The next tech revolution: Busting bureaucracy

Over the past 20 years, nothing has transformed business as thoroughly or as frequently as information technology. Gary Hamel, Visiting Professor of Strategy and Entrepreneurship at London Business School, talks about the MIX.

This article is provided by the Deloitte Institute of Innovation and Entrepreneurship.

In the first wave, advances in IT prompted many companies to revamp their operating models. In Wave 2, the growing power of the Web provoked a fundamental rethink of business models. And over the next few years, Wave 3 will yield a broad-based and long overdue revolution in management models.

Wave 1: New Operating Models
In their 1993 bestseller, Re-engineering the Corporation, Michael Hammer and James Champy argued for a comprehensive retooling of the operating processes that organizations use to source, produce, and distribute their products and services. While the idea of simplifying workflows was hardly new (90 years earlier, it had been at the heart of Frederick Winslow Taylor's crusade for "scientific management"), what was new was the capacity of information technology to bust through functional silos, simplify byzantine processes, and dramatically reduce response times.

In the wake of Hammer and Champy's book, businesses around the world spent hundreds of billions of dollars integrating and streamlining their supply chains. Today, it would be hard to find a large organization that hasn't paid a small fortune to vendors like SAP (SAP), Oracle (ORCL), and Salesforce (CRM) for their ERP (enterprise resource planning) and CRM (customer relationship management) "solutions."

Re-engineering, which might have looked like a one-time project to a neophyte CIO in the early 1990s, has become a never-ending arms race. Each new technology -- big data, cloud computing, mobile -- launches a new sprint. It isn't cheap to stay in the race. IT consultancy Gartner estimated that in 2013, companies around the world ponied up nearly $300 billion for enterprise software; an amount that, though staggering, was less than 8% of total IT spending. While IT seldom delivers all it promises, no organization can opt out. It's ante up or fall behind.

Wave 2: New Business Models
In 1998, I co-authored Fortune's first cover story on the Internet. At the time, Amazon and eBay (EBAY) were toddlers, Google (GOOG) was still crawling, and Facebook (FB) had yet to be born. Nevertheless, it seemed that something truly revolutionary was afoot. We wrote:

The Internet will change the relationship between consumers and producers in ways more profound than you can yet imagine. The Internet is not just another marketing channel; it's not just another advertising medium. The Internet is the foundation for a new industrial order.

And so it turned out to be. The Internet dramatically lowered the cost of entry for companies, empowered customers, squeezed out middle men, compressed margins, blurred industry boundaries, and challenged the very idea of the mass market.

In this second wave of IT-powered change, it wasn't operating models that were reworked, but hundred-year old business models. In publishing, travel, entertainment, retailing, financial services, telecommunications, and education, legacy business models were, disintermediated, dematerialized, and democratized. And more often than not, it was the insurgents, not the incumbents, who took the lead. For example, Wal-Mart didn't open its online store until 2000, six years after Amazon (AMZN) sold its first book online. Despite Wal-Mart's (WMT) formidable resources, it has yet to catch up, and probably never will. In 2012, Wal-Mart sold $7.7 billion of goods online, a fraction of Amazon's $61 billion.

After the dotcom bust, many thought the Internet's impact on business would wane. But the emergence of the "social web" triggered another avalanche of business model innovation, exemplified by companies like Facebook, Twitter (TWTR), LinkedIn (LNKD), Yelp (YELP), and TripAdvisor (TRIP). For incumbents, it was no longer enough to be an e-business, now you had to be a social-business -- engaging with customers in entirely new ways, often on mobile platforms. As before, industry veterans were often slow to catch the scent. For every company like Burberry, that reconceived its business model from a "social" point of view, there were dozens of others that treated "social" as little more than a marketing initiative.

In IT's first wave, the winners were the arms makers -- companies like Cisco (CSCO), Dell (DELL), EMC (EMC), HP (HPQ), IBM (IBM), Infosys (INFY), Microsoft (MSFT), and VMWare (VMW), and the army of IT consultants who marched along in their wake. Today, the companies that form the vanguard of the enterprise-focused IT industry have a market value of well over $1 trillion. They bulked up while their clients were struggling to keep up.

The big winners in Wave 2 were the entrepreneurs and investors who developed entirely new web-centric businesses. In the U.S., Google, Facebook, and Amazon alone have a combined market value of more than $740 billion. China's top three Internet companies have an estimated market value that tops $225 billion. It would be hard, I think, to find a single incumbent whose Internet-focused initiatives have generated even a fraction of this sort of market value.

Wave 3: New Management Models
I'm betting that the next IT-enabled revolution will upend old management models -- the structures and processes organizations use to plan, prioritize, allocate, coordinate, measure, hire, and reward. The fact is, the biggest drag on performance in most companies isn't a sclerotic supply chain or an insufficiently webby business model. Rather, it's a management model that empowers the few while disempowering the many; one that favors efficiency over every other business goal and conformity over every other virtue; one that makes organizations less adaptable, innovative, and inspiring than they could be and, increasingly, will need to be.

The basic architecture of large-scale human coordination hasn't changed much since Moses led the Israelites out of Egypt. Ask an engineer at Google, a branch manager at Credit Suisse, a nurse in Britain's National Health Service, a priest serving the poor in a Rio favela, a guard in Shanghai's Hongkou Detention Center, or an Emirates Airline pilot to draw a picture of their organization, and you'll probably get a rendering of the familiar pyramid.

In one form or another, this has been one of humanity's most enduring social structures. Formal hierarchy is simple and scalable. Its clear lines of authority, cascading goals, and tight supervision facilitate the efficient aggregation of human effort. It provided the scaffolding for Caesar's army and Henry Ford's automotive empire, and it is still the backbone of just about every enterprise on the planet.

In contemporary organizations, this universal architecture is complemented by a clutch of key management processes: strategic planning, capital budgeting, financial reporting, performance management, recruitment, training and development, product development, project management, knowledge management, risk management, and so on. There's a name for this mash-up of military command structures and industrial management: bureaucracy.

A hundred years ago, the German sociologist Max Weber celebrated bureaucracy as being "superior to any other [organizational] form in precision, in stability, in the stringency of its discipline, and in its reliability," and he was right.

Bureaucracy was a major advance in solving the problem of efficiency at scale. If you have a couple of cars in the garage, a digital device in every pocket, and don't spend 80% of your time growing your own food, you owe a huge debt to those early management pioneers who laid the groundwork for the modern industrial enterprise.

But when the goal is anything other than efficiency -- when it's adaptability, or innovation, or encouraging human potential -- bureaucracy turns out to be an almost insurmountable impediment. Bureaucracies, by their very nature, are inertial, incremental and uninspiring. That's a problem because today operational efficiency is just the price of entry; a necessary, but far from sufficient, condition for competitive success.
In a business world where customers are omnipotent, where barriers to entry are crumbling, where incumbent advantages are fleeting, and where employees, like citizens, flee authoritarian regimes, efficiency isn't anywhere near enough.

That's why we're launching the Busting Bureaucracy Hackathon at the MIX. Join progressive thinkers, management practitioners, and technologists from around the world in laying the groundwork for the post-bureaucratic organization.