IT training future of the firm khotailieu

Future of
the Firm
This Is Not Business as Usual

Josh Bersin, Tim O’Reilly,
Roger Magoulas & Mike Loukides



Future of the Firm

Josh Bersin, Tim O’Reilly, Roger Magoulas,
and Mike Loukides

Beijing

Boston Farnham Sebastopol

Tokyo


Future of the Firm
by Josh Bersin, Tim O’Reilly, Roger Magoulas, and Mike Loukides
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Table of Contents

Future of the Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Setting the Context
Trust, Responsibility, Credibility, Honesty, and Transparency
The Search for Meaning
New Leadership Models and Generational Change
Big Systemic Thinking
New Kinds of Partnerships Between People and Machines
From Hierarchies to Networks
Free Agency, Personal Brands, and the Evolving Employer/
Employee Relationship
Compensation Beyond Pay
Diversity, Inclusion, and Fairness at Work
Board Governance and Diversity
Conclusions

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Future of the Firm

We’re excited that O’Reilly Radar is partnering with Josh Bersin to
cover topics like organizational learning, workforce expectations,
adapting to digital transformation, and leveraging technology for
human resources—all topics related to the future of the firm. Bersin
has a long history of providing prescient advice on the human side
of what organizations need to tackle the changing technological
landscape they face. You may know him from the research reports
he developed at Bersin by Deloitte.

The “future of the firm” is a big deal. As jobs become more automa‐
ted, and people more often work in teams, with work increasingly
done on a contingent and contract basis, you have to ask: “What
does a firm really do?” Yes, successful businesses are increasingly
digital and technologically astute. But how do they attract and man‐
age people in a world where two billion people work part-time?
How do they develop their workforce when automation is advanc‐
ing at light speed? And how do they attract customers and full-time
employees when competition is high and trust is at an all-time low?
When thinking about the big-picture items affecting the future of

the firm, we identified several topics that we discuss in detail in this
report:
Trust, responsibility, credibility, honesty, and transparency.
Customers and employees now look for, and hold accountable,
firms whose values reflect their own personal beliefs. We’re also
seeing a “trust shakeout,” where brands that were formerly trus‐
ted lose trust, and new companies build their positions based on

1


ethical behavior. And companies are facing entirely new “trust
risks” in social media, hacking, and the design of artificial intel‐
ligence (AI) and machine learning (ML) algorithms.
The search for meaning.
Employees don’t just want money and security; they want satis‐
faction and meaning. They want to do something worthwhile
with their lives.
New leadership models and generational change.
Firms of the 20th century were based on hierarchical command
and control models. Those models no longer work. In success‐
ful firms, leaders rely on their influence and trustworthiness,
not their position.
Big systemic thinking.
The firm of the future must be able to adapt to changing envi‐
ronments, changing interactions with its customers, and chang‐
ing communications patterns within the organization. Every
firm must understand their business is a complex system, and
that it’s impossible to change one aspect of the organization
without affecting everything else.

New kinds of partnerships between people and machines.
AI and ML are changing almost every job. This shift raises
many questions: Who manages the machines, and how? What
skills do those new managers need, and how are they acquired?
What kinds of compensation are appropriate?
From hierarchies to networks.
Firms of the future are trending toward networked marketpla‐
ces where organizations build on their core competencies and
outsource the rest to a network of contractors and free agents.
Increasingly, these networks are managed by centralized algo‐
rithmic systems.
Free agency, personal brands, and the evolving employer/employee
relationship.
Employees are free agents, which means hiring and retaining
talent is difficult. Firms need to help employees meet their
career goals, satisfy employees’ ethical concerns, and more.

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Compensation beyond pay.
The nature of compensation is changing, with firms offering
alternate work relationships, more flexible workplaces, training
opportunities, additional perks and benefits, and more of a
sense of “taking care” of workers.
Diversity, inclusion, and fairness at work.

It’s well known (but not well practiced) that diverse teams pro‐
duce better results. But achieving diversity is more than a mat‐
ter of filling the pipeline with new hires. Diversity requires
solving compensation problems, creating a safe workplace,
inclusion, and ensuring everyone knows their opinions will be
respected.
Board governance and diversity.
Board independence and increased diversity can help improve
board governance. Diverse boards provide broader perspectives
and ask better questions, helping improve outcomes and adapt‐
ing to rapidly changing business environments.
This is only a preliminary map of the territory, with some topics
appearing across multiple regions. Our high-level view tries to dis‐
tinguish the cities from the fields, mountains, rivers, and oceans that
surround them.
Whatever the future of the firm, rest assured, it won’t be business as
usual.

