Tuesday, September 28, 2004

Small and nimble: small but valuable companies in the future

Paul graham has a new essay that covers good things that came out of the Internet Bubble:
...doing good work will matter more than dressing up-- or advertising, which is the same thing for companies. That people will be rewarded a bit more in proportion to the value of what they create.

To me the interesting thing is the tension between two trends: on one hand huge corporations evolving into efficient world powers and on the other hand the naturally higher productivity of small loose working groups.

I believe that there is a unifying force that will undo the tensions between these two trends: to approach peak efficiency mega size corporations will federate into smaller business units (*) that may become their own cost centers and also take maximum advantage of consultants and other suppliers. Not to sound like a technical-marketing guy, but future technologies like semantics aware web services and SOAs really will allow work processes to become finer grained and distributed for maximum cost efficiency.

Larger organizations do not often become more efficient as they grow. One excellent example is the rise and fall of the nation state (that is happening now, only we are too close to the phenomenon to see it clearly). The British and then the U.S. empires did not have to be efficient - they only had to be able to exert more controlled violence than competitors.

I believe that world dominating mega corporations will not fall into the trap that nation states did: that of slacking off concerning efficiency. While I see the nation state going the way of the dinosaur, I believe that more efficient corporations will do well and I hope that competition will to some extent provide sufficient checks and balances (for at least quasi fair treatment of non-peak performing labor and also at least some protection of the environment) that the largely corrupt governments can not now control because of payoffs and influence peddling.

I may be very wrong about this, but I do not think so: long term, I believe that at least in potential the future looks bright indeed. Starting at the level of individuals, a tightly connected world will provide incentives for trying to achieve peak performance. With Internet technologies, clusters of peak performers can form small highly efficient work groups that might be either independent cost centers in mega corporations, or act as consultants and suppliers. I also expect to see more loosely coupled virtual corporations created by skilled workers coalescing together for tasks as needed.

The competition for quality will likely offer other incentives for decentralization. For example, the food industry has been going through a long period of consolidation that yields cheaper prices but much lower quality. I live in Sedona Arizona and spend lots of time in San Diego; in both locations the locally grown organic health food industries seem to be thriving. Some people really will spend a little more money for better tasting food. Mega scale corporations may end up owning this market but they will probably work through smaller and localized producers and distributers.

So issues of scale will reach equilibrium with desire for quality being a strong force.

(*) I worked for a long while at SAIC: at the time they organized in small cost centers that surprisingly often competed with each other for new work! The small work groups (I never worked in any of the larger divisions) tended to be efficient.

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