Building an Exponential Organization Fit for an Accelerated world

In his speech and conversation with Claudio Ludovisi, Salim Ismail says the key in an exponential organization is to take the innovation team to the edge of the core organization and build off the ideas on the edge.

We have doubling patterns in a very profound way and it has been happening since as long back as 1900. We have been doubling price-performance computation for a hundred years. Through the wars, recessions, and the ups and downs in the industry, the growth of computing has been steady. It is because when any domain, discipline, or industry is turned into a digital environment and powered with information technologies, its price-performance starts doubling. We are seeing it now in several domains and technologies. In his book called Abundance, Peter Diamandis says that if we could harness this acceleration, we would soon see an abundance of healthcare, education, clean water, and energy, in about a decade.

The key point around doubling patterns is that they are now operating in a dozen technologies, and it has never been seen before. Although a negative example, the doubling pattern can be understood by the spread of COVID-19, wherein cases are doubling every two to three days. The difficult part about exponentials is that one never sees them coming, which happened in the case of COVID-19. Leaders were assured of containing the spread when there were 100-200 cases, until they suddenly started doubling. 

Our knowledge and intuition about the world are linear and so companies make future predictions based on their past performance and fail to see the oncoming exponentials. Applying it to the industries, we see this in typically three layers of information disruption- information-enabled physical products, physical products with information-based revenue, and information-only products. A vast majority of industries in the past created value from the sheer physicality of the world. Then came the products like Kindle and iPhone that were physical products but their revenues were digitally-driven, and now with the rise of mobile and the internet, there are entire industries that are completely digital with very little physical manifestation. The world that was predominantly physical with very little information is now transforming into becoming predominantly digital and information-driven.

All of this acceleration is leading to four major dynamics in the world- digitization, disruption, demonetization, and democratization. Digitization of the world has quickened. All of our memories and even all our relationships are now digital. A natural progression of digitization is disruption. From a business perspective, the best metaphor for that is photography. When we moved from film photography to digital photography, three fundamentally important things happened- marginal cost went to zero, that is, the cost does not change with the number of photographs taken. As a result of the cost dropping, the domain exploded, and now we are taking a billion times more photographs. The third thing to happen is subtle yet very important from the business perspective, which is a shift in the problem space. After moving to the digital environment, the big problem in photography is not whether one can take the best photograph but managing all the photographs stored. In this way, we have gone from a sourcing problem to a filtering problem. In the scarcity problem space that existed before, business models cropped up around scarcity, like courses on photography, books on composition, etc. but now, all the incumbents helping to optimise for that scarcity have gone. This transition is happening in several domains, and the coronavirus will accelerate it dramatically.

All of this acceleration is leading to four major dynamics in the world- digitization, disruption, demonetization, and democratization.

The incremental impact of this acceleration is profound. In technology after technology, the cost is crashing to zero or near zero. In our world, advanced technology has always cost a lot, and today for the first time in human history, advanced technologies are very inexpensive. For example, the blockchain is open-source and free. Solar energy is now riding the information doubling pattern, doubling every two months in its capability, and it has been doing this for 40 years. So, for 40 years, we are doubling the price performance of solar roughly every two years. At this pace, we will be able to deliver 100% of the world energy supply using just solar by the end of this decade. This completely changes geopolitics- the middle East completely collapses, the foundation of the Canadian economy, whose 40% of exports are oil, would be in deep trouble. These are the enormous challenges we will be facing. 

As previously mentioned, doubling patterns do not stop once started and keep going, and so if we can deliver 100% in the next 10 years that means in 12 years, we can deliver 200%, in 14 years we can deliver 400%, and so it keeps going. Energy has been scarce for the entire history of humanity and is about to become abundant. It has already started to happen; a quarter of all the farms in California are solar-powered, so much energy is being generated in Chile that people are giving it out to their neighbours for free, and ironically even the Coal Museum in Kentucky is now using solar panels. These changes indicate that the inflection point is happening. Tesla cars are another example of doubling patterns as one can travel thousands of miles at zero cost because they are electrically charged and the charging stations are free. 

However, one difficulty is that our institutions cannot cope with this. All of the mechanisms by which we run the world were all designed a few hundred years ago, like education, democracy, monetary systems, etc. were designed for a slow incremental pace of change. Our education system is designed to train a child to make them prepared for a job in their early 20s but we don’t know what the jobs would look like in five years. Many such institutions are crumbling down because they were not designed to suit the present times.

From an economic perspective, a couple of things are happening- firstly, the metabolism of the environment is accelerating. It used to take years to build a billion-dollar marketplace and now it is happening in months. Interestingly, when you digitize, you see an incredible deflationary crash in revenues. There has been a 6x drop in revenue in the newspaper businesses over two years and a 10x drop in the music business when it got digitized. In music, we had eight major music studios selling scarcity -CDs, DVDs, cassettes, etc.- and all of it pretty much disappeared with digitization. Now, we are selling abundance with digital music streaming platforms, so there is a shift from a scarcity business model to an abundance business model. Most importantly, all the incumbent music studios nearly disappear in this model. 