Setting the Context
Before diving into the details, let’s look at the factors that have influ‐
enced our perspective on the future of the firm.
The economist Milton Friedman claimed that “there is one and only
one social responsibility of business—to use its resources...to
increase its profits.” This formula no longer works. Today, driven by
technological, social, and political factors, success requires broad
systemic thinking about all the players the organization affects—
employees, customers, society, the environment, fairness, inequality,
and purpose. The context, the milieu, the incentives, the scale, and
the workforce expectations that organizations operate in have all
changed in a world with increasingly sophisticated automation, with

massive social connectivity, and with issues of inequality and climate
change. More and more people are questioning whether the basic
Setting the Context

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tenets of capitalism work best for everyone, whether automation will
wipe out jobs, what millennial and younger employers want and
demand from the companies they work for.
There’s a lot going on, a lot to digest, and a lot to process. For exam‐
ple, Seth Klarman, in a recent (and rare) interview with Evan Osnos
at The New Yorker, explains how his focus on value investing helped
him evolve his thinking—that a short-term profit focus is the wrong
perspective for organizations, that they need to focus on customers,
on employees. Recent reporting from the Davos World Economic
Summit highlights the “clueless” response from billionaire attendees
that “upskilling” for a digital age is all that’s needed, that wealth
inequality is not the problem. And for citizens, the situation is
worse: the latest research shows that only 20% believe “the system is
working for me.”
These observations and many more help inform this compendium
of topics. In the sections that follow, we address what business lead‐
ers, tech leaders, and decision-makers can expect; how they can pre‐
pare; and what they should learn to shape the future of their own
firms. These are lessons that affect much more than the bottom line.

Trust, Responsibility, Credibility, Honesty, and

Transparency
From our perspective, we see society undergoing a trust shakeout,
with formerly trusted brands losing that trust and new trust inter‐
mediaries ascending to positions of trust and influence. Organiza‐
tions can take advantage of the shakeout to focus on building trust
and earning a trust premium that both customers and employees
value.
As Laura Baldwin, President of O’Reilly Media, likes to say, “Your
customer (your user) is your conscience.” Not only do your custom‐
ers let you know when you’ve let them down, they let the world
know. And increasingly, there are some with a much bigger mega‐
phone than others. In particular, there are people who understand
what Jeremy Heimans and Henry Timms call “New Power”. Donald
Trump rode social media power all the way to the White House;
Alexandria Ocasio-Cortez has become a congressional powerhouse
even as a freshman because she too knows how to work the levers of
internet visibility and vitality.

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Concerns around trust and credibility swirl around many of the
major social media companies—concerns that are amplified by the
newness of the companies and the newness of online social media.
For example, it is easy to blame tech companies like Facebook and
Google for spreading fake news and hate speech, while giving tradi‐

tional companies a pass on behavior that is at least as egregious.
Facebook’s systems failed to stop fake news from spreading; too
often, traditional media sources spread it intentionally. (See Yochai
Benkler’s fascinating book on internet propaganda and the role that
traditional media outlets have played in legitimizing and amplifying
content that was once shut down by those with journalistic integ‐
rity.)
Even within tech, Facebook and Twitter get most of the attention
while YouTube and Reddit, doing a far worse job of addressing mis‐
information, generally receive little scrutiny. Uber uses low-paid
temporary workers with uncertain schedules and incomes—so do
Walmart, McDonald’s, and the Gap. Why do the tech firms get so
much more heat while traditional companies often get a pass? Any
attempt to come to grips with these problems needs an even-handed
analysis of system-wide problems, not scapegoating of particular
firms or industries.
But consider the fate of tech companies as a taste of things to come.
The ability to shape or even to manipulate public opinion via social
media is reaching a new level, not just in the hands of talented
human practitioners but of those wielding new tools of algorithmic
manipulation.
We can expect notions of trust to expand to include trust in
machine learning and artificial intelligence algorithms far beyond
social media. When these algorithms go bad—when results are
biased, unfair, inexplicable—the results can shake a firm’s reputation
and erode trust. Facebook and Google are in the crosshairs because
AI and ML are at the heart of their businesses, but more and more
companies will be swept up into scrutiny. And it can happen fast!
Consider the failure of Microsoft’s chatbot experiment Tay, where
trolls were able to game the application to create a PR disaster of

offensive remarks on its very first day of operation.
Increasingly, organizations planning on public-facing or customeraffecting ML/AI services need to make fairness, accountability, and
transparency primary design objectives, not things to be tacked on

Trust, Responsibility, Credibility, Honesty, and Transparency

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at the end of projects. (See fatconference.org and fatml.org for more
information on research into fairness, accountability, and transpar‐
ency [FAT] in ML.)

