Unanswered Questions at Supernova 2007

I have been unusually quiet here recently because I have been going through a major transition.  About six weeks ago, I joined Deloitte & Touche USA LLP with a mandate to establish a major new research center in Silicon Valley.  The Center will explore key business issues created by the intersection of business strategy and information technology.

I will be serving as Co-Chairman of the new research center along with John Seely Brown and we have already enlisted the support of Lang Davison as Chief Content Officer.  Until co-founding the center with us, Lang had been the Editor of The McKinsey Quarterly. Lang and I go way back in terms of our collaboration – in fact, he was a key collaborator in the development and writing of both Net Gain and Net Worth and has edited all our subsequent Quarterly articles.

Last week, Kevin Werbach asked me to address his Supernova conference and offer a preview of some of the questions that will form the foundation of the research agenda for the new center.  We are still at a very early stage in defining the research agenda, but it was a great opportunity to get some feedback and input from very smart folks. It occurred to me that I could throw the net even broader through my blog and seek out further input to help shape our research agenda. So, here’s an abbreviated version of the presentation I gave at Supernova – please let me know your thoughts and ideas on how to increase this research agenda's relevance and power.

Questions are often as valuable as answers

It’s appropriate to step back occasionally and reflect on what we don’t know, rather than simply sharing what we know. In times of rapid change, asking the right questions is often as important as the answers – at least they help us figure out where we might start looking for answers. There is no shortage of questions – the key is to focus on questions that are not just intellectually interesting, but also where significant economic impact is at stake. These are the questions that will focus our research agenda.

Foundation questions – what is going on in the world around us?

1.  What if there is no equilibrium?

We all understand that the component technologies of our new infrastructure – computing, storage and networking – continue to advance at exponential pace.  In fact, this is the one central difference between this new generation of infrastructure and all the previous generations of infrastructure – for example, railroads, electricity and telephones – that shaped our economies in the past. All of these earlier generations were characterized by a major technology breakthrough, followed by the adoption of key standards and a diminishing rate of performance improvement. Our new infrastructure defies this pattern and proceeds with exponential rates of performance improvements.

Here’s the paradox: at the same time, we cling to traditional equilibrium concepts and institutions  that emerged and prevailed in more stable times. Nathan Mhyrvold highlighted in his talk yesterday the contrast between the exponential advance of technology performance and the linear thinking of most executives. Clayton Christensen got the attention of the business world with his perspective on disruptive innovation – but even that is a punctuated equilibrium view – it holds on to the assumption that equilibrium will eventually return.

A more specific question might be: what are the institutional architectures required to operate in a world where there is no equilibrium? Early conventional wisdom suggest that these architectures should focus on agility and flexibility, but that misses the real opportunity – balancing agility with the persistence and stability required to build and deepen long-term trust based relationships. Being able to discern what needs to change and what needs to remain stable may be the greatest challenge of all.  In looking for early indications of what these architectures might look like, the richest sources of institutional innovation will be China and India, not the U.S. or Western Europe

2. Can the firm survive as the action flows to the edges?

The early view of the Internet was that it would be a catalyst for the fragmentation and marginalization of firms. Tom Malone at MIT wrote an interesting book forecasting the rise of the E-Lance economy.

An alternative view suggests that firms will unbundle and rebundle in ways that lead to even greater concentration and consolidation (although paradoxically at the same time facilitating more decentralization and power at the edges). In the process, the rationale for the firm will fundamentally shift – from Ronald Coase’s classic view of the firm as an institution designed to economize on transaction and coordination costs we are likely to shift to a rationale focused on accelerating talent development.

3. Are all ecosystems created equal?

The term “ecosystem” is used so broadly and loosely along with lots of related words – networks, webs and communities– that it runs the risk of losing all meaning and blending into the banal. At one level, we are all interdependent and operate in a broader fabric of cooperation – from the earliest hunter gatherers to today.

We desperately need a workable taxonomy, not just for its own sake but to help us see what is new and help us to choose what forms of cooperation have the greatest power to create more business value in specific contexts.

