In my last blog post, I referenced recent announcements by Microsoft, Google, and Apple of new or increased online storage offerings. In the post, I took advantage of these announcements to envision a world where personal computing (i.e. applications, storage, content) would migrate to the cloud, signaling an end to local computing as we know it. Rather than requiring a heavy client device such as a traditional desktop or laptop computer, a user would be able to access online applications, storage, and content through any connected device with web browsing capability (i.e. from a wristwatch and mobile phone to a home appliance with a screen or a television to a connected vehicle).
The evolution of inexpensive (moving to free) online storage, ad-supported online applications, inexpensive connected client devices, and inexpensive (one could argue that its costs will shift to zero at some point) connectivity have tremendous implications for the ways in which business gets accomplished in the future. Consider the following
In 1937, economist Ronald Coase published an article, The Nature of the Firm, in the journal Economica. Within the article, Coase argues that firms exist because there are costs inherent to free markets such as costs of communication, of sharing information, of trying to find goods and services. Given these costs, Coase suggests that firms are formed because it is more efficient and less expensive to complete many of these tasks internally within a formal organization rather than outsourcing them to the market and thus incurring these added costs.
In September 1998, MIT Professors Thomas Malone and Robert Laubacher published an article in the Harvard Business Review entitled, The Dawn of the E-Lance Economy. In the article, Malone and Laubacher describe how the evolution of technology and the decreasing cost of communications are making the traditional corporation obsolete. Taking this idea further, the authors envision a world where business is "carried out autonomously by independent contractors connected through personal computers and electronic networks. These electronically connected freelancers--e-lancers--would join together into fluid and temporary networks to produce and sell goods and services. When the job is done--after a day, a month, a year--the network would dissolve and its members would again become independent agents. (Citation)
Consider these two articles jointly. In essence, Malone and Laubacher argue that the evolution of technology reduces to zero, over time, many of the costs that form the basis for Coases argument. If the costs inherent to free markets disappear or at least become negligible, it becomes possible to marketize all sorts of functions and tasks traditionally left to formal organizations. Along these lines, in 2004, Malone published The Future of Work, an excellent book examining how decreasing communication costs will lead to the decentralization of organizations.
These trends and analyses, when viewed through an Innosight lens, fit the patterns of interdependency and modularity. In 2003, Clayton Christensen and Michael Raynor authored The Innovators Solution, a follow-up to Christensens 1997 work, The Innovators Dilemma. Within Solution, Christensen and Raynor introduce a discussion of interdependent and modular systems. Synonymous with optimized or proprietary systems, interdependent systems have unique linkages between elements ranging from product components to the members of a product value chain. Essentially, the pieces are integrated like puzzle pieces and have only specific partners (consider the iPod and iTunes). Modular product architectures, on the other hand, are synonymous with the concept of plug-and-play and resemble building blocks, consisting of standardized interfaces, enabling parts to be easily swapped in and out (consider Linux or Java vs. Microsofts integration of Internet Explorer with the Windows operating system).
By definition, interdependent systems often lead to higher performance than modular systems because the system is closed and optimized. In contrast, modular systems often lead to lower costs because there are a greater number of suppliers, since interfaces are standardized and pieces can be swapped in and out. In industry, interdependency is often required to raise the performance of a new solution. Eventually, however, continued interdependency often drives the performance of that solution beyond that which the target market is willing to pay for. The target market then frequently turns to modular solutions which, at that point, often offer good enough performance along with modularity-driven advantages such as lower cost, convenience, or other ancillary benefits.
Returning to the Coase and Malone and Laubacher articles, it is clear that the potential shift from hierarchical, industrial corporations and multinational megacompanies to one of individual e-lancers can be considered similar to the shift from interdependency to modularity. Indeed, considered in the context of the definitions above, the dominant corporations and value chains of today can be thought of as interdependent architectures, delivering high levels of performance when complex coordination is called for. On the other hand, such corporations and value chains are often fraught with challenges such as high costs due to overhead and of putting specialized systems into place (e.g. the costs of maintaining physical infrastructure, HR systems, training employees, employee benefits etc).
As Christensen and Raynor found, modular architectures are often the solution when interdependent architectures prove too costly. Considered in the context of this research, the e-lance economy may represent a modular stage of organizational evolution - indeed, an architecture of easily swappable or plug-and-play components (e.g. individuals or resources). In an age where closed, proprietary systems are recognized as inhibiting the ability of organizations to respond to or even identify innovation-borne change, modularity seems a promising answer; virtually every element of the value chain could come together on an ad-hoc, objective, modular basis without being hamstrung by the subjectivity and myopias brought on by business process and the long-term commitments to physical infrastructure, a capital investment in which innovation may quickly make irrelevant.
On the premise of a future in which organizations become increasingly loosely organized, a forthcoming blog post will examine how vendors can put themselves in the best position possible to create and capture value when an immense shift (such as this one) occurs - as Christensen, Raynor, and Matthew Verlinden articulated in their 2001 Harvard Business Review Article of the same name, it is important to Skate to Where the Money Will Be. In the meantime, I look forward to any and all thoughts, reactions, comments, and questions.