Knowledge industries are not new, but they do supply vital clues as to how we will be working in the new millennium. By Jarrod Jordan
On the threshold of the year 2000, predictions of cataclysmic changes are commonplace. This is scarcely surprising. Similarly “millenarian” fears of apocalyptic events abounded in Europe in the lead up to the year 1000. The prospect of a new “prime number” to mark the passage of history can have a powerful effect on the imagination.
Rhetoric suggesting that the world is about to experience dramatic change is not entirely misplaced. A shift towards knowledge-driven businesses away from capital-driven businesses has been occurring over the past 50 years, and it will radically change the character of work.
It is analogous to the change that occurred after the Middle Ages when capital replaced land as the means of generating wealth. The scarcest commodity of production became the means of financing endeavors and labor came to be considered a commodity. Optimisation of capital became the first priority – a view still central to today’s downsizing philosophy.
Europe’s economy has grown by more than 70% in the past 25 years. Despite this, only 10% more new jobs were created. It seems that fewer people are needed to achieve economic growth. Some companies have realised that they can be lean, asset poor and highly successful: advertising, media, auditors and software companies, for instance. (In 1995, Microsoft achieved a return on equity of almost 30%.) The high market-to-book ratios of these types of companies can only be attributed to the rising importance of intangibles.
The shift towards intangibles is also occurring in companies with a conventional structure. (To give an example, the Dutch management thinker Arie de Geus describes Shell as a management club.) They are not concerned about contracting out physical operations. What they do is more difficult to execute than retaining control of such operations. The work of companies such as Shell is knowledge-driven and it is redefining our concept of what it is to work in a company, or to have a career.
Many corporate systems today are based on the assumption that people cannot be trusted. Too often managers in a quota-driven environment forget that they are dealing with a community of persons. This could be why most Fortune 500 companies have a relatively short life span – about 50 years.
By contrast, the knowledge industry seeks to reduce risk by enhancing learning and trust while devolving power to those who are dealing directly with the problems. The model has been so successful that its implementation is at the core of United States regional development policy.
Japan could have been forgiven for believing that its mastery of the corporate model would see it become the dominant economic power in the early 21st century. However, the gradual emergence of US knowledge-industry practices, especially on the East Coast, saw America capture 25% of the increase in industrial-country exports from 1990 to 1996. In 1997 the World Economic Forum ranked the US as the world’s most competitive economy. The move away from efficiency to effectiveness was effective and efficient.
Economics writer Robert Kuttner indicates that there are three models for efficiencies that lead to economic growth, borrowing from the theories of well-known economists: the Smithian (Adam Smith), Keynesian (John Maynard Keynes) and Schumpeterian (Joseph Schumpeter). Smithian efficiency promotes the making of the right things at the right place at the right cost. Keynesian efficiency claims that potential output is lost if an economy does not realise its full employment potential. Joseph Schumpeter claimed that long-term investment in technology was imminent.
The three theories tend to sit in uneasy relationship to each other; certainly they do not provide a unified conceptual framework. It may, however be necessary to create such a framework if the issues posed by new millennium work are to be resolved. A synthesis could be achieved by adopting a co-operative paradigm: allowing all three theories to coexist and applying whichever is necessary at a given time. The English management thinker Charles Handy writes: “To grow at an average rate of, say, 3% per annum, a society has to improve its efficiency at, maybe, 5% overall in order to stay competitive.”
So far, the drive for efficiency is creating a distorted “Smithian effect”. The 20/80 rule of thumb whereby 20% of the products create 80% of the profits is being transferred into other areas. Some companies want to lose 80% of their employees. This trend started in the knowledge-industry companies and has been adopted in numerous corporate models. The difference is that the knowledge-driven companies are recognising the value of intangibles that cannot be accounted for in the balance sheet, and the corporate downsizers are simply trying to optimise capital in an increasingly competitive market.
A counter-approach was put forward by Keynes, who recognised that economic problems are neither the sole nor permanent issues facing the human race. He was referring to technological unemployment and pointed to the ultimate intangible: how people will live their lives. Yet this, too, is insufficient. Consider the declining years of the European communist regime in Poland. Nominally, employment was high. Yet empty shops were overstaffed. One busy factory produced bus chassis, which were stacked daily in a yard. No one made engines or any other parts to go with the chassis. The point is that being “busy” or “employed” is not the same as leading a productive life.
Understanding the new millennium economy requires understanding the intangible qualities of work itself. Productive also means helpful, creative and useful. Just improving traditional forms of wealth may not be enough. In America, the rise in per-capita consumption in the past 20 years was 45% but the decrease in the quality of life, as measured by the Index of Social Health, was 51%.
Max Dumais, director of the De Bono Institute, says that the management and social challenge is to locate and build on motivation and passion. “The question is, How do we get our people to own their work, even if they don’t own shares? and the answer is the other bottom line, the thing about their occupation that truly engages them and normally involves their thinking.”