The Search for Meaning
The increased demand for trust and fairness covered in the previous
section is part of a broader search for meaning—a topic of increas‐
ing interest and importance to organizations as they grapple with
what motivates and inspires their employees, customers, and suppli‐
ers. The last few years of economic, political, organizational, techno‐
logical, and social turmoil that helped fuel the trust shakeout have
also intensified the search for meaning across the culture.
As the global economy has recovered from the 2008 meltdown,
there has been a frightening increase in income inequality around
the world. In 2017, eight men owned more wealth than the poorest
half of the world, and in the US, wages after inflation have barely
budged for 30 years. This trend, coupled with the need to deal with
issues of global warming and migration and immigration in most
developed economies, has created a crisis in trust.

New research by Edelman shows that in developed markets, only
one-third of citizens believe their family will be better off in the next
five years. Nationalism in the US, Brexit in the UK, and similar pop‐
ulist movements in France, Germany, and other countries show that
the people are “rising up,” forcing political and business leaders to
focus on making their lives better.
The impact on corporations has been enormous. Research by Gallup
shows that more American millennials have a positive view of
socialism (51%) than capitalism (45%), and a Shelton Group survey
found that 64% of US consumers believe it is “extremely important”
that companies take a stand on current social issues and adjust their
purchasing behavior based on those commitments. There is also a
growing backlash against plutocratic philanthropy: while people
appreciate wealthy “winners” of the economy for their gifts, they
now want government to step back in and fix problems like infra‐
structure, rampant growth in CEOs’ profits, and misbehavior.
This has given rise to a search for meaning in the boardroom. Even
Davos, the global meeting of business leaders, has lost its sense of
purpose, as companies now sit around discussing the fourth indus‐

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Future of the Firm


trial revolution but seem to have no consensus about how to regu‐
late privacy, data security, ethics, and global warming among
nations.

For CEOs, this has created a dilemma: while they feel beholden to
stockholders who want steady increases in short-term profits, they
now realize they must take a position on the value of their compa‐
nies’ products and services to society. And they are struggling to
find their footing.
Companies like Unilever, Patagonia, and Johnson & Johnson have
been mission-driven from their founding. They have always oper‐
ated on the premise of “doing well by being good” and have a long
track record of taking care of their employees, keeping their supply
chains clean and sustainable, and making sure they practice ethical
behavior in their product design, customer service, and operations.
They are truly “conscious capitalists” at their core. But there is a new
class of winners (Apple, Facebook, Google, Amazon, Alibaba) that
are amassing enormous profits and market share in the digital econ‐
omy, and are struggling to understand the consequences of their
attention-driven business models.
And for all other firms, trust is now a way to differentiate them‐
selves. Allbirds, a fast-growing shoe company that has the potential
to threaten Nike or Adidas, builds its shoes entirely from sustainable
products; it focuses on health and comfort for its young buyers, and
its brand has skyrocketed in popularity because of its “good” way of
doing business.
Consumer packaged goods companies like Unilever, P&G, Nestlé,
and General Mills have been operating in this world for decades.
They face constant criticism over water treatment practices, food
quality, and other social issues, so they are vigilant and have mature
ways of staying ethical as needs and problems change.
Others, like banks, insurance companies, and investment firms, are
not sure what to do. Larry Fink, the CEO of BlackRock, the largest
investment firm in the US, has told his investors two years in a row

that if they and he don’t focus on responsibility in their strategy, the
firm will cease to thrive. CEO after CEO is finding new language to
sell purpose and mission, forcing managers and senior leaders to
think the same way.

