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

by Salim Ismail

Social Technologies

Social technology is finding fertile ground because the workplace has become increasingly digitized. It started with email, which provided asynchronous connectivity; next came wikis and intranets that provided synchronous information sharing; today we have activity streams that provide real-time updates throughout organizations.

Asana, a software company founded by Dustin Moskovitz (a co-founder of Facebook) and Justin Rosenstein improves work productivity, and is based on the principle that “your to-do list should be just as addicting as your Facebook wall.” File sharing, the fourth leg of the social stool, has recently enjoyed widespread adoption. Tools, from Google Drive, Box, Dropbox and Microsoft’s OneDrive, are vital to sharing information and providing updates to a single instantiation of customer information. For example, Citibank once had more than three hundred different customer databases, each consuming valuable overhead and costing enormous sums in duplication and redundancy. Such drag on costs and operations is simply not acceptable in an Exponential Organization—or, indeed, for any company trying to compete in the 21st

If you remember our list of linear attributes of traditional organizations from way back in Chapter Two, we can now juxtapose linear versus exponential characteristics: Linear Organization Characteristics ExO Characteristics Top-down and hierarchical in its organization Autonomy, Social Technologies Driven by financial outcomes MTP, Dashboards Linear, sequential thinking Experimentation, Autonomy Innovation primarily from within Community & Crowd, Staff on Demand, Leveraged Assets, Interfaces (innovation at the edges) Strategic planning largely an extrapolation from the past MTP, Experimentation Risk intolerance Experimentation Process inflexibility Autonomy, Experimentation Large number of FTEs Algorithms, Community & Crowd, Staff on Demand Controls/owns its own assets Leveraged Assets Strongly invested in status quo MTP, Dashboards, Experimentation

Let’s now look back at our definition of an ExO: “An Exponential Organization 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.”

Isaac Newton’s second law precisely summarizes the overall concept of an Exponential Organization. The law, F = MA, states that force causes acceleration in inverse proportion to mass. A small mass allows dramatic acceleration and quick changes in direction—precisely what we’re seeing with many ExOs today. With very little internal inertia (that is, number of employees, assets or organizational structures), they demonstrate extraordinary flexibility, which is a critical quality in today’s volatile world.

The key question for any organization is not whether you “look” like an Exponential Organization, but “How exponential are you?” That is, how much have you internalized the philosophy of being an ExO? How does it inform your daily operations in terms of autonomy and social technology? How efficiently do you use the right tools, from dashboards to interfacing? And how open are you to risk, to experimentation and even to failure?

Key Takeaways ExOs manage the abundant output of SCALE externalities with guidance from their MTP and the control framework of five internal IDEAS elements: Interfaces Dashboards Experimentation Autonomy Social Technologies The more assets and workforce you have, the harder it is to switch strategies and business models. The more information-enabled you are, the more strategic flexibility you have. A diagnostic survey (Appendix A or www.exponentialorgs.com/survey) will help measure the Exponential Quotient of your organization. Interfaces create frictionless migration from external to internal attributes. SCALE and IDEAS elements are self-reinforcing and integrative.

LinkedIn founder Reid Hoffman has said, “If you’re not embarrassed by the product when you launch, you’ve launched too late.” These days, product development cycles are measured not in months or quarters, but in hours or days. The Lean Startup movement, with its paradigm of constant iteration/experimentation, began on the Toyota car production line in the 1970s, moved to the Internet in the 1990s, and is today showing that it is applicable to almost any type of business.

2. Drive To Demonetization

What’s important to understand is that in the age of the Exponential Organization, the new information-enabled technologies will power exponential cost drops not just in sales and marketing, but also across every business function.

In a 2003 Harvard Business Review article entitled “One Number You Need to Grow,” Fred Reichheld introduced the concept of a Net Promoter Score (NPS), which measures the loyalty that exists between a provider and a consumer. An NPS can be as low as −100 (everybody is a detractor) or as high as +100 (everybody is a promoter). An NPS that is positive (i.e., higher than zero) is considered good, and an NPS of +50 is excellent. The NPS is largely based on a single, direct question: How likely is it that you would recommend our company/product/service to a friend or colleague? If you have a high NPS, then your sales function is free. If you are using peer-to-peer models, your service costs can also essentially be free. Using crowdsourcing and community ideation (such as Quirky or Gustin), your R&D and product development costs can also approach zero. And it doesn’t stop there. What we’re now seeing with ExOs—and this is tremendously important—is that the marginal cost of supply goes to zero.

As shown in their book Abundance, Peter Diamandis and Steven Kotler argue that as technology brings us a world of abundance, access will triumph over ownership. By comparison, scarcity of supply or resources tends to keep costs high and stimulates ownership over access.

