THE BLOG
12/06/2007 04:00 pm ET Updated May 25, 2011

Management 2.0

Over the last decade, the Internet has dramatically transformed the world of business. It has enabled real-time, globe-spanning supply lines, and allowed a swarm of upstarts to upend old business practices. Yet when it comes to the management models that predominate in most companies--the methods and processes used to create strategies, set goals, allocate resources and align effort--the web's impact has been comparatively modest. The management process in most companies is still based on the principles of bureaucracy: hierarchy, standardization, and control. Looking forward, though, there's every reason to believe that the Internet will change the work of management just as thoroughly as it's changed every other facet of commercial life.

To fully appreciate the power of the Internet to transform management, we have to go back to basics, and focus on the two essential tasks that comprise the work of management.

The first job of any manager is to amplify human capabilities--that is, to create an environment in which individuals are empowered, equipped and encouraged to give the very best of themselves. The second task is to aggregate individual efforts in ways that allow human beings to do together what they couldn't do on their own. "Management innovation" entails getting better at both amplifying and aggregating human capability--and it is this challenge that brings us back to the Internet.

Before the Internet, human beings had only two choices when confronted with the challenge of mobilizing human effort for productive ends--create a market or build a bureaucracy. While markets are great at unleashing initiative and passion--picture the frenzied madness of a Wall Street trading floor or the passionate haggling in an Arab souk--they're not very good at complex coordination tasks. A market will never develop a blockbuster drug, for example. Bureaucracies, on the other hand, are great at aggregating human capabilities--and modern bureaucracies are capable of coordination feats that would have amazed even pyramid-building Pharaohs. Yet as every victim of red tape, myopic leadership, and organizational inertia knows, bureaucracies aren't very good at amplifying human capabilities.

But now, thanks to the power of the Web, there may be an opportunity to transcend the market-versus-hierarchy trade-offs that have long bedeviled human beings. Like the stock market, the Web allows individuals to "trade on their own account," to be free agents in the global economy; yet unlike the stock market, it also allows them to collaborate across time and space to build things of enormous complexity--like a computer operating system. Like a bureaucracy, the Web is filled with mini-hierarchies, where some voices carry more authority than others; yet unlike a bureaucracy, where share of voice is a product of credentials and titles, influence on the web is a measure of the value one actually brings to the broader community.

In the years to come, progressive companies will use the Web to overcome the shortcomings of their antiquated, bureaucracy-based management models--flaws that today severely inhibit the capacity of these organizations to adapt, innovate and inspire. Consider, for example, two of the most pernicious design flaws of industrial age management practices, and how the Web may help us to surmount these deficits.

Design Flaw: Creative apartheid. In many companies, innovation is seen as the responsibility of the "creative types" who work in R&D or new product development. Everyone else is viewed as peripheral to the task of innovation. This sort of "creative apartheid" denies "ordinary" employees the chance to fully exercise their creative gifts, and thereby limits a company's overall innovation performance.

A potential Web-based solution: Distributing the tools of innovation. The world today is filled with video bloggers, mixers, hackers, mashers, tuners and podcasters. These folks are using Photoshop, TypePad, GarageBand, Pro Tools, and thousands of other creativity-boosting applications to give vent to their creative urges. Yet most companies have done little to help their employees become fully empowered business innovators. Think about your own company: Has it given every employee access to a comprehensive suite of business innovation tools? Do associates have unrestricted access to a global database of customer insights and competitor intelligence? Can they download detailed financial models in order to explore the profitability implications of changes in pricing, promotional spending, staffing or other variables? Does every employee have the chance to mock up new product designs using computer-aided design software? If not, your company isn't really Web-enabled.

Design flaw: Under-informed decisions. In a recent large-scale study, senior executives judged nearly a quarter of their decisions to have been wrong. This is hardly surprising, since it's virtually impossible for a small cadre of senior executives to accurately estimate the costs and benefits of complex strategic decisions.

A potential web-based solution: A market for judgment. The Web is a great tool for collating the views of hundreds, or even thousands, of individuals, and has spawned a wide variety of "opinion markets." Given that, suppose your company created an internal "market for judgment" that aggregated the views of a broad cross-section of employees with the goal of establishing the odds that a particular project will meet its intended return. For every big new project, employees would have the chance to buy a security that would pay out only if the initiative achieved a pre-determined rate of return. These securities would be launched while the project was still in the planning stage, and the price of the security would reflect a wide range of opinions on the project's likely success. Imagine, for example a security that pays out $1000 after 5 years if a specified project delivers an internal rate of return of 15% or better. If six months prior to breaking ground, the security is selling for $100, it's obvious that most employees are highly skeptical about the project's prospects. Senior executives could still green light the plan, but they would have a lot of explaining to do if the initiative ultimately failed.

One hundred years ago, the railroad, the telephone, and reliable electrical power, paved the way for the emergence of the modern industrial company. Today, a new suite of "social technologies," centered around the Web, is giving us the chance to reinvent management as we know it--an opportunity that is only open, though to the companies and managers that can slough off a hundred years of management dogma. The potential pay-off for inventing Management 2.0? Organizations that are as adaptable, innovative and engaging as the people who work for them.