The Search for Meaning

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At the firm level, this is an existential issue with employees. Employ‐
ees of all ages no longer want to work for companies that “do bad
things.” Facebook’s Glassdoor ratings, for example, have dropped
30% in the last six months because of the ethical missteps and con‐
troversies that have been exposed, with its ranking in the list of
“Best Places to Work” slipping from #1 to #7. Google employees
stage protests for #MeToo, against defense department contracts and
other corporate behavior. And it’s not just Facebook and Google:
“The Tech Revolt” documents other manifestations of tech worker
activism. While tech workers may have better facility with the tools
for organizing, that knowledge can spread to others looking for
employers that “do good to do well.” In this tight labor market,
nearly every company should focus on its purpose to burnish its
employment brand.
Apple, Microsoft, and IBM are now spending a lot of time talking
about how to build technologies we can trust. Uber has changed its
corporate advertising to talk about quality of life and selffulfillment. This move toward becoming a “trusted player” in the
world, acting like a global citizen, and truly defining one’s business

in the context of its value to society is an enormous new trend that
CEOs, CTOs, and CHROs now face all around the world.

New Leadership Models and Generational
Change
In a recent study by Deloitte,1 81% of senior leaders said they need
new models of leadership. The characteristics most cited are the
ability to lead during ambiguity (82%), leading through influence
instead of hierarchy (68%), managing a wide variation in work
arrangements (51%), and understanding how to leverage technology
and new jobs created by machines (46%).
The entire concept of leadership has come under question. Witness
the company with the iconic leadership model of the late 20th cen‐
tury: GE. GE is the subject of many books discussing its leadership
model, the strong persona of its former CEO Jack Welch, the drive
to reduce bureaucracy and hold people accountable, and the objec‐
tive to be number one or two in a market or get out of the business.

1 Data is from the forthcoming 2019 Global Human Capital Trends report from Deloitte.

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Future of the Firm


Today GE is a fallen giant that failed to leverage digital business
models and has now been taken off the Dow Jones Index. How did
this happen?

There are a series of changes taking place.
First, leaders are everywhere. Even the youngest employees are lead‐
ing initiatives, teams, and organizations. (Mark Zuckerberg was
thrust into leadership in his 20s.) The idea that you must “wait your
turn” and experience a wide variety of roles before you lead is no
longer valid. Today, leaders learn to lead on the job, so they need to
be coached all the time.
Second, leaders now lead through influence, not position. In the GE
and older hierarchical models, the leader was the boss. You did what
they said, and the boss wielded power over you. Today, the pyramid
is inverted: technical and functional experts make decisions on
behalf of the company; leaders are here to coach, align, and help
people succeed. They gain followers because of their reputations,
not their job titles or levels.
Third, we now lead in diverse, multigenerational organizations.
More than 55% of college graduates are women; the fastest-growing
segment of the workforce is now people over the age of 50. If you
are not able to lead a team of men and women, people of many cul‐
tures, and people of many ages and demographic groups, you will
not succeed. Deloitte’s research on highly inclusive teams shows that
groups that feel “included” perform at about 1.8x the rate of those
that feel “left out.” This is a model of leadership.
Fourth, we need leaders who can iterate, experiment, and learn to
quickly solve problems. The days of 3- to 4-year product cycles, long
development plans, and years of market study are over. Today’s
high-performing companies develop products in an agile way, they
show them to customers early, they fail fast and repair mistakes, and
they iterate using data and experimentation. Today’s leaders must be
hands-on and they must support this process of continuous,
customer-driven improvement.

There are some significant challenges for leaders ahead. Can your
leadership team adapt to gender equality, pay fairness, and a truly
global culture? Can your leadership team attract and assemble
smart, empowered people and keep them aligned and performing
toward your goal? Can your leadership team reorganize and revital‐

New Leadership Models and Generational Change

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ize the business as it changes, without being tied to old models that
have fallen out of date? And can your leadership team adopt a
growth mindset, designed to help everyone in the organization
learn?

Beyond Perks: New Leaders Model Work-Life Balance
The following is a nice example of how embracing a modern benefit
works to set cultural norms in an organization, and also gets noticed,
becoming part of the story the organization can use to attract and
retain the workforce it needs.
Note: The comments come from Bill Higgins’s personal Twitter
account and represent his own views, not the views of his employer.
I’d like to give a public kudos to April Underwood (@aunder) for
teaching me about the importance of intentionally modeling good,
ethical behavior to reinforce the right cultural norms in your areas
of influence.
Here’s the story, which I don’t think April will mind me sharing.

