July 10, 2007

DeConstructing the Corporation with Web 2.0

Why do companies exist ? Since companies consist of individuals who have the skills for which the market is willing to pay .. why is it that companies do not disintegrate ( or rather deconstruct ? ) into its constituent components ?

Ronald Coase was the first to ask this question in 1937 in his essay on “The Nature of the Firm” and his answer was simple : The cost of doing a certain transaction – that adds value – is less inside company than it is outside. What he meant was that doing business by assembling all the right people and support services inside an establishment was more efficient than trying to find and coordinate the same things in the world at large. This answer was good enough for him to win the Nobel Prize because people saw for themselves how individual craftsmen in the cottage industry could not compete in cost and lost out to the mega corporation.

But unfortunately, or perhaps fortunately for many of us, this was not the last word on the subject. Jacques Derrida coined the term Deconstruction to denote a process by which texts and languages of western philosophy appear to shift and complicate in meaning when read in the light of assumptions and absences they reveal within themselves. From this perspective, what assumptions facilitate or hinder the deconstruction of companies ?

Consider the case of Encyclopedia Britannica and Wikipedia. The cost of assembling a set of reasonably credible articles on a large variety of topics is far higher in the case of Britannica than it is for Wikipedia – which is why Wikipedia thrives and grows whereas Britannica ( and even its modern version, Encarta ) is virtually dead. Ronald Coase is still correct with the first part of his analysis – it is the transaction cost that matters, but his assumption that the transaction cost for a deconstructed entity will be necessarily higher is at risk.

But how did the transaction cost go down ? Because the internet and a set of related technologies has made communication, collaboration and dissemination so easy that is now cheaper to get the same quality of deliverables from a widely dispersed set of individuals than if they were in a tightly integrated organization.

In other, more traditional businesses, outsourcing of non-essential services is an immediate example. We find it cheaper to use a courier service to deliver mail rather than have an employee travel just as we find it cheaper to use a janitorial service to clean the toilets. But even before we outsource such mundane tasks we need to have a mechanism to ensure adequate quality. Tools and techniques have to be in place to ensure monitoring of individuals or clusters of individuals who are not tightly coupled to, and share the common aims of, the parent organization to the extent that a regular employee would be. Examples of such tools and techniques could be service level agreements, written contracts and the legal framework to enforce such contracts.

So we see the emergence of a collection of tools, technologies, methodology and frameworks that has a dramatic impact on the relative transaction costs and leads us toward the possibility of questioning Coase’s assumption that integrated companies would always be more efficient than groups of loosely coupled individuals.

Does this mean that the corporation is dead ? Can it be deconstructed completely ? Not quite but we can certainly consider a spectrum of opportunities.

Consider an integrated steel plant at one end of the spectrum. It is abundantly clear that no amount of current technology will ever be able to replace a Blast Furnace or a LD Converter with anything that can operate out of an individual’s backyard.

At the other end of the spectrum we have Call Centre where, a person with a telephone can and does carry on front line mission critical customer facing operations, irrespective of where he is as long as he has access to the correct computer applications.

Somewhere in between but perhaps closer to the steel plant than to the call centre is the automobile business which has historically managed to out-source the manufacture of many components to third party vendors by using a variety of modern control and tracking tools. Again, somewhere in between but this time closer to the call centre than to the steel plant is software development where again a slew of tools ranging from teleconferencing, email, document sharing all the way up to CMMI compliant methodology ensure that the quality of deliverables from dispersed teams is as good as, if not better than, comparable deliverables from apparently tightly knit and collocated teams.

The key factor in all these cases, that allows us to challenge Ronald Coase’s assumption that corporations are always more efficient than a corresponding deconstructed entity, is the quality of the tool set that allows collaboration across a locations and reporting relationships. An immediate example would be telephones : The Great Indian Software Story would never have been written had it not been for a dramatic improvement in reliability and drop of prices of international phone calls and TCP/IP networks. On the other hand, the Great Indian Manufacturing Story never quite reached the best-seller lists because infrastructure and regulatory bottlenecks never allowed the corresponding transactions costs to drop below the necessary threshold.

Going forward, what are the new tools and techniques that will allow us to deconstruct the corporation ? The jury is still out on this but one potential candidate is the collection that is loosely referred to as Web 2.0 – a phrase coined by O'Reilly Media in 2003 that refers to the second generation of web-based communities and hosted services. Web 2.0 technology has two key features namely, social networking and user generated content.

Social networking are based around products like Orkut that help create a community of familiar ( and hence presumably trustworthy ) individuals who are comfortable with each other, even though they may be separated in both time and space. Just as the comfort of being able to talk to a software programmer in India helped many IT managers to entrust their key IT systems to an off-shore software company, so would it need the next-generation of collaboration tools – in this case, social networking – to build the network of mutual trust that will facilitate the next round of deconstruction.

Equally important is user generated content. Products like YouTube, FlickR, Blogspot and of course Wikipedia have demonstrated that it is possible to collaborative build rich and meaningful content that in many cases is far superior to what is possible through traditional means.

Human beings are inherently social and are most comfortable with a visual, especially 3D, interface. This is why video conferencing is always better than a phone call, if you can afford the bandwidth and the technology. Fitting into this slot very comfortably is the technology of virtual worlds as implemented in products like Second Life.

Virtual worlds technology had its origins in online role playing games but has today evolved into what is known as massively multi-user online collaborative platforms that allow individuals and corporates to create content and facilitate social and business networking on a scale that is qualitatively different from anything that we are currently used to working with.

Telecommunication and internet technology has transformed the global business landscape in a manner that was difficult or impossible to anticipate when the World Wide Web – or Web 1.0 – first appeared in 1996. Web 2.0 is the next step towards the DeConstructed Corporation.

for a list of interesting websites check this Web 2.0 awards site