In the industrial age of machines, there’s generally been a presumption of economies of scale. Our bookkeeping systems are oriented towards acquiring an asset, and depreciating it over the expected lifetime of the machine.
In an knowledge economy, does that presumption still work?
From 1997 …
A number of leading companies today are experimenting with a new way of organizing – the cellular form. Cellular organizations are built on the principles of entrepreneurship, self-organization and member organizations.
Source: Miles, Raymond E., Charles C. Snow, John A. Mathews, Grant Miles, and Henry J. Coleman. 1997. “Organizing in the Knowledge Age: Anticipating the Cellular Form.” The Academy of Management Executive (1993) 11 (4): 7–24.
In 1993, the IBM Consulting Group was formed on these principles. In history, IBM Consulting Group was absorbed under IBM Global Services in 1995, and by 1996, the cellular form was forgotten in the movement towards globalization.
I would be interested to hear a bit more about that. Was it not working? Was the idea of globalization at IBM, at that time, one of homogeneity in services? It seems like a truly globally-oriented and globally spanned organization would, optimally, be composed of a multicellular structure, locally appropriate and tailored.
My wild guess (totally unfounded) would be that someone took the model and tried to transplant it somewhere without consideration for locally appropriate (more like a franchise than a cell), and it didn’t fly, and the model was scrapped.
The decree was entered when the computer age was in its infancy on the basis of IBM’s conduct in the market for old-fashioned tabulating machines, which worked with punch cards. The decree’s protections, however, extended as well to electronic data processing machines.
The decree’s main provisions required the Armonk, New York–based IBM to sell its machines as well as lease them, and required IBM to provide service and sell parts for IBM computers after they were no longer owned by IBM. This created a market in used equipment that competed with IBM’s new machines and limited its monopoly power in the computer market.
There’s an argument against reductionism in IBM’s prior behaviour. IBM used to be famous for “taking care” of everything computer-related for a large scale enterprise business. This is a definition for an information system, rather than information technology, where IBM would provide hardware, software and services bundled into a package.
However, the consent decree effectively meant that IBM would get most of its revenue from computer hardware and operating systems. It never played much in application software, nor in consulting services. Many would say that the rise of Andersen Consulting (that would become Accenture) was the result of IBM not participating fully in computer services.
With Lou Gerstner joined IBM as CEO in 1993. He put the company back on a strong financial footing by making some hard decisions (e.g. killing OS/2 development to leave Intel-based operating systems to Microsoft; offering voluntary retirements that became oversubscribed). A Forbes article from 1999 describes the barbell strategy.
Marker in hand, and looking every bit the former McKinsey & Co. consultant he is, he sketches his vision on the easel in his office: a vertical barbell. The big weight at the bottom is components. At the top end is services. The skinny bar in the middle is everything else: PCs, servers, network gear.
Profits are moving to the ends of the barbell, Gerstner says. The companies in the middle? “They’re becoming assemblers. The value is being pulled down to the people who have the real underlying assets.” Look at Intel and its 23% aftertax margin: “They’re at the bottom of the chain–and they make all the money.”
So the strategy was to make make money on services. The scale of making a difference at IBM is something that most people don’t appreciate. I would occasionally meet people who would want me to help that with a partnership at IBM. I would say that I would be happy to introduce them to an executive, if they thought that they could generate $10 million in revenue within a few years. Of course, most people don’t think that big. In a really bad year, 1993, IBM’s revenue was $67.7 billion. For IBM to really make a difference in the services business, growth rates would have to be huge.
The typical belief was that management consulting, the core of IBM Consulting Group’s offerings, would only be about 10% of the services revenue. The big money was in systems integration projects, pulling together a variety of information systems into something more coherent. This coincided with the rise of Internet, as IBM coined the term e-business in 1997.
So, the challenge with cellular form organization is that is makes a lot of sense for a management consulting business, but doesn’t necessarily make sense in light of an exploding systems integration business.
I was an IBM Canada employee from 1985 to 2012. However, in 1994-1995, I was a management consultant within IBM Consulting Group, working out of the Dallas office. By 1996-1997, that group was absorbed into Consumer-Driven Supply Chain group – actually part of Sales & Distribution, not IBM Global Services – out of Waltham, Massachusetts. I actually wasn’t an employee of IBM Global Services in Canada, because I was more valuable to the company flying around the U.S., working on bigger projects. In the official IBM Canada headcount, I reported to managers in the Retail Industry unit of Sales & Distribution. It wasn’t until after the assignment to the IBM Advanced Business Institute at Palisades that I returned to Canada in 2001 to join Business Consulting Services in Markham.
This personal reflection illustrates that when IBM said global, they really meant global. It was a big change when payroll was no longer done in Canada, but global payroll was run out of Brasil. The first work permits to the U.S. that I got were through a small Toronto consultant; the later work permits were processed from Research Triangle Park in Raleigh.