Today, a trend known as Collaborative Consumption leverages the Internet and social networks to create a more efficient utilization of physical assets. The following shows just some of the vertical markets affected by the phenomenon of moving from “possess” to “access”: bartering, bike sharing, boat sharing, carpooling, ride sharing, car sharing, collaborative workspace, co-housing, co-working, crowdfunding, garden sharing, fractional ownership, peer-to-peer renting, product service system, seed swaps, taxi shares, time banks, virtual currency (Source: Wikipedia).

3. Disruption is the New Norm

In his influential bestseller The Innovator’s Dilemma, Clayton Christensen points out that disruptive innovation rarely comes from the status quo. That is, established industry players are rarely structured or prepared to counter disruption when eventually it appears. The newspaper industry is a perfect example: it sat by for a decade as Craigslist systematically disrupted the classified advertising model.

We see a consistent set of steps around disruptive innovation comprising the following: Domain (or technology) becomes information-enabled Costs drop exponentially and access is democratized Hobbyists come together to form an open source community New combinations of technologies and convergences are introduced New products and services appear that are orders of magnitude better and cheaper The status quo is disrupted (and the domain gets information-enabled)

We are seeing this evolution occur in drones, DNA sequencing, 3D printing, sensors, robotics and, certainly, Bitcoin. In each domain, an open source, networked community has sprung up, delivering an accelerated stream of innovation exactly in line with the steps listed above.

Beware the “Expert”

When Kaggle runs a competition, it has found that the first responders are experts in a particular domain who say, “We know this industry, we’ve done this before and we’ll figure it out.” And just as inevitably, within two weeks, complete newcomers to the field trounce their best results.

5. Death to the Five-Year Plan

One of the hallmarks of large companies is the presence of corporate strategy departments that formulate and publish five-year plans. These are multi-year strategies that are supposed to outline a company’s long-term vision and goals. In fact, the primary function of many corporate development departments is simply to fill in the details of that vision and provide specifics on planning, purchasing, HR and operations.

A few decades ago, it was feasible (and important) to plan out that far. Companies made strategic investments by looking ahead a decade or more, and the five-year plan served as the central document outlining the implementation details of those long-term strategic bets. However, in an exponential world, the five-year plan is not only unworkable, it is seriously counterproductive—and the advent of ExOs signals its death.

Built to Last: Successful Habits of Visionary Companies.

Moments of Impact: How to Design Strategic Conversations That Accelerate Change,

Chris Ertel and Lisa Kay Solomon outline the elements of successful planning and strategic meetings and decision-making within organizations to address a widespread problem: most planning and strategic meetings are a failure. Ertel and Solomon boil it down to five distinct phases for any team planning session or strategic decision: Define your purpose Engage Multiple Perspectives Frame the Issues Set the Scene Make it an Experience

Moments of Impact is an important guide for anyone interested in reducing the rash of mind-numbing, unproductive meetings and optimizing th...

Thus, the near future, certainly for ExOs, sees five-year plans being replaced with the following elements: MTPs for overall guidance and emotional enrollment. Dashboards to provide real time information on how a business is progressing. Leveraging “Moments of Impact” for clean, productive decision-...

In an ExO world, purpose trumps strategy and execution overrides planning. Replacing five-year plans with these new, real time elements can be scary but it’s also liberating, and the rewards for those willing t...

6. Smaller Beats Bigger (aka Size Does Matter, Just not the Way You Think)

All that is changing. In The Start-up of You, Reid Hoffman shows that transaction costs are no longer an advantage and that each individual can (and should) manage himself or herself as a business. Why? One reason is the unparalleled and unprecedented ability of a small team today to do big things—an ability that grows ever greater if the exponential technologies described in Chapter One are put to use. Both now and in the coming years, adaptability and agility will increasingly eclipse size and scale. A telling example

Joi Ito, director of the MIT Media Lab—which shows how startups are characterized by high upside potential and low downside, while large organizations are characterized by just the opposite.

Perhaps the earliest example of this platform model was Google. Its search prowess allowed it to scale quickly, and once the company hit critical mass, the AdWords platform enabled self-provisioning advertising platforms from which other companies could grow. Google in turn took its share by taxing that growth. Facebook was also successful at becoming a platform, relying on its extraordinary market penetration and knowledge about its users to spawn such ExOs as Zynga and its recent mobile efforts. Amazon is another success story, as is Apple’s App Store ecosystem, which is probably the clearest example of an ExO product becoming a platform. MySpace and Friendster, on the other hand, failed to become platforms.

So, the answer to the question of how big an Exponential Organization can get yields yet another, more precise, question: How quickly can you convert exponential growth into the critical mass needed to become a platform? Once that happens there is no practical limit. It’s one big coral reef.