From 1960 to 1992 OECD figures indicate that the proportion of US companies providing business services grew from about 7% to about 15%. The number in manufacturing fell from about 25% to about 16%. According to Swedish management academic Karl Erik Sveiby, in his book The New Organisational Wealth, 50% of the fastest growing companies in the US between 1989 and 1993 could be labelled “knowledge companies”.
Changes to the character of work will alter fundamentally industry formation and social institutions. With the move away from the corporate model, unions may need to find new homes. Geoff Mulligan and Tom Bentley envisage the development of “employee mutuals”, which they suggest could be the new model for unions. They suggest that the mutuals could market, train and manage their members to realise the members full working potential in the environment created by downsizing.
Although downsizing seems sensible from the point of view that people are employed as needed, personal dignity often suffers; and personal dignity is valuable social capital. Organisational development consultant Louise Klein of Louise Klein & Associates, says: “There is a growing inquiry into the understanding of values and purpose. The traditional concept of job security has changed. Personal dignity can no longer be attached to a single job, but rather to the skills and values that you can bring to any number of assignments.”
The periodic culling of middle ranks is an inevitable function of the hierarchical company structure. In recent times the average job has lasted about six years. As Handy points out: “People grow older at the same rate but organisations narrow at the top. There is no room for everyone to advance their careers.” At least, not under these structures. The current trends point to three possible developments: increasing unemployment, a greater succession of jobs per worker, or the emergence of employment arrangements in which the worker is aligned to more than one company simultaneously or treats each company as a client.
This last option would be preferable to an overburdened social security system. The new focus may be on an individual’s level of employment rather than on employment or unemployment per se. Technology is providing the means for such a transition. A sign that points to this development is the desire of many professionals to acquire transferable skills. Other signs are the retraining of retrenched workers and the growth of contracting firms.
Although the motivations for these developments may be different, the result is the same: a growing workforce that will no longer be dependent on any one employer.
Companies will face the problem of how to attract and keep the people they need. De Geus points out that in the existing economically driven companies there is an unwritten understanding that skill is exchanged for remuneration. According to Sveiby, about 75% of a knowledge company’s costs are remuneration. The de Geus concept of the “living company” embodies the principle that: “Individuals will deliver care and commitment in exchange for the fact that the company will try to develop each individual’s potential to the maximum – the implicit principle of the living company guarantees that they [the employees] will have the opportunity to improve the world.”
Such views exemplify the rising awareness of the need for companies to create social capital to accompany their growing economic capital. Today’s society still values the high flier but, as Handy writes: “A champion’s life is short, and trophies are no substitute in the end for a shared commitment to something beyond oneself.” Trust flourishes wherever there is commitment to a task. People can work hard when they have to; but they work harder when they really want to.
One of the paradoxes of this period of transformation is the attitude to learning. Although common sense tells us that no one can know everything, many leaders feel obliged to pretend that they do. People experience a certain discomfort in hearing a leader admitting a lack of knowledge or expressing a desire to learn.
De Geus points out that every act of decision making is a learning process, one that involves increasing numbers of meetings. The problem is that the process is slow in today’s business context. De Bono has offered a technique that provides an effective and enjoyable way to clarify perceptions and move to an action plan. He calls it the “Six Thinking Hats”. Dumais says: “One group rethinking employment and jobs for the new millennium dropped the notion of jobs in favor of the more embracing concept of engagement. We need to discover a person’s passion and then surround them with the resources to realise that passion. Our recent discussion on the disabled in the workplace transmogrified into a discussion about the differently abled – as we all are.”
Meetings in the next millennium will focus less on what to do and more on getting to know and understand people. Skilled people know what to do. They want to know whom they are doing it with, why and what they can learn from each other. In his book, The Great Game of Business, Jack Stack describes how he purchased a unit of International Harvester and turned it into a $100-million company. He started with an 89:1 debt/equity ratio and an interest rate of 18%. The share price rose, over a 10-year period, from 10 to $18.60. The crux of his method was to treat the employees as trusted analysts while educating those who did not understand the business or the figures. Everyone was involved at a personal level in building the business. The task of the new-millennium manager will be to help people seek out knowledge and develop ways of implementing it in order to achieve their common purpose.
In relation to effectiveness, Chris Russell, innovation manager with Honeywell, says: “About 80% of implementations fail to deliver expected benefits due to implementation issues. This is not about the ideas, just the way the ideas are implemented.” The problem resides here in the attitude to learning and how it relates to the decision-making process.
However, learning may well be more enjoyable in the new millennium. British psychologist D. W. Winnicott coined the term “transitional object” in his book Playing and Reality. The transitional object allows one to learn without fear of consequences so that the learning can be applied to real life.
Essentially, he is describing a toy or a game. Winnicott and other authors see real learning as “discovery through play”. Although their work is aimed at understanding the learning process in children, there is no reason why adults should not benefit from the findings. The armed forces play games: war games. Their survival depends on it. The difference between a toy and a game is that a game presupposes a winner. Games are based on a competitive model, whereas toys can lead to building a co-operative model. Toys evolve into tools.