In a previous job at IBM, I was responsible for deploying Slack for
the company, which made us the largest and possibly the most
iconic enterprise adopter of Slack. Through this job, I had the privi‐
lege of getting to know April and other excellent leaders at
@SlackHQ.
At the first Slack Frontiers conference closing party, I walked up to
April to congratulate her on the successful conference and her then
soon-to-be-born first child. I asked her how long she planned to
take off work and, while I don’t recall the exact duration, it was
longer than I would have expected for such a critical leader. I told
her that I thought it was personally awesome that she was going to
take such a leave and how I thought she’d always be glad that she
did, later in life.
She told me that she was also doing it because she wanted to model
the right cultural norms for Slack (i.e., people watch what you do,
not what you say). And she wanted to use her position of influence
to make it safe and even encouraged other Slack folks to take
advantage of Slack’s generous and humane policy to allow new
mothers and fathers to take a significant leave of absence after the
birth of a new child.

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While I have always tried to act morally and ethically at work,
April’s comment really raised my consciousness that as a leader, one

of my explicit responsibilities is to publicly model the right behav‐
iors. These days, it’s quite an explicit and important part of my per‐
sonal approach to leadership, and something I explicitly require my
leaders to do as well.
Thank you April for teaching me this important lesson, and know
that I am helping to spread it. Even though you are no longer at
Slack, I hope we can stay connected so that I can continue to learn
from you, and so that I continue to support you and your good
deeds.
—Bill Higgins (@BillHiggins), IBM Distinguished Engineer, AI for
Developers
PS: My company, IBM, also has a generous policy for paternity and
maternity leave, and this is one of the many reasons I am proud to
work there.

Big Systemic Thinking
There is nothing simple about business. It’s easy to get trapped by
simple business models—for example, optimizing by doing more of
what you know. “We’re doing well selling widgets, so let’s make
more” is a good decision only if you know that the market for widg‐
ets is growing, that you can maintain or increase your market share,
and that there isn’t something you can do even better. While it may
be necessary to simplify the components of a business to best under‐
stand and apply them, taking the time to do big systemic thinking
could be the most important factor to an organization’s sustained
existence and success.
Today, as products become services (every product now has a digital
footprint, which itself provides service revenue), companies have to
understand the ecosystems in which they live. Cummins, for exam‐
ple, one of the leading providers of diesel engines, has been studying

its ecosystem for decades. Today, the company sells not only engines
but online diagnostics, services to dealers and resellers, and continu‐
ous digital services to its users. In time, Cummins may become a
“digital services” company with revenue streams as large as its
machines.

Big Systemic Thinking

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How do you skate to where the puck is headed, rather than where it
is? Firms have to understand and participate in their entire business
ecosystem. Those that don’t do this often disappear in a flash. Digital
Equipment Corporation’s machines were absolutely central to the
university and industry researchers who developed both the Unix
operating system and the internet, but the company failed to realize
that its own VAX/VMS operating system was a dead end. It was
unwilling to sacrifice a popular but declining product for the future.
If Digital had really understood the ecosystem in which it was
engaged, the company might have seen this trend.
By way of contrast, consider Amazon, one of the best “systems
thinking” companies in the world. As it built its retail business, the
company realized that its many elements could be unbundled. Its
massive internet infrastructure was a product in itself. Now Amazon
Web Services (AWS), the unbundled services that power Ama‐
zon.com, is a leader in the cloud computing market, enabling even
Amazon competitors. Not only that, but Amazon realized it could

be more than one online retailer among many—it turned itself into
a marketplace by unbundling its web catalog, its warehousing, and
its delivery services and making them available to other merchants,
reducing its own costs and taking a share of everyone else’s profits.
And now, because of the scope of its marketplace offerings, it has
built a large and fast-growing advertising business, taking away a
meaningful fraction of what seemed to be Google’s unchallengeable
share in one of the most profitable areas of search.
Sometimes, thinking holistically means deciding what not to do. For
example, O’Reilly Media closed its online retail store not because the
store was failing, but because the store got in the way of the compa‐
ny’s strategic decision to pivot from retail book sales to becoming a
learning marketplace.
None of these are simple decisions you could arrive at just by doing
more of what’s working. They also aren’t decisions you can arrive at
by decomposing an organization into its component parts and ana‐
lyzing them separately. They don’t come from simplistic and reduc‐
tionist models of how the business works. Rather, they require a
broad understanding and intuitive sense of the business and its
environment: its customers, its competencies, its competitive situa‐
tion, and how forces are constantly shaping and reshaping all of
these. The decisions themselves, like “sell computing infrastructure

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Future of the Firm

as a service,” sound simple in retrospect. But getting through the
complexity to those decisions isn’t simple.
There are no silver bullets; big systemic thinking can go just as
wrong as any other thought process. Getting through the noise to
communicate those decisions to employees, to customers, and to the
board of directors isn’t simple, either. But without that kind of
thinking, you can’t be right.