The incremental impact of this acceleration is profound. In technology after technology, the cost is crashing to zero or near zero. In our world, advanced technology has always cost a lot, and today for the first time in human history, advanced technologies are very inexpensive.

However, it is difficult to spot these doubling patterns. Even the top energy experts failed to see the exponential growth of solar energy. Even till 2017, they predicted a linear growth for solar energy even as the actual growth was following a doubling pattern. In 2018, experts even predicted a dip in growth. They cannot wrap their heads around exponential growth. All of our companies are filled with experts having 20-30 years of experience in this domain and are resistant to the idea of exponential change. So, this is the enormous difficulty in our efforts to upgrade our companies, and the fact that this is happening is driven by the sheer democratization of these technologies.

All the domains are going through digitization, after which the cost drops to zero followed by the formation of open-source communities, and finally, there is a radical disruption of the status quo. For example, Focus@will is a company that uses music designed to improve users’ productivity. Every knowledge worker, student, software developer, and so on in the world can use it to increase their productivity on demand. The CEO of Red Bull should be worried about this, but they will not see this coming and instead look towards others as their competitors. We call this the orthogonal effect of innovation, where you don’t see it happening and yet it disrupts you.

Now, the big question is what to do about it. One of the godfathers of angel investing, David Rose points out that all the organizations are top-down hierarchical structures built for efficiency and predictability, but today we need to be built for agility, flexibility, adaptability, and speed, and we are simply not built for those. In the last decade, a new breed of organizations has been built and we call them the exponential organizations. They are delivering at least ten times better, faster, and cheaper than their competitors in the same space. In terms of the organization structure, they have learned to scale the organization as fast as we can scale technology. For example, Chris Anderson made TED, which was once just a conference, into a global media brand by doing three things- he established a huge purpose, allowed everyone to watch TED talks by uploading them on YouTube for free, and then he let everyone co-create a TEDx event leveraging his community. His cost of doing this was zero. 

Three things go into building global brands like TED. First, they all have a Massive Transformative Purpose (MTP). If organizations today are not purpose-driven, they would find difficulty in retention, hiring, engagement, etc. They have 10 characteristics- five of them are externalities for scaling very quickly, namely staff on demand, community and crowd, algorithms, leveraged assets, and engagement. For example, Uber uses staff on demand instead of hiring staff. The other five are internal mechanisms that we use to drive the control framework and manage culture, namely interfaces, dashboards, experimentation, autonomy, and social. A start-up should be doing all of these because only exponential organizations can succeed now.

It is easier to document how to build a start-up. The challenge is how to build a big company and retrofit this into a large organization. The first suggestion to large companies is to update their leadership, and secondly, to not do disruptive innovation in the core organization as it gets you the immune system response and leaves you stuck in a political fight. When you attempt disruptive innovation in a legacy environment, the immune system attacks you and you spend all your time fighting antibodies in your company and institution. It is worse in the public sector because the existing policies are the immune system. 

In the last decade, a new breed of organizations has been built and we call them the exponential organizations. They are delivering at least ten times better, faster, and cheaper than their competitors in the same space.

We have never seen disruptive innovation succeed in a mothership ever. Instead, the idea is to take the innovation team to the edge of the core organization and build off the ideas on the edge and away from the core organization. In summary, the ideal is for a core organization to reshape itself, spin the Exponential Organizations (ExOs) off the edge and ideally, the ExOs become bigger than the core organization. A successful example of this is Lojas Americanas, the largest retailer in Brazin that spun off its e-commerce unit. The e-commerce unit went on to generate more revenue than the mothership.

Claudio Ludovisi in Conversation with Salim Ismail

Claudio Ludovisi: Amidst this crisis, what do you see as the greatest untapped opportunity that we can leverage or gain as a world, or as both business and society?

Salim Ismail: I think the biggest opportunity will come from energy as we are about to hit energy abundance. When you have energy abundance, then desalination becomes free leading to lots of clean water. If there is clean water, we can take out half of all the diseases in the world because 50% of those are from dirty water. The ripple effect is unbelievable. We are going to get an abundance of energy, water, to add to the existing abundance of food.

The big challenge is that all of our institutions are geared towards scarcity. In fact, in business, if you don’t have scarcity, you pretty much don’t have a business. Now, we can build a world or build a business based on a future abundance model geared towards abundance in a particular domain, which is the purpose-driven organization. This way, we have an organizational structure that can take advantage of that.

Ludovisi: How do you think the media, entertainment, and sports will be affected by this disruption happening by COVID-19?

Ismail: This entire economy is based on blood flow and high metabolism money velocity, and people are arguing whether it is a V-shape, a U-shape recovery, or a Nike swoosh-shape recovery. But I don’t think there is a recovery. This is going to strike down