Hallmarks of the 'digital organization'

Respected MIT economist Erik Brynjolfsson explains how you can get the most bang for your extended enterprise buck.

With productivity growth at an all-time, Erik Brynjolfsson, director of MIT's Center for eBusiness, has been researching just how much influence electronic business systems and the extended enterprise have had on this economic measurement. In a recent interview with Signature Series Executive Editor Julie Bort, Brynjolfsson revealed the hidden traits of companies that use technology to the best productivity effect. He calls these companies "digital organizations."

How have the e-business and the extended enterprise trends affected the companies most adept at using technology to increase productivity?

In most of the 20th century, you could make a pretty clean distinction between what happened between firms - markets - vs. what happened inside a firm - hierarchies. Markets tended to have very simple kinds of communications. Prices and quantities are examples. Inside the organization much of the communication flow was command and control. Now we are seeing the communication flows become richer and more complicated. We're seeing relationships that are neither markets nor hierarchies - they are really more like networks, partnerships and value-adding relationships.

Are you referring to exchange hubs, where competitors interact?

No, I'm thinking more like long-term supplier relationships where very rich data might be exchanged - the way Boeing exchanges CAD data with its suppliers or Dell with its suppliers, or Wal-Mart exchanging information with Procter & Gamble. The data exchange is much richer than simply, 'We'll place an order off of your product list for this price and quantity.' It's more like, 'Here are our customer needs and specifications. Here are some product components that we'd like you to help us design. Here's what some of our other partners are doing.' And gigabytes of data are being exchanged, whether that's standard data or CAD drawings. This isn't the classic market system anymore. It's really something that we've never seen before that relies on intensive data communications, on new levels of trust and on institutions that are at least as important as the technology infrastructure.

What are these institutions?

Outsourcing is an example. In many cases people may even be physically working side-by-side, but technically be working for different companies. You may bring together people from different companies to work together for a new product launch or a new service. Some industries have been organized like this for years, Hollywood - the way they make movies - and construction. It's a more flexible kind of relationship that network technology is making feasible in a lot of other industries.

What is an IT executive's role in this new structure?

These inter-organizational systems really require a lot more coordination between technology and the business side. One way to achieve that is through more dialog between business units and the IT people, and more business knowledge on the part of the technology people. And also - something that seems to get neglected whenever people talk about this - it requires a lot more technology know-how on the part of the business unit types, especially the CEO. You can't, in today's world, formulate successful business strategy without knowing the technological opportunities. I'm talking about a deep understanding of what technology can do, what the underlying trends are in communication speeds and processing, and what can be done with things like voice recognition, RFIDwireless.

There are those saying technology is reaching a stage of maturity, where the low hanging fruit is all gone. Nothing could be further from the truth. The fact is, if you look at the underlying trends, at the chip level, basic communications or software, all the performance measures are increasing as fast if not faster than they were 10 years ago. Then consider that technology use is on a much bigger base now than it used to be, and basic arithmetic indicates that the effects on the economy are likely to be larger not smaller. The pace of change is accelerating.

What do the new organizational structures entail?

We identified a set of seven practices we called collectively the digital organization. These were practices that correlated with significantly higher productivity and stock market performance. One involves greater decentralization of human decision-making. Another is machine-readable or rule-based decision-making becoming more centralized. So we've got simultaneously centralizing and decentralizing, depending on the type of decisions.

In digital organizations, decisions don't have to be made or checked by the people at the top all the time. Incentive systems get people to do the right thing. These companies were more likely to have performance-based rewards, pay, promotions and more likely to use broadly distributed stock options and other types of bonuses related to performance. The theory and the practice suggest that those help people make the right decisions.

We also found that digital organizations work hard at maintaining a consistent corporate culture. Economic incentives can help - profit sharing and bonuses - but there are things you can't attach to a quantitative goal. The culture helps people focus on the things that the company thinks is most important, whether that's customer service or quality or creativity. Digital companies invest more in training when they hire people. They work a lot harder at identifying good candidates for each position and they pay more. One fear was the way these companies were achieving high profit fulfillments was through some kind of a zero sum gain effect - getting people to work more, an electronic whip, more hours a day squeezed out of them. But the data suggested that employees were happier in these organizations.

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