New Kinds of Partnerships Between People
and Machines
At internet companies like Google, Facebook, and Amazon—and
any other company delivering software-based services—we need an
inversion of perspective. It’s easy to think that programmers are sim‐
ply workers, assembling code like a previous generation assembled
manufactured goods, but in fact, much of the actual work these
companies do to serve their customers is done by software agents.
At Amazon, one piece of software shows you your buying options.
Another takes your order. Another queues it up for shipping. The
software developers and “DevOps” staff are the managers of this new
generation of workers. Every day, the managers are checking on
their digital workers, A/B testing new approaches, and giving their
workers feedback in the form of new code releases.
Meanwhile, the central job of massive, real-time coordination of
people and resources—formerly done by human managers—is
increasingly done by machine learning and artificial intelligence sys‐
tems. The humans creating these systems are more like their teach‐
ers than their managers. They create them and train them, then turn
them loose on the problem. When something goes wrong, those
with a 20th-century perspective expect the company management to
step in to fix the problem directly, but in a 21st-century company

like Facebook, Google, or Amazon, the company’s programmermanagers must actually retrain the systems, or build new ones to
compensate for their failings. The humans no longer run the opera‐
tions directly. Managing the unintended side effects of poorly
designed systems becomes the principal focus of human managers.
For a purely digital company like Google or Facebook, the analogy
stops there. But at companies like Walmart, Amazon, or Uber,
which provide physical-world services, the software bots are inter‐

New Kinds of Partnerships Between People and Machines

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mediaries between the managers and humans. When a customer
requests a ride from Uber or Lyft, a software agent routes a driver to
the pickup, and from there to the destination. But the driver isn’t the
only one in the workflow. In what Microsoft researcher Mary Gray
calls “Ghost Work”, a pieceworker in India may be performing a
security check on the driver via Amazon’s Mechanical Turk service.
Uber is a single vast machine made up of humans and software
working in a complex dance.
Machines also upskill the drivers. It is no longer necessary for a
driver to know their way around the city. The app knows that. This
is one of the key enablers of a model in which anyone can drive for
pay. This is also the new face of learning on demand: learning by
doing, with the machine guiding you along the way. Autodesk, the
engineering and construction management company, is exploring
this same concept, building tools that increasingly help humans to

do complex jobs not just by teaching them new skills but by partner‐
ing with them in new ways.
While we don’t know all the implications of automation and AI, we
know people will still have important roles. Already, as AI enters
roles like retail and customer service, companies like IBM and
American Express are hiring people to monitor decisions made by
software, improve social cues, and translate machine recommenda‐
tions into more meaningful recommendations. Just as we “train” our
computers to think through software and instructions, people will
“train” their robots to be more successful through feedback.

From Hierarchies to Networks
Ever since Ronald Coase wrote “The Nature of the Firm” in 1937,
the general understanding has been that the command and control
systems within a single organization have lower transaction costs
than the cost of finding, vetting, and contracting from among a
marketplace of small independent businesses. That system peaked
with the lifetime employment and generous benefits of the golden
age of industrial concentration. But for the last 30 years, companies
have been building two-tier organizations (with a highly compensa‐
ted core of dedicated employees and a far larger base of fungible
contractors) and outsourcing relationships, usually to large out‐
sourcing companies that hide the churn of workers at the fringe.

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Future of the Firm

The internet and big data added the last pieces of the puzzle, provid‐
ing capabilities for companies to directly manage large networks of
individuals (though intermediaries may also still play a role). A
company such as Uber or Airbnb displays this pattern in its fullness:
asset light, algorithm heavy. Human-scale marketplaces and man‐
agement processes have been replaced by algorithmic, internet-scale
marketplaces in industries such as advertising, where Google is only
the largest of the algorithmic advertising networks that have threat‐
ened “Mad Men”–style agencies. Amazon only looks like a retailer;
once you realize that it carries more than three billion SKUs world‐
wide (600 million in the US alone), many of them from third-party
sellers who themselves carry all of the inventory risk, you under‐
stand that it, like Uber or Google, is an algorithmic matching mar‐
ketplace, pairing up buyers and sellers in real time.
Systems like these preserve the appearance of free market econo‐
mies, but in reality they are centrally planned economies, where the
designers of the algorithms ultimately choose who gets what and
why. As these platforms achieve near monopoly status, it vastly
increases their power relative to their marketplace participants. We
need a new theory of antitrust: one that measures the health of plat‐
form marketplace ecosystems, and the extent to which marketplaces
compete with their suppliers, rather than simply looking at con‐
sumer benefit.
Building platforms that take better care of suppliers, not just their
users, can create a critical strategic advantage. You can already see
this, for example, in Apple’s position on privacy (treating its users as
data suppliers to be valued, whereas Google and Facebook treat
them as resources to be exploited).

