Beyond Enterprise 2.0

Over the last decade, the Internet has transformed many aspects of the way business is conducted — from how goods are bought and sold to where work is done. To explore what might constitute the next generation of Web technologies and what effect they will have on the nature, purpose and management of organizations, MIT Sloan Management Review contributing editor Martha E. Mangelsdorf sat down with two leading experts: Erik Brynjolfsson, director of the MIT Center for Digital Business and the George and Sandra Schussel Professor of Management at the MIT Sloan School of Management; and Andrew P. McAfee, associate professor of business administration in the Technology and Operations Management Unit at Harvard Business School.

Looking ahead to the next year or two, what do you think are some of the most important ways in which the Web — and in particular so-called Web 2.0 technologies — will continue to change the way business is done?

Brynjolfsson: I expect a big thematic change in the way people have been using the technology. Because of the recession in 2001–2002 and really, frankly, some overspending in the late ’90s, there was for several years a focus within corporations on cost-cutting and using the Internet to save money, gain efficiencies and improve productivity. That was largely successful. But going forward, I think there’s going to be more of an emphasis on using Web 2.0 technology to support innovation, creativity, collaboration and information sharing. When it comes to what CIOs are asked to focus on, there’s a bit of a cycle that parallels the business cycle. Going forward over the next year or two, I see a focus on using the Web to grow revenues and foster innovation — as opposed to a focus on cutting costs.

McAfee: I think that’s exactly right. There are several trends going on — some of which have been going on for some time, some of which have started to accelerate recently — that support this flowering of collaboration and innovation and creativity that we are seeing on the Web. One trend is that the cost of participating on the Web continues to plummet. Processing, bandwidth, storage and memory all just continue to get cheaper and cheaper. It’s also getting a lot less expensive to contribute to the Web or to build an industrial-strength Web site.

In addition, expertise barriers to putting content on the Web have basically vanished. If you get a Blogger account, you don’t need even basic HTML skills to start getting your thoughts up on the Web. Anyone with an Internet connection can play on the Web in all the ways they want to now. And that contributes to this flowering of innovation and creativity.

Brynjolfsson: While it’s true that everyone can weigh in on just about every topic on the Internet today, that doesn’t mean everyone always should. For example, you don’t have to be a climate change expert to edit the Wikipedia entry on global warming, but maybe Wikipedia would be better if people focused on areas where they had something to contribute.

Really, what we need is “meta-innovation” — innovation about ways to innovate.

We need innovation not just in the technology but innovation in some of the institutions that manage the collaboration and that manage a global community working on problems. The question is: Is there a way that we can create an institution or a set of institutions where the right answers emerge consistently from collaborative efforts?

McAfee: We don’t have a lot of experience with how to do that. We’re used to the forms of organization we’ve had for a long time. The Web — this worldwide, zero–incremental cost network that we’ve built — gives us a lot of opportunities. I think the innovators and the entrepreneurs going forward are the ones who realize how to seize that and build great institutions and organizations in the new environment.

I’m not saying that the complete level playing field that the Internet makes possible is a great idea in all cases. But the business opportunity it presents is to create the architecture of participation — the ground rules of the game — so that the good material emerges.

One place where we’ve seen Internet-based collaboration work effectively is open-source software development. Is that an interesting model for how this type of collaboration might play out in other industries?

Brynjolfsson: It’s very interesting and it’s an example of a broader phenomenon that has sometimes been called the “gift economy.” There are a lot of knowledge workers who contribute what they have to offer not necessarily for purely financial motives but because of a whole set of motivations psychologists can tell you we all have. You see this in open source, you see it in Wikipedia, you see it in the in-depth, really thoughtful reviews on Amazon.com or some of the travel sites.

We as a society are wealthy enough that most people don’t have to spend every waking hour just getting food and sustenance. So we have the luxury to indulge some of our other interests and needs — including a taste for creativity that seems to be innate in most people.

McAfee: What we’re seeing is just how deep-rooted that desire is to do several things: to share, to communicate, to get your expertise out there and to do what Ward Cunningham, who invented wiki technology, called “authoring.” A lot of us have a deep urge to get our thoughts up there in a way that reaches an audience.

Let’s talk a little bit about the process of how the good material — good content, good ideas — can filter up.

McAfee: When I talk to corporate audiences, I usually start with the technological mechanisms that let “good stuff” emerge. The Internet has a huge amount of structure because of the links between pages. And Google realized that and was able to harness that, which is why we perceive Google’s results to be so good. If you let people author Web content and you let them interlink, the cream is going to rise to the top in a sense; the most popular content is going to be very evident very quickly.