The competitive model has worked only because the presence of a real or imaginary threat triggers some primal bonding instinct that in turn provides a level of co-operation. The higher the level of co-operation, the more effective the group becomes. However, it is counter-productive to introduce increasing levels of fear to achieve this. Co-operation has been the building block of civilisation. It is towards that goal that the most evolved societies move. This is not to say that interest groups should or will abandon their positions. They will simply find more constructive ways of realising their purpose. The following advice was given to de Geus many years ago by his controller: “A manager does not create people; certainly not in his own image. As a manager you take people as they come, the way God created them, and you learn to work with them.”
In his extensive studies for Shell, de Geus found that “tolerant” systems survive. He writes: “Systems that deliberately introduce diversity into the product line – even at the expense of short-term proceeds – and allow activities to go on undisturbed in the margin of the field, have greatly increased chances of survival across the generations.” There is a distinct difference between this and the disastrous diversification of the 1960s and 1970s. Diversification then was a conscious top-level decision to move into new areas. But diversity is recognising that your company has more skills and resources, in the form of knowledge-based assets, than you previously realised. Then it is just a matter of choosing to allow their development, looking in from time to time to see how these new assets might be of benefit to the company.
More emphasis is placed on the task than on procedure or hierarchy in the knowledge industry. An emerging force in innovative companies is the team. Research by the European Union on small and medium businesses indicates that efficiency decreases with size in service-sector businesses. The companies they studied had from one to 499 employees. Sveiby notes that the Swedish software company WM-Data divides its people into teams of no more than 50. The company employs about 3800. Structurally this approaches the de Geus concept of the living company, a company in which no single person is steering.
The living company seeks to extend its own potential step by step. The way to do this is to set a context, a direction, then let go. This can be achieved only if an organisation is willing to shed some of its managerial dependence on hierarchies, procedures and specific instructions.
Handy supports the principle of “subsidiarity” as the governing principle of the new company structure. He writes: “The decisions and responsibilities should lie as low down in the system as possible. To make it work, the holders of responsibility … have to be educated up to their responsibility. You can’t, responsibly, give responsibility to incompetents.” Although federalism is a familiar concept in politics, many companies are still run like feudal demesnes. Federalism points to the distribution of powers.
In the federalist model, the accumulation of too much power in one place is avoided. With the emerging knowledge industry we can see the gradual reversion of responsibilities, and even ownership, to those who own the resources: the workers. Companies such as Royal Dutch Shell, Honda and Johnson & Johnson have all found the federal model a suitable one. Their centres aim to co-ordinate, not necessarily to control.
Honeywell’s Chris Russell, talking in relation to “seed funding” (that is, when an idea is generated within the company and requires significant funding, $30,000 or more, to get it up and running) is echoing Handy: “Our approach is to cause the flow of responsibilities towards teams and individuals. At the same time, no board wants a company to drift. Management must be highly competent in its ability to receive new information and to present ideas.”
To see the deterioration of the old corporate model one need only look at the “industry” to which it is least suited, the music industry. The Internet is causing the big music corporations to lose control of their products. Musicians, who are the true owners of the resources, are recording their own music and supplying it directly through a Web site or e-shops (electronic stores on the Web).
Another thorn in the side of the music companies is that people are copying recordings digitally over the Internet. Although some marketing and software developments may stem the tide, the fact remains that a new system has emerged: that of smaller music organisations creating highly fluid and mutually beneficial networks of Web sites and distribution links.
These new virtual workplaces may turn the offices we know into something very different. Mark Langdon, general manager of strategic development for AE Smith Linc Services says: “In the next millennium businesses will appreciate the effect the office environment has on business performance and profitability. Offices will be redesigned to provide collaborative teamwork environments, which will require less space. Office space will be allocated to tasks, not people. Intelligent buildings will create environments to allow organisations to achieve their business objectives while maximising the effectiveness of the occupants and minimising life-cycle costs. Virtual space will replace physical space. Companies will value their intellectual property (such as the long-term relationships they are able to build up with customers) more highly than their tangible assets, and be rewarded accordingly.”
Handy argues that the purpose of a company is: “To make a profit in order to continue to do things or make things, and to do so even better and more abundantly.” However, short-term management priorities often abduct resources required for governance. The federal model tends to free up resources and allow smaller bodies to achieve a common purpose without compromising their unique identities.
Indeed the competitive model may well be in decline, particularly with the realisation that a company can grow and achieve its goals without defeating an opponent. Many computer software and hardware companies are using components made by “competitors” in their products, and the strategy is not doing their market values any harm. Perhaps the model of federalism is heralding the beginning of something that could take the separation of powers to a new stage of evolution. The new millennium of work is shaping up to be unlike anything we have seen before.