I would like to share a few lessons we learned from our near-death experience and rebirth.
1. Businesses must be genuinely global. Technological advances and globalization have completely changed the rules about how and where things can and should get done, yet many companies still cling to their old models for operating, duplicating the same functions and organizations in various locations. This leads to layers of complexity, discrepancy and redundancy that produce a significant drag on efficiency and performance.
We were operating on a multinational model, with mini-IBMs in most of the countries we operated in–IBM Japan, IBM Canada, IBM France, IBM Argentina, etc. Many had their own local manufacturing and delivery operations. Each country had its own unique profit-and-loss statements, its own legal and human resources departments, its own information technology and financial systems, and so forth.
Because of our global reach and advances in technology, we were able to move past that and adopt a shared-services model that allowed us to strip away a lot of that cost and complexity while also better using our resources and talent. We adopted standard processes and reporting procedures for all our internal functions and consolidated those activities in key centers.
We also adopted this approach to how we develop, deliver and support our products and services. This allowed us to tap the best talent and resources wherever they resided, be it in Bangalore, Brazil, Bratislava or Boulder, to run our business and serve clients around the world. This model has allowed us to lower our shared-services costs by about 25% over the last five years.
It also ensures that nine out of 10 IBM employees now focus on developing, producing and delivering high-value solutions for our clients rather than servicing the internal workings of IBM. And operating as a global business means that even our teams in small growth markets can tap IBM’s talent pool to deliver value for their clients.
As a 1982 MBA graduate, I left the consulting business inside of IBM in 2006, because the services business wasn’t running like a McKinsey or BCG, but more like an Accenture or CSC. I went into an Industry Solutions unit that was North American, that meant that I spent most of my time with customers in the U.S. (who generate revenue more than 10 times the volume of customers in Canada).
From a systems design perspective, a cellular form organization is a choice. it works well if the driving force is ongoing knowledge management. A different organizational form may make sense when we’re talking about enterprise-scale technologies operating at global scale.
Now that the world seems to be turning towards deglobalization, there’s some interesting strategic questions as to whether IBM might return to the multinational form that it had in the 1980s. Probably not, though. My friend @gmetcalf once said to me that IBM eats whales, and it really can’t survive on minnows.
Are these issues addressed in the "Theory of the Firm? especially as outlined in this nice wiki article?
Herbert Simon’s work in the 1950s concerning behaviour of organizations in situations of uncertainty, which argued that “people possess limited cognitive ability and so can exercise only ‘bounded rationality’ when making decisions in complex, uncertain situations”…is his work and that of the Carnegie School pertinent to cellular form orgs?
The ideas of Cellular Form Organizations were specifically oriented towards knowledge workers. There’s a challenge when “knowledge is sticky” to individuals, yet there’s an enterprise interest in “organizational learning”.
The Theory of the Firm, as it comes from Ronald Coase (and into Oliver Williamson – I was reading that in graduate school in the early 1980s) essentially ask the question about why firms exist, as oppose to just transacting over markets. Think of moving from an agarian society (e.g. human labour and animals) to an industrial society (e.g. centered on machines).
In the industrial era, firms buy a machine. It costs a lot up front, but there’s a operational life to the machine, and fiscal accounting was created so that the purchase could be depreciated over the life of the machine. So, if we have a factory where a machine last 10 years, we can depreciate it over 10 years. (We could argue about whether that should be straight line, with the same amount of depreciation every year, or an accelerated schedule where we take percentages of a declining balance).
In the information age, do we depreciate investments in knowledge? Traditionally accountants have created a category of goodwill when acquiring a company, that can be amortized over some time. However, the economics associated with an industrial model may not fit well in the information age (or the services economy, as another way of expressing it).
Herbert Simon’s idea of bounded rationality fits into Oliver Williamson’s view on transaction cost economics. This is still economists trying to figure out social organizations.
The research in cellular form organizations comes from a different school. It’s not economics, it’s now called organization science. It used to be called either organization design, or related to organizational development. Researchers in these fields are usually psychologists, anthropologists and sociologists.
In my typing this response, an economist would look at my efforts in terms of utility maximization, that I get more benefit out of doing this, than it costs.
An economic sociology would look at what I’m doing, and consider that I might be giving you a gift. I don’t really calculate the return of investment into friendship, so rationally explaining my behavior is likely to be incomplete.
Pardon my cavalier words but the one-dimensional approaches to thinking such as we find in most English thinkers like Hobbes’ Leviathan, John Locke’s Notes on Freedom or utilitarianism always struck me as one-dimensional and hence really uncivilized…LOL
Maybe psychology may tell us if humans really seek the greatest utility maximization or ROI for their efforts…I don’t think most humans are selfish