With wikis and Wikipedia, the mechanism there that allows good ideas to emerge is that if I don’t like your edit, I can undo it with one click. That means there’s no point for you to spend six hours defacing my work, because I can undo your edits so easily. You have great incentive to be helpful, rather than harmful, if you want your contributions to last.

Brynjolfsson: The examples Andy is giving are examples of a broader phenomenon that Tom Malone, my colleague at the MIT Sloan School, is calling “collective intelligence.” Malone recently founded the MIT Center for Collective Intelligence to try to understand the common themes between iniatives like Wikipedia and Google. He points out that it’s not just that Google has a clever search algorithm and some powerful servers; it’s that there’s a tremendous amount of structure in the Web itself that people create every time they add a link to one of their pages. That collective intelligence is what Google leverages so effectively. Ironically, most internal webs — intranets — don’t have that same kind of cross-linking. As a result, the same algorithms are radically less effective internally than externally.

What would your advice be to managers about adopting Web 2.0 tools within their organizations?

McAfee: The first piece of advice I’d give is that you might want to rethink your infrastructure for collaboration and communication. Take a look at the new toolkit out there — things like blogs, wikis, tags and internal prediction markets. (Internal prediction markets allow employees to buy and sell stocks related to questions like “Will we sell over 50,000 units of Product X this quarter?”) Think about what tools would make sense for your organization and how to get people to actually use them.

Which technologies, specifically, do you think are the low-hanging fruit for corporate executives to consider?

McAfee: The ones that I try to get managers excited about these days are those that let people express the desire they have to contribute or publish for a broad audience. If you want to dip your toe in the water, set up a few wikis, set up a few employee blogs. Watch what happens as a result. These are low-risk, low-cost experiments.

However, one huge fallacy of using Web 2.0 technologies within a corporation could be described as “if we build it, they will come.” That’s the belief that if you set up some internal Web 2.0 infrastructure, then you’re going to get great emergent phenomenon — an internal Google-level search and a Wikipedia-level internal collaboration environment. The main reason that doesn’t happen is that the number of people who are actually contributing content to the Web — as opposed to passively consuming it — is a tiny, tiny percentage of all Web users. You scale that down to enterprise size, and there’s essentially no one participating in what I call the Enterprise 2.0 — that is, the use of Web 2.0 tools within companies. The manager’s job is to increase the ambient level of participation in and contribution to these Enterprise 2.0 environments.

How do you go about doing that?

McAfee: The economists would say you provide incentives to do it — whether hard or soft incentives, cultural ones or monetary ones. We can use the rich mix of managerial tools we have to get people to behave the way we’d like them to and do the things we’d like. One of the simplest and most effective techniques I’ve seen — and I’ve seen it over and over — is for a boss to just say, “I’m not reading any e-mails about this project; put all your information up on the wiki where we can all see it and use it.”

Brynjolfsson: Paradoxically, some of the most powerful incentives can be created when you simply take away undue structure and constraints. And that’s probably the class of incentives that’s going to be most useful here. If people in organizations have more freedom to work laterally and diagonally and in all the other directions within their organization, then you’re going to see more creativity and innovation. You’re also going to see a lot more potentially useful connections emerge organically.

This doesn’t come costlessly. One of the benefits of the organization of a corporation is the potential for streamlining and efficiency that hierarchy brings to bear. Ultimately, it’s a trade-off in terms of where you want to be on that creativity vs. efficiency spectrum. The nice thing is that innovations in technology and in organizational design are allowing us to push out the frontier of that trade-off, so that you can get more innovation without sacrificing efficiency to the same degree.

McAfee: I don’t think Erik believes, and I certainly don’t believe, that everyone should abandon hierarchy and abandon any element of command and control inside an organization. That would be a ludicrous thing to say. An existing company can take advantage of both the benefits of imposing structure and hierarchy and some level of managerial intervention while simultaneously getting out of the way in other areas and letting the lateralization and the diagonal innovation emerge. And I don’t think that it’s naive to expect that both of these phenomena can happen — just as it’s not naive for an organization to have an ERP [Enterprise Resource Planning] system and a wiki at the same time.

