Complexity brings existential threats to organisations. It’s a rare industry not challenged by early or advanced stages of disruption: publishing is under open-source siege; music and film industries by P2P (peer to peer) sharing; education establishments by MOOCs (mass open online courses); computers by mobile; ‘fin-tech’ (financial technology) is challenging traditional financial firms; while even the consultancy model - long protected by big brains erecting barriers to entry - is threatened by the rise of technology-based analytics and tools unbundling their value proposition.
Banking disruption is one of the most dramatic. As the cost of internet-enabled smartphones rapidly moves down the cost curve, payments by mobile phone is ‘hurtling towards the $1 trillion mark’. Mobile money is fast ‘becoming a substitute for paper-based banks as it enables people who cannot get to a branch or ATM to use financial services.’ In Kenya, two-thirds of the population use mobile-money. Weighed down by regulatory and PR burdens, banks in the developed world may struggle to compete with nimble, unencumbered competition from ‘left-field’ exploiting these new growth models.
However, incumbents would be wrong to see the challenges (or solutions) as technological ones alone. Central to markets are people, yet modern organisations, taking their lead from classical economics continues to view wo/man not as s/he is, but as they would like them to be. The efforts of Leon Walras in the 19th century to bring to economics the precision of physics in describing human social behaviour have been widely criticised for the flawed assumptions in his general equilibrium model. We are not ‘sovereign in tastes, steely-eyed and point on in perception of risk, and relentless in maximisation of happiness’ as parodied by Nobel prize winning economist Daniel McFadden in 2006. We aren’t rational, nor adept at optimising gains, and as the Dutch proverb goes ‘he who has choice, has trouble.’ We instead make decisions ‘not only cognitively, but also strategically and viscerally.’
Yet, consensus continues to accept what the general equilibrium model tells us about human behaviour, despite it’s many flaws. Consensus remains unresponsive to the insights of social scientists that can prove the real homo sapien bears little similarity to the artificial homo economicus. Even in the face of surmounting evidence this view remains entrenched; while the likes of Milton Friedman even argue that the model could be correct even if the assumptions are not.
While organisations continue to bury their hand in the sand about the real drivers of human behaviour they will continue to see the changes around us as purely technological ones. The anti-tax campaigns against the darlings of the technology revolution - Google and Apple most notably - may therefore confuse decision-makers as to the real causes (for example, endowment, aversion-loss, certainty, recency effects and sociality of choice) and blind them to the opportunities they must exploit in order to survive in our complex world.
The ‘relentless parade of new technology’ whipping up today’s data deluge adds to modern complexity. According to IBM, 2.5 quintillion (a billion billion) bytes of data are generated every day. The World Economic Forum blog put this into perspective - we are now ‘producing the same amount of data every 10 minutes as was produced in the last 5,000 years. McKinsey’s Global Institute argues this wave is still surging, as high-potential technologies ‘could have a potential economic impact between $14-33 trillion a year in 2025 - equal to almost half the global economy today.
Against this confusing backdrop executives must continue to contain increasing risks and costs and implement the right decisions that drive change to remain competitive. Yet, organisation’s whose strategies to thrive (or just survive) through efficiencies alone end up sailing ‘too close to the wind’ - risking the whip-end of ‘black swan’ events as, in a tightly-coupled world, they become ‘as weak as the weakest link in their chain.’
Now, as never before, executives put the attraction (and retention) of key skill central to their strategies for successfully navigating a highly volatile world. Yet, despite technological advances remaking the world anew ever more rapidly, workforce productivity growth remains stubbornly stagnant. Since 2005, overall Eurozone productivity has increased just 3% (and only 13% since 1995). Even in America since 2010 it’s been a measly 0.3% per year (compared to 1.5% over the previous 20). This raises the question - are organisations misusing technology advances and people’s skills?
Modern knowledge workers spend half the week on email; looking for or gathering information as tools are rarely made to fit the human. The success of Atos - a French IT-service supplier - to become a ‘zero-email’ company this year by integrating social-networking platforms for natural communication may be one the most significant - if less heralded - organisational developments of 2014.
Organisations are currently poorly structured to exploit new information, ideas and opportunities. Technology development often outstrips our evolutionary ability to ‘differentiate useful information from noise.’ This explains why even the printing press took ‘330 years and a million dead in battlefields for the advantages to take hold.’ How long will it take the modern organisation to adapt?
The 20th century’s ‘great acceleration’ brought global change at unprecedented scale. Medical advances spurred population growth; rapid urbanisation generated enormous consumer demand; and mass industrialisation and production, combined with technological advances, brought the capacity to exploit this. Yet, it also brought increased levels of complexity; the unruly off-spring of modernisation.
Today’s fragile global economy heightens the risks organisations face. Government attempts to mitigate these risks focus on regulation that may have prevented the previous crisis, but arguably not the next one. The effect of new regulation will be to increase short-term business costs and systemic risks due to a widespread failure to comprehend the role complexity plays.
Regulatory costs to business are well-documented: since 1998 the cumulative cost to UK business alone has been estimated by HM Treasury at 90 billion pounds; while compliance with even a few sections of the US Dodd-Frank law have been estimated at $100-150,000 per firm (The Economist, ‘Too Big Not to Fail’. Feb 18th, 2012). While costs are predictable, the risks of unintended consequences - of which history is worryingly replete - are not.
Designing the future to be an improved version of the past often has critical impact in the present:
The first ‘law’ of complexity is that hindsight doesn’t lead to foresight
Title is attributed to Niels Bohr, the renown physicist
Shape the Future
Don't just adapt to it