Looking ahead, I would suggest that networks of creation and economic webs will trump all other ecosystems in value creation and capture opportunities because these have the ability to embrace and extend the value creation potential of other ecosystems

4. If the world is so flat, why are spikes becoming more prominent?

Once again, the early view was that geography doesn’t matter in the age of electronic networks – we were finally going to see “the death of distance.” Tom Friedman captured our imagination with his view of The World Is Flat.  But we need to pay attention to the perspectives of Richard Florida, the author of Cities and the Creative Class and The Flight of the Creative Class as well as a provocative Atlantic Monthly article, who keeps focusing on an inconvenient truth: the trend towards coming together in dense urban areas to create spikes of talent is accelerating, rather than disappearing, on a global scale. How to resolve the paradox of greater spike formation in a flat world?

In fact, geography may matter more than ever. The flat world may be making spikes even more necessary, attractive and scalable. Spikes appear to be playing an increasingly important role in talent development. If talent development is becoming more critical to the success of firms, what is the explicit spike strategy of each of our firms?

Strategic questions – what are the most promising actions to create and capture value?

1. Is adaptation all there is?

Conventional wisdom holds that, in the absence of equilibrium, adaptation is the best strategy – we need to develop the capability to sense and respond to the changes going on around us.

While adaptation is certainly necessary it misses the real opportunity. With accelerating change and growing uncertainty, there are increasing opportunities to shape outcomes in ways that were simply not feasible in more stable times. In particular, these shaping strategies focus on generating positive incentives that can mobilize and align large numbers of other participants.

2. Can we escape the Red Queen effect?

There’s a powerful image that resonates in corporate boardrooms around the world – the image of the Red Queen running faster and faster just to stay in the same place. Adaptation in a world of more rapid change implies running faster just to stay in same place

Product and process innovation only provides temporary relief for the Red Queen effect as companies become more adept at copying the advances of others. We need to harness institutional innovation and move from scalable efficiency to scalable learning so that we can begin to learn faster and find ways to get ahead of the pack in a more sustainable fashion

3. As “L curves” replace “Bell curves”, what are the most promising routes to the head?

As I have written recently, we are shifting from a Gaussian world of bell curves where averages have meaning to a Paretian world where extreme events prevail. Chris Anderson in his book The Long Tail showed great insight in focusing on the long tail of Pareto “L curves” and how to play there, but in the process he may have distracted us from the real opportunity. Perhaps the most interesting question is how to use the long tail as a launch pad for head strategies. In this context, developing privileged access to concentrations of knowledge flows on the edge holds great promise.

4. We have a growing realization that stocks of knowledge are diminishing in value relative to flows of knowledge, but what is required for effective participation in the highest value flows of knowledge? How do we avoid drowning in proliferating flows of knowledge while ensuring that we tap into the most relevant flows?

Stocks of knowledge diminish in value much more rapidly in times of rapid change. As a result, strategic advantage increasingly depends on privileged access to knowledge flows.

A point of view about destination helps to generate and filter knowledge flows, but productive friction helps to sustain flows.  Here’s a paradox – the more uncertain the environment becomes, the more important it is to have a destination clearly defined in order to make sense and make progress. One of the biggest risks is that companies spread themselves too thin in rapidly changing environments and fail to really nurture the knowledge flows that matter the most.

5. What are the opportunities for the bottom of the pyramid to attack the top?

C. K. Prahalad has helped us to understand the fortunes that are waiting to be made by creatively serving customer needs at the bottom of the pyramid. Once again, though, this perspective may distract us from another opportunity – the bottom of the pyramid may become a launch pad for successful attacker strategies challenging incumbents in more developed economies – the institutional innovation required to serve customers at the bottom of the pyramid can also be used to carve out significant share in more developed economies – something that JSB and I have described as “innovation blowback”.

6. How do we measure success when so many of the rules are changing?

Financial metrics matter more than ever, but the problem is they are lagging indicators – what we need are leading indicators. We need a new set of leading indicators tied to two sources of power within networked economies – talent and customers. As I have written before, some interesting new measures are return on attention (ROA), return on information (ROI) and return on skills (ROS) – measure both from the perspective of the firm and of the customer/employee.

