecosystem partners.” While there’s some Purpose there, and it’s somewhat Massive, it’s certainly not Transformative. Furthermore, it is a statement that could be used by at least a dozen Internet companies. If we were to write Cisco’s MTP, it would likely be something along the lines of, “Connecting everyone, everything, everywhere—all the time.” Now that would be exciting.

The most important outcome of a proper MTP is that it generates a cultural movement—what John Hagel and John Seely Brown call the “Power of Pull.” 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.

This cultural shift inspired by the MTP has its own secondary effects. For one thing, it moves the focal point of a team from internal politics to external impact. Most contemporary large companies are internally focused and often have lost touch—except through rigid and formalized marketing surveys and focus groups—with their market and customers.

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?

An MTP as a Competitive Edge 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.”

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).

Why Important? Dependencies or Prerequisites • Enables coherent exponential growth • Binds collective aspirations • Attracts top talent across the ecosystem • Supports a cooperative/non-political culture • Enables agility and learning • Must be unique • Leaders must walk the walk • Must support all three letters in acronym

Staff on Demand

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.

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.

For example, in an effort to keep the overall skills of the organization fresh, AMP, Australia’s largest insurance company, requires that half its 2,600-strong IT department be made up of contractors. According to Annalie Killian, a global executive at AMP, such a requirement is not just helpful; in this day and age, it’s mandatory.

While maintaining permanent staff is likely to remain more important in certain equipment- and capital-intensive industries such as shipping, mining or construction, in any information-enabled business a large internal staff seems increasingly unnecessary, counterproductive and expensive. And the old argument that freelancers and contractors only increase the bureaucracy needed to manage them quickly falls away too: thanks to the Internet, the cost of finding and tracking outside staff drops almost to zero. In addition, due to the rapid rise in the number of Internet users, the volume and quality of freelancers has gone up dramatically in the last ten years.

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.

In the words of Chris Anderson, the former editor-in-chief of Wired magazine: 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.

A firm called Advisory Board Architects (ABA) presents a fascinating example of how to take the Staff-on-Demand concept to a whole new level. ABA noticed two issues with company boards: First, as Jaime Grego-Mayer, a partner at ABA, notes, “95 percent of all boards are simply not managed,” since most of a CEO’s attention goes to managing the company. Second, removing a non-performing board member can be a delicate and political matter; because it’s embarrassing for the CEO, it usually doesn’t happen. ABA offers companies a human resources department for boards, allowing CEOs to outsource the management and tracking of the company board to the firm. 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.

In 2010, the world had 1.2 billion people online globally. By 2020, that number will reach five billion. Nearly three billion more people and their brains will be available to work via smartphones, tablets or at Internet cafes. The capabilities that will be unleashed are beyond imagination. Against this onslaught, what traditional organization, bogged down with permanent, full-time employees, can endure? Why Important? Dependencies or Prerequisites • Enables learning (fresh perspectives) • Allows agility • Forms stronger bonds among core team • Interfaces to manage SoD • Clear task specifications

Community & Crowd

It’s possible because Anderson has tapped into a large group of passionate enthusiasts who contribute time and expertise. “If you build communities and you do things in public,” he says, “you don’t have to find the right people, they find you.”