At the recent Ayala Innovation Summit, the keynote speaker —Yuri van Geest—talked about Exponential Organizations (ExO).
He described how technologies are reinventing best practices in business and explained why Exponential Organizations are 10 times better, faster and operate more cost-efficiently than our traditional corporations. The original concept of ExOs is traced back to Moore’s Law. We are familiar with this law that Intel co-founder Gordon Moore postulated when he observed in 1965 that transistors were shrinking so fast that every year, twice as many could fit into a single chip. In 1978, he adjusted the pace to a doubling every 18 months. This is still a valid principle after almost 40 years although some physicists are predicting that we may be reaching the physical limits. But then, who knows? New nano – technologies are being developed that might push the envelope. Most of us in the audience were familiar with Moore’s law but it was difficult to comprehend how organizations could develop faster than the economy, faster than the market, faster than any of the Limits to Growth that we discussed in a previous article.
This was the exact opposite of the Limits to Growth.
Yuri provided us with various technologies that have improved exponentially over the years: 3D printers costing $40K in 2007 were down to $100 in 2014; a drop of 400 times in seven years. Industrial robots costing $500K in 2008 were down to $22,000 in 2013, a drop of 23 times in five years. Drones costing $100K in 2007 were down to $700 in 2013, a drop of 142 times in six years. There were other examples in Nanotech and Biotech.
These technology breakthroughs signal the extreme speed by which products, and the services around them, are fast evolving. He pointed out that the average half-life of a business competency has dropped from 30 years in 1984 to five years in 2014. This obviously has significant repercussions on the future of our children. They have to improve their core competencies every five years simply to catch up with developments.
At this rate, a liberal arts degree may be the only degree that won’t be obsolete in the long term. Yuri pointed out that 89 percent of the Fortune 500 companies from 1955 were no longer in the list in 2014. He also described that the average life span of an S&P 500 company has decreased from 67 years in the 1920s to 15 years today. He predicts that in the next 10 years, 40 percent of all S&P 500 companies will disappear from the list. He quoted Marc Andreessen, founder of Netscape Software, who said, “Software is eating the world in all sectors. In the future, every company will become a software company.” What he actually meant was that every company will be driven by software (or it vanishes). UPS, a logistics company is an example. With its American fleet of 55,000 trucks, it makes 16 million deliveries daily. By applying telematics and algorithms, UPS efficiently re-routes trucks (think Waze), saving as much as 85 million miles a year, resulting in savings of $2.5 billion a year. Without the algorithms, it would not survive the cutthroat industry.
Rather than owning assets, ExOs access, rent, or share assets. Leveraged assets include cloud computing and even customer assets as inputs to business. Engagement is comprised of digital and reputation systems, games and incentive prizes, which create network effects and positive feedback loops. An example given was Allstate, an insurance company, which ran a contest to improve its claim algorithm. When the contest ended, Allstate’s algorithm had improved by 271 percent.
When ExOs need to scale, they use customized filtering and matching processes to process the output of external attributes into their internal organizations using algorithms and workflow software. Uber, a ride sharing service, which many of us use, has this. This company is currently valued at $17 billion. User interfaces allow users like us to find and get matched with drivers who enrol on their site. Because of this, it costs Uber essentially zero to use additional drivers.
Our takeaways: Our organizational structures have evolved mainly to manage the scarcity of people, capital and resources (the limits to growth). The concept of ownership works well for scarcity. They are turning this theory on its head because in an information-based world, accessing or sharing the (excess) abundance works better. Our organizational structures are still very linear (think of the traditional 20 percent p.a. growth in our five-year plans), while the information-based world is now moving exponentially.
While we learned how to scale technology, (mainly cloud computing since 2006), it is time to scale the organization’s strategy, structure, processes, culture, people and systems. An ExO is one whose output is disproportionately larger, at least 10 times times larger than its peers because of the use of new technologies that leverage exponentially. They use staff on demand, which leverages external people for both simple to complex work. They attract and leverage their communities by harnessing creativity, innovation, validation and even funding (think crowdsourcing/or funding/or the ISIS propaganda machine for that matter).
As the world turns to data and information, ExOs are leveraging algorithms, including machine learning to get new insights about products and customers. Harnessing this data (and the new technologies) will ultimately be the litmus test on whether our corporations will still be around in the next 10 years. This is the anti-thesis to the Limits to Growth and we can adapt this to face the challenges of a brave new world.
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Ronald S. Goseco is currently EVP of the Financial Executives Institute of the Philippines and COO of IDI-Volkswagen an AC Industrial company