It Isn’t Just Internet Giants Who Manage Networks
O’Reilly Media can be seen as a case study in how to build competi‐
tive advantage by recognizing a business as a two-sided market‐
place of suppliers and customers. Twenty years ago, the company
was primarily a publisher of computer books. Realizing its success
depended not only on its community of authors as suppliers but
also on the communities of open source and internet software
developers who created the technologies they wrote about, the
company added a conference business to bring together and evan‐
gelize the work of those developer communities. O’Reilly also
launched an online ebook platform to which it invited even its big‐
From Hierarchies to Networks

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15


gest competitors, because the company leaders understood they had
to grow the whole market and not just their own share of it. As new
online learning modalities like video and live training became pos‐
sible, they morphed their platform to embrace them, not just
because they are popular with users but because they provided new
revenue opportunities for their suppliers.
Thinking beyond simple compensation, O’Reilly offers authors the
opportunity to speak, provide training, and participate in live
online events on its learning platform and at the many conferences
the company puts on. By providing these opportunities for authors,
O’Reilly helps those authors bolster their credibility and reputa‐
tions, and they in turn help the company maintain its reputation as

a top destination for those interested in teaching what they know
about cutting-edge technology. This is a major benefit to the com‐
pany’s customers, but its business strategy was triggered by under‐
standing what would make the marketplace more vibrant for its
suppliers.

Perhaps the biggest change taking place is the rapid evolution away
from management hierarchies to networks of highly empowered
teams. More than two decades ago, software engineers realized that
large, hierarchical software teams were underperforming, so they
developed the concept of small, multifunctional teams. (The book
The Mythical Man-Month by Frederic P. Brooks, Jr., first pointed this
out.)
Since then, the business concepts of “Agile,” “teams,” “Scrum,” and
“iterative development” have exploded in all areas of business, shat‐
tering the corporate hierarchy. Yes, companies still have job levels,
managers, and executives, but more and more companies now real‐
ize that people do not perform well when they are “told what to do.”
What really makes companies thrive is letting people “solve prob‐
lems,” “serve customers,” and “invent” in their own personal ways.
In a recent study published in the Harvard Business Review, 83% of
R&D departments, 82% of operations, 79% of marketing, and 78%
of sales, HR, and finance teams reported that they believed they
were using some form of “Agile” in their business operations. While
the true application of Agile principles in non-software operations is
still emerging, the trend is clear and unstoppable. The firm of the
future is a network, not a functional hierarchy.

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Future of the Firm


This has implications in many areas of management. Should we pro‐
mote people “up” or “across”? Should we pay people for individual
performance or team results? Should we promote leaders who are
good at direction and strategy or those who thrive at coaching and
development? Should we develop goals from the top down or bot‐
tom up?
Every management principle can now be questioned, and as we see
companies like GE fall behind in their growth and profitability, we
can question decades of management philosophies based on the
industrial organization of business. We believe the future of the firm
is an empowered, bottom-up structure—and one that operates like a
network, not a directed hierarchy.

Free Agency, Personal Brands, and the
Evolving Employer/Employee Relationship
As the bonds of loyalty fray between companies and their employ‐
ees, there are two countervailing trends. First, relatively low-skilled
employees, who might once have had secure jobs, have joined what
Guy Standing calls “the Precariat”, living lives of continuous partial
employment. In contrast, highly sought-after employees (such as AI
professionals in Silicon Valley) have become the equivalent of movie
or sports stars. The ability of such people to build reputations
through open source software, blogging, and other forms of internet
visibility gives them free agency. This leads to a tension in which
some companies seek to hide their talent, while others let them dis‐

play it freely. You can see this in the difficulty Amazon and Apple
had in recruiting AI talent because of their cultures of secrecy, while
Google and Facebook allowed employees to publish their research.
Amazon was forced to open up, and Apple is starting to.
Skills and capability far outweigh seniority and tenure for determin‐
ing free agent compensation. In highly stratified organizations, this
can cause serious dislocations in pay and status. For example, in
order to appropriately compensate cybersecurity professionals, the
White House Office of Personnel Management had to create entirely
new compensation guidance, authorized by an act of Congress! If
this can happen in government, expect (for now) that salary parity
rules at private companies will also be selectively tossed out—until
the equity issues get thorny enough for a broad reassessment.

