In this blog post I wanted to explore the business case for collaboration, and the circumstances that have changed over the last 3-4 decades which make collaboration such an important vehicle for driving value for organizations. I will reference several sources for this article and welcome any comments. My goal is to explain concepts clearly so you can have better conversations within your organization.
What has changed?
Over the last 30-40 years, business has changed dramatically. The need for better collaboration revolves around three factors:
- The increasing speed and complexity of business
- How businesses’ generate value
- How organizational structures are changing
Speed and Complexity of Business
Why has the pace of business changed so dramatically since the mid 1980’s? In Baruch Lev’s book, “Intangibles Management, Measurement, and Reporting”, Mr. Lev states it was the unique combination of two related economic forces:
- Intensified business competition brought about by the globalization of trade and deregulation in key economic sectors (telecommunications, electricity, transportation, financial services, etc.)
- The advent of information technologies (most notably the Internet)
These forces fundamentally changed the pace of business (speed) and how corporations create value in developed countries. How can we illustrate these statements?
Speed of Business (Pace of Change)
To illustrate the speed of business we will look at two graphics. First, we can look at the average lifespan a company stays in the S&P 500. The lifespan figures are according to an Innosight study of almost a century’s worth of market data. The lifespan is based on seven year rolling averages.
- In 1958 corporations lasted in the index for 61 years.
- By 1980 the average tenure had shrunk to 25 years.
- Today, the average is around 18 years.
- By 2027, 75% of the S&P 500 will be replaced.
The figure above brings to life a famous quote from Jack Welch , “If the rate of change on the outside exceeds the rate of change on the inside, the end is near.”
Why has the rate of change on the outside exceeded the ability of the organization to change? A main culprit is the network effect of customers brought about by the Internet. In the YammerTV webcast entitled, “The Responsive Organization” Yammer Co-Founder & CTO Adam Pisoni expanded…
Via the web, customers have formed their own networks that enable them to connect and communicate much faster than before. This flow of information has shifted power to the consumer. Unfortunately, the flow of information in most organizations today is nowhere near as fast as the flow of information within the networks of our customers, illustrated by the graphic below…
The flow of information within a customer’s network (shown on the left) is much faster than the flow of information within an organization’s network (shown on the right) because of the time it takes for information to get to appropriate decisions makers and make its way back to the person who needs to act on the information.
An Enterprise Social Network technology, like Yammer, provides a communications system for the organization – the way in which your company can connect and communicate as a network – in the same way as your customers do. So your employees, like your customers, can have easy access to the right information, to be empowered to make decisions as they are faced with new information, new challenges, and new circumstances. An enterprise social network (pictured below) provides the ability to have a network where information can travel as fast within your organization, as it does outside your organization – i.e., your customers’ network. When you hear the concept of transparency in an organization, people are really talking about the power of working as a network.
The Evolution of How Companies Generate Value
Every company is struggling to keep up with their customers. Companies want to have the ability to quickly gather ideas and test them (in low risk scenarios), get feedback, and then turn the idea into a profitable business model. Networks are vital to having this capability, and networks are an exercise in collaboration.
Baruch Lev went on to explain the way companies generate value has also dramatically changed since the early 1980’s. “Because of the intensified competition brought on by globalization of trade, deregulation in key economic sectors and technological change, companies had to fundamentally change to survive. Companies now place a premium on rapid innovation, and intensive use of information technology. As a result, the way companies create value changed, going from tangible assets to intangible assets.”
This change in value creation can be illustrated by a chart Gartner research released back in 2006…
- The red line shows the average market value of an S&P 500 organization.
- The blue line shows the average book value reported in the organization’s financial reports – the balance sheet value of net physical (plant, property, and equipment) and financial assets (cash, stocks, bonds, and financial instruments).
The growing gap between the market value of a company and what it reports in its financial statements demonstrates the real value drivers are no longer captured through physical assets, but rather via intangible assets.
Understanding Intangible Assets
From an accounting perspective, an intangible asset is a claim to future benefits that does not have a physical or financial (a stock or bond) embodiment. Patents, brands, business models, unique organizational structures are all examples of intangible assets. Intangible assets are also known as intangibles, knowledge assets and intellectual capital. If a claim is legally secured (protected), such as in the case of patents, trademarks, or copyrights, the asset is generally referred to as intellectual property.
For simplicity sake, Intellectual Capital is comprised of Human Capital, Structural Capital, Partner Capital, and Customer Capital (picture below is taken from Leif Edvinsson and Michael S. Malone’s book entitled, “Intellectual Capital: Realizing Your Company’s True Value by Finding Its Hidden Brainpower.”
Leif Edvinsson expanded, “In addition, a company’s culture and strategic capabilities count as intellectual capital or intangible assets. Intangible assets are the basis of an enterprise’s innovation power, the raw material from which the bulk of its future economic and financial results are made. Intangibles often interact with tangible and financial assets to create corporate value and economic growth. Although it is convenient to classify intangibles by their major generator, the assets are often created by a combination of these sources.”
Shift in Organizational Theory
As a result of the changing pace of business and how companies generate value, how organizations are structured to take advantage of these changing circumstances is evolving as well. A great synopsis of the history of organizational theory and structures is provided by Steve Blank is his blog post entitled, “The Future of Corporate Innovation and Entrepreneurship”. Steve states, “While companies have existed for the last 400 years, their modern form is less than 150 years old.”
He goes on to walk through the circumstances that have forced company structure to evolve, and how the modern organization is at a crossroads because of the need to create new business models (the most important intangible asset you have) to drive continuous innovation. This is the core of the Innovator’s Dilemma – executing and improving existing models and inventing new and disruptive business models. Large companies are terrific at sustaining innovations – which involve improving upon an existing, proven business model. Disruptive innovations however are about searching for a new business model that works.
As Steve points out in his blog post, the Business Model Canvas provides a great tool for turning an idea into a business. (View this animated movie to see it in action).
Changing Nature of Employee Work
Another impetus to an evolution of organizational structures is reflected in the types of work employees are performing. McKinsey research examined this back in 2005 with their article entitled, “The Next Revolution in Interactions”. McKinsey observed, “The workforce now consists of people who largely or wholly spend their time interacting around non-routine work – which are more complex in nature. Complex interactions typically require a higher level of judgment, involve ambiguity, and draw on experiential knowledge”.
And from Adam Pisoni again, “Work is increasingly done by virtual teams, and by workers using mobile devices. Also, the amount of non-routine work is increasing, meaning we are spending more of our time on things that fall outside of normal processes. In fact, Gartner predicts that by 2015, 40% or more of an organization’s work will be “non-routine”, up from 25% in 2010.”
Since we are working within more complex environments doing “non-routine” work – which usually requires multiple people to come to a decision – being able to locate experts, decision makers and work products of other knowledge workers gains in importance. And technology enables these organic networks to form, to emerge, in ways that can help drive innovation, sales and improve operations. This leads to organization’s becoming more responsive, but this also speaks to different organizational structures being needed to take best advantage of the networks.
Examples of different organization structures are examined by the concept of the Responsive Organization, which Microsoft and Yammer are documenting here, as well as within The Management Innovation eXchange (MIX).
So, to go back to our original question – why has collaboration grown in importance? The speed of business has changed the way organizations must work to create value, and the type of work that is done to create value has changed, resulting in a workforce that largely spends it’s time interacting. Collaboration is about improving interactions, to make the knowledge worker more productive, and to grow the power of our organizational networks (both internal and external) to better respond to disruption.
I hope this post provides you with some reasons “why” collaboration has grown in importance and enables you and your organization to have dialogue around improving collaboration through the use of technologies and evolving organizational structures.