For example, as Uber scales, it is helping its drivers buy cars. Its pre-purchase of 2,500 Google cars will provide an enormous data surge it can turn into new services. Uber today already is a platform with a critical mass of drivers, which allows it to move horizontally and offer new services: postal, gift and grocery delivery, as well as limousine and even medical services. All leverage Uber’s key retail and demand-driven positioning, resulting in nearly in...

Now that the asteroid of digitized information has hit, the global economy has changed forever. The era of traditional, hierarchical market domination by dinosaur companies is coming to an end. The world now belongs to smarter, smaller and faster-moving enterprises. This is certainly true now for information-based industries, and it will soon be true for more traditional industries as well.

7. Rent, Don’t Own An important mechanism empowering individuals and small teams everywhere is low-cost access to technology and tools.

comparable transformation is taking place with biotech equipment. BioCurious, another Silicon Valley invention, is an open wetlab where enthusiasts take courses, use centrifuges and test tubes, and synthesize DNA. Genspace offers a similar resource in New York City.

Airline operators used to build their own engines, an intricate and high-risk operation. Then GE and Rolls Royce, both experts in manufacturing engines, began offering leasing programs. Today, airlines pay for engines by the number of hours flown. In other words, something as expensive and complex as an aircraft engine has now become a rented, pay-as-you-go asset, rather than an expensive internal business unit.

8. Trust Beats Control and Open Beats Closed

As we saw with Valve software, autonomy can be a powerful motivator in the age of the Exponential Organization. The Millennial generation is naturally independent, digitally native and resistant to top-down control and hierarchies. To take full advantage of this new workforce and hang on to top talent, companies must embrace an open environment.

Google has done just that. As we outlined in Chapter Four, its Objectives and Key Results (OKR) system is fully transparent across the company. Any Googler can look up the OKRs of other colleagues and teams to see what they’re trying to achieve and how successful they’ve been in the past. Such transparency takes a considerable amount of cultural and organi...

According to David Vik, Zappos’ “company coach,” there are five key precepts to Zappos that drive culture across the organization: Vision: What you’re doing Purpose: Why you do it Business model: What will fuel you as you’re doing it Wow and uniqueness factors: What sets you apart from others Values: What matters to you

Another key reason that ExOs are implementing trust frameworks is that in an increasingly volatile world, predictable processes and steady, stable environments are now all but extinct. Anything predictable has been or will be automated by AI or robots, leaving the human worker to handle exceptional situations. As a result, the very nature of work is changing and requires more initiative and creativity from every team member. At the same time, team members often wish their organizations had more trust in them. According to a 2010 survey conducted for The Conference Board, a global business membership and research association, only 51 percent of Americans said they were satisfied with their bosses. It is important to understand that open trust frameworks cannot be implemented in isolation or simply by fiat. They are an important consequence of implementing Autonomy, Dashboards and/or Experimentation. One of the reasons Facebook has been so successful is the inherent trust that the company has placed in its people. At most software companies (and certainly the larger ones), a new software release goes through layers upon layers of unit testing, system testing and integration testing, usually administered by separate quality assurance departments. At Facebook, however, development teams enjoy the full trust of management. Any team can release new code onto the live site without oversight. As a management style, it seems counterintuitive, but with individual reputations at stak...

9. Everything is Measurable and Anything is Knowable

The first accelerometers (devices used to measure new motion in three dimensions) were the size of a shoebox and weighed about two pounds. Today’s model is now just four millimeters across and is found in every smartphone on the planet. Welcome to the sensor revolution, one of the most important and least celebrated technological revolutions taking place today. A BMW automobile today has more than two thousand ...

We suspect that the key questions many readers are now asking include: How exponential is my organization? How prepared are we to compete in this new reality? What do we need to change to become an Exponential Organization?

Not surprisingly, we have discovered that not all ExOs have all of the characteristics of paradigmatic ExO. In fact, our studies suggest that for an ExO to achieve the 10x baseline threshold and earn the ExO title, it often needs only four (or more) of the eleven attributes to succeed. That is a sufficient number to dominate a new market with information services or to drop the denominator (costs) into an existing one. Furthermore, some of the attributes, while pointing the way, may not apply (at least not today) to certain industries.

Key Takeaways Information accelerates everything. Marginal cost of supply is dropping exponentially for the first time ever. Everything is being disrupted. In a disruptive world, smaller is better. “Experts” tell you how something cannot be done. Rent, don’t own, assets. Everything is being turned into information—and is thus measurable and knowable. An ExO Diagnostic can help you score and analyze your organization. Implementing four or more ExO attributes can yield the 10x performance improvement.

Part Two Building the Exponential Organization