Platform questions – how can various types of platforms augment our capabilities?

1. When is self-organizing not enough?

In focusing on various forms of decentralized collaboration, we have tended to celebrate the self-organizing characteristics of these systems. Perhaps we need to shift back and recognize that successful collaborative creation initiatives are never completely self-organizing. Every one of these efforts depended on an orchestrator who carefully and thoughtfully defined a minimal set of rules required to kick-start collaboration – we need to better understand what these rule sets are and to be thoughtful about the different rule sets required for different types of creation efforts.

A lot of work has been done on governance mechanisms in open source software, but there’s a lot of uncertainty about how broadly these governance mechanisms might be applied beyond open software.  What modifications might be required to governance mechanisms or what modifications to the creation process might be necessary to extend these mechanisms to other domains beyond software?

2. How are pull platforms likely to evolve?

As the pace of change accelerates, we are in the midst of a broad transition in terms of how we access and mobilize resources. As JSB and I have written elsewhere, we are moving away from push programs that attempt to forecast demand and make sure that the necessary resources are available when and where needed. In their place, we are seeing the emergence of much more flexible pull platforms that help people connect with the resources that are most relevant to them whenever and wherever they need the resources.

Push programs treat people as passive consumers (even when they are producers like workers on an assembly line) whose needs can be anticipated and shaped by centralized decision-makers. Pull platforms treat people as networked creators (even when they are customers purchasing goods and services) who are uniquely positioned to transform uncertainty from a problem into an opportunity.

The pull platforms that we now have are only the earliest stages of development. To harness the full potential of these pull platforms we will need to move to much more robust federation governance structures that accommodate services from a growing number of independent and diverse participants.  The lean manufacturing approaches of leading edge manufacturers succeed only because they dramatically narrow the number of participants. Different governance structures are likely to be required to scale pull platforms.

3. What is the next generation of IT architecture?

Until now, the trajectory of IT architectures has been from the inside out. Starting in the centralized glass house of large enterprises, these architectures slowly evolved to embrace departments and then the desktop, until finally, in tentative fashion, they reached out to connect selected business partners. These architectures are not likely to be scalable in terms of the ability to connect and coordinate activities across large numbers of independent business partners. As SOAs are held captive by IT architects within the enterprise, attention will shift to outside-in, relational architectures that first take shape across enterprises.

What is different about these architectures? They are designed from the outset to support sustained collaboration across large numbers of enterprises, robustly addressing a number of key challenges, including the reality of many autonomous entities, rather than one control point and the need to effectively connect the extraordinarily heterogeneous technology platforms and skill sets likely to prevail across these autonomous entities. Rather than assuming fine grained, short-lived transactions are the rule where one can be optimistic about completion, these architectures must cope with coarse grained, long-lived interactions where one needs to be more pessimistic and develop appropriate compensation mechanisms in case of failure. More broadly, I expect to see a move from transactional architectures to relational architectures, shifting from supporting discrete transactions like a request for inventory availability or the booking of a sale to architectures designed to support enduring and deepening relationships of individuals and institutions.

Without these outside-in architectures, companies will be constrained in accelerating talent development because existing technology architectures limit the ability of individuals to connect into rich networks of specialization and push themselves to get better faster by working with others. Individuals and institutions will still find ways to connect into these networks, but the scope and scale of the interactions will be much more limited

There you have it, three broad sets of questions – dealing with foundations, strategies and augmentation platforms. They get to very basic issues regarding value creation and value capture –and they’re more than enough to keep a research center fully occupied for some time

This is a first cut at the questions that John Seely Brown and I, along with our senior colleagues, will be pursuing through the new Deloitte research center. We’ll have a critical mass of research staff within the research center itself but we want to pursue this research with an open architecture approach. We’ll be reaching out to, and collaborating with, people across many institutions with relevant experience and interests. We look forward to collaborating on some of the most challenging issues confronting executives today.

Once again, I encourage anyone with thoughts or ideas on this research agenda to connect with us and help us to refine this “alpha” version of our research agenda.