Brynjolfsson: In fact, I think a lot of the ERP systems and the process-management tools that are often considered to be antithetical to wikis can be very complementary or synergistic with the collaborative tools. Andy and I are working on a paper now called “Scale Without Mass” that looks at how you can leverage creativity and new ideas through business process replication by using tools like ERP and CRM [customer relationship management]. The idea is that when somebody comes up with an innovation, you can use these process-management tools to much more rapidly replicate and disseminate the new ideas throughout the company on a global basis. There are a number of examples of companies doing that. That is a good example of this trade-off between innovation and efficiency being much less severe than it used to be.

McAfee: We’ve got one set of tools that allow the good ideas to percolate up to the top, and then you can use these very structured process-management technologies to replicate the innovation. One way to think about managers’ role in this era is that they grab the good ideas that percolate up and then propagate them throughout the organization — with brutal efficiency in some cases.

That’s interesting. Can you give some examples of that phenomenon?

Brynjolfsson: When Amazon comes up with a better shopping experience for its customers, the improvement may involve changing a few lines of code or rearranging of some pixels – and, instantly, millions of people have a new shopping experience on each of their desktops, all over the world. Amazon is constantly doing experiments to see if the company can improve the shopping experience by a few tenths of a percent in terms of the yield and efficiency. At a Web-based company, it’s pretty easy to see how creativity can be quickly leveraged to millions of “store locations,” if you will. The same thing is true for software firms or other companies that replicate their products and services digitally. But what we’re beginning to see is that is happening more and more — even in industries that aren’t purely Web-oriented. Andy did a fascinating study of CVS Corporation, a retail pharmacy chain based in Woonsocket, Rhode Island. CVS improved its business process for ordering prescription drugs and then, within the course of a year, replicated the improvement at more than 4,000 retail locations. That’s something that wouldn’t have been doable before firms had a technology platform already in place for implementing and disseminating the innovation.

In the CVS case, did that innovation come about through the use of Web 2.0 collaborative technologies?

McAfee: That particular innovation at CVS came from a cross-functional team brought together to solve a problem. What we’re seeing more generally, though, is that a lot of clever ideas now are percolating up via some combination of people and technology — and then they’re propagated throughout the organization. Companies in very turbulent, very information-intensive industries tend to be the ones that have gone the furthest with deploying the new Enterprise 2.0 infrastructure and the mindset that goes along with it.

Brynjolfsson: In addition to structural changes, there are also some softer, cultural things that companies can do. Google, for example, has a norm that all employees are supposed to spend about 10% of their time on new ideas that aren’t related to Google’s main products. The company gives employees remarkable freedom as to how unrelated those projects and ideas can be. That’s something that Google can afford to do in part because the company has been successful, so a real test would be whether a company that didn’t have margins like Google’s could afford to offer that kind of freedom.

McAfee: I’ve also talked to a few different professional services firms about the Enterprise 2.0 phenomenon. Like Google, those firms are also very successful, very high-margin businesses. But the soft shift — the cultural shift for them — they’re finding difficult to execute, in part because their focus for so long has been on billable hours and on classic notions of productivity and output. And I think that neither Erik nor I see any technology that will by itself resolve that dilemma.

One of the things that I find interesting about these technologies is that you can draw the boundaries around them wherever you want. Use them purely for one lab or one work group — great. Or use them companywide — great. Include all of your customers, suppliers and users — great. With these technologies, you can very easily select the scale of community you want.

My colleague Karim Lakhani and I are writing a case study right now about Cambrian House Inc., a software development company based in Calgary, Alberta, that’s drawing the boundary very widely. The company leaders have stopped saying they know what software they should develop next. Instead, they have a suggestion board [open to the public] where anyone who wants can post an idea for a piece of software that they think will be successful and in demand. Cambrian House has a tournament and votes on the ideas submitted every month. The company commits to at least test the products that win — to build them to the point where the company can see whether the products will succeed in the market. Cambrian House will give each month’s tournament winners some share of any future profits on that software product. The company also partitions out the coding tasks not only to its own employees but also to the community of people who know about the company and come to its site; the company offers these outside coders a share of the product’s profits. Cambrian House is partially outsourcing both idea generation for new products and then product creation. What the company does is sit in the middle, coordinate all those activities, get the software to market and then partition out the proceeds that result.

So they’ve essentially viewed their core competency as managing their community.

McAfee: Exactly.