Free Agency, Personal Brands, and the Evolving Employer/Employee Relationship

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Top talent (executive or technical) commands superstar salaries, just
as in movies and sports. Astonishingly high levels of compensation
are funded not with dollars, but with stock options and grants,
which pass at least some of the costs to investors and hide the true
cost of employee compensation. Some companies correctly report
stock grants as employee costs, but many continue to bury these
costs in footnotes and report non-GAAP financials. This has led to a
vast compensation imbalance between companies with sky-high
stock valuations based on growth momentum and those that are liv‐

ing in the more mundane world of real cash flow and profits. This
creates increasingly a winner-takes-all race for talent.
The Superstar Firms theory, put forth by David Autor and others,
posits that eventually these higher wages will spread through the
corporation and into the broader market, bringing up compensation
levels for ordinary employees. This is something to be hoped for. In
the meantime, companies without highly inflated stock must com‐
pensate employees in other ways. One such approach is through
brand, mission, values, and purpose (we’ll come back to this in the
next section). Macroeconomic factors may eventually also bring
profitless growth stocks to a more reasonable level.
Even at lower levels, though, there is far more job mobility, again
through online platforms. Temporary work through a platform like
Upwork can even be a way of gaining new skills in an environment
with less risk than at a person’s current employer. Data from O’Reil‐
ly’s online learning platform shows that employees often seek addi‐
tional training before changing jobs, and after moving to a new
internal job or receiving new responsibilities. Training is no longer
something employees are sent to; it is something they seek out.
It is also worth noting there is a new labor movement building, but
it’s not focused on the old labor issues. It’s more concerned with top‐
ics covered in “The Search for Meaning” on page 6. When Google
employees walked out, it was about Google’s failures of social con‐
science, not about higher wages or working conditions. They were
protesting Google’s involvement in providing AI for military pur‐
poses, and rewards to a top executive who, facing multiple charges
of sexual harassment, had been forced out of his job but still
received a massive severance stock payout. On a humbler level,
when 30,000 Starbucks baristas used the coworker.org platform to
raise issues with management, the first issue was not higher wages

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Future of the Firm


but the dress code, which required all employees to cover up any tat‐
toos!

Compensation Beyond Pay
One of the fast-changing parts of organizations is the way people are
paid. As increasing numbers of workers engage in contract, contin‐
gent, or gig work, organizations are rethinking their rewards. Eco‐
nomic data shows that US workers’ wages are not keeping up with
inflation, leading an estimated 40% of American workers to take on
“side hustles”. How does the firm of the future think about pay?
Research shows this is a re-engineering process taking place now. A
2018 study by Deloitte found that only 12% of companies strongly
agreed that their pay practices were fully aligned with their business
strategies. In most cases, companies compete for talent, so pay is
driven by market wages. But when you dig deeper, the data shows
something different.
In any given job family, there are employers who pay less (perhaps
even “underpay”) but offer more career development opportunities,
a more flexible workplace, and more benefits. Others, with more
competitive cultures, may pay more—but they expect more. This
new bifurcation of pay is letting firms think about all their people as
independent agents, and they can now create the optimal mix of pay

and benefits for their employees.
We’re seeing a shift in the composition of compensation toward
perks, benefits, and non-cash rewards. In the US, benefits have
grown from 28% of payroll in 1998 to 32% in 2018, increasing the
burden employers are taking on. This increase is largely due to a rise
in medical costs, leading employers to increase focus on well-being
programs and other health benefits that reduce health care expenses.
In fact, there is now an entire industry of corporate well-being pro‐
grams in place, creating an escalating war for the best, most innova‐
tive, most modern types of well-being benefits. This goes beyond
yoga classes and includes offerings such as programs for fertility, pet
care, elder care, and free lunch; allowances for commuting; pro‐
grams to help with student loans, financial fitness, and healthy diet;
and mental health counseling. And that’s leaving out a huge exten‐
sion in parental leave, exemplified by a CEO as central to his com‐
pany as Mark Zuckerberg taking advantage of his company’s liberal
parental leave policy to step away from his job for a full two months.
Compensation Beyond Pay

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