Brynjolfsson: In general, the whole concept of internal and external [to the corporation] is becoming a lot blurrier. And that’s again, partly, because of these kinds of tools. Part of this goes back to the basic economics about what it means to be an employee. For example, it’s difficult for an assembly-line worker at General Motors to create value at home, without access to the company’s capital equipment. But 150 years ago, craft workers did work with their own capital, and they had a lot more autonomy and independence. It was often blurry as to whether you’d say they were working for a firm or working for themselves. Today, in many ways we’re coming back to that type of arrangement, where knowledge workers, who work with their own human capital and perhaps access to the company’s technology infrastructure that they can easily get from home, can create a tremendous amount of value for a company. Employee/independent contractor distinctions are less relevant for that kind of worker and that kind of firm.

The traditional corporate organization was tremendously successful throughout the 20th century. But, as we said at the outset, the technology innovations are engendering a whole set of complementary innovations in organizations. The traditionally sharp distinction between markets and firms is giving way to a multiplicity of different kinds of organizational forms that don’t necessarily have those sharp boundaries.

McAfee: Some people who get really enthusiastic about the new Web technologies say that they render managers obsolete, or that we are going to have a completely self-organizing economy. But what we’re saying is that we find that these changes actually heighten the role of managers and executives, who need to think about how to organize and compete in the new environment. And this implies another really interesting set of issues and challenges for management: thinking about what they want to have inside the boundary of their own firm versus what they want outside.

Brynjolfsson: It’s not a question of complete decentralization or complete centralization. Instead, we see companies simultaneously using centralization and decentralization in different aspects of their businesses. I’ve learned a lot from Andy’s case study about Zara, the fashion retailer that is part of the Inditex Group, based in A Coruña, Spain. Zara’s example highlights how even a light touch of technology can radically change the way a company or an industry works.

McAfee: Erik and I both find Zara a really interesting company. In a very vertically disintegrated industry — apparel manufacturing and retailing — where everyone else outsources to low-wage countries, Zara is very vertically integrated. The company controls warehouses, cutting facilities and distribution centers and owns its stores. Zara’s management pursues that strategy because they want the company to be fast, and they want to react to changing fashion trends in a couple of weeks — as opposed to in six months. As a result, they use a really interesting mix of centralization and decentralization. In particular, Zara has decentralized decisions about which clothes should be in each store. Headquarters decides what goods are available, in what quantities and at what price, and transmits this information to all the stores twice a week. The stores then decide what they actually want and use the same technology to transmit those decisions to headquarters, where the decisions are all added up. Then headquarters puts the products on trucks and sends them to the stores. There’s this constant back and forth of information that helps the designers at Zara come up with the right new models and then get them into the right stores.

It’s clearly another form of collective intelligence. While many companies in Zara’s industry rely on very sophisticated software, genius designers or marketing to forecast or create demand, Zara does essentially none of that. The company in effect says, “Store managers, you tell us what people are going to wear for the next few weeks; then we’ll build it and get it to you.”

Brynjolfsson: This example highlights a trade-off between local and central knowledge that exists in every industry. And technology is allowing companies to move that knowledge back and forth much more rapidly. What you want to do is match the locus of decision making with the place that has the relevant knowledge, as well as make sure people at that location get any other pieces of knowledge they need. In Zara’s case, those local store managers have on-the-spot information that would be impossible for someone at headquarters to really understand. It’s even almost impossible for the local store managers to communicate it, because there’s so much subtlety to it. On the other hand, what can be communicated pretty easily are production schedules and availability.

McAfee: As Erik notes, one of the golden rules of organizational design has been to always line up the decision rights with the relevant knowledge. Is that knowledge quantitative or qualitative? If it’s quantitative, we can ship it to headquarters and analyze it. If it’s qualitative, is it distributed? Does it have to remain distributed? The new technology toolkit gives managers a lot of options for thinking through that golden rule.

Brynjolfsson: In many dimensions, it’s very difficult to make predictions about the next five years. But the technology side is oddly predictable. We’re quite confident that we’re going to have a continuation of Moore’s Law on the processor side and comparable improvements in memory, communications speed and storage. That means that the bottleneck — the real place where there’s room to make excess returns if you’re an entrepreneur or a manager or a venture capitalist — is in finding creative ways to use those technologies. Bank on a tenfold improvement in the next five years in most of those technologies I just mentioned. Now ask yourself: What will you be able to do differently given that tenfold improvement in cost or capability?

We are very far from exploiting the full potential of the technology. The set of technologies we have floating around today are fodder for at least a decade or two worth of organizational innovations — let alone the tenfold improvements we’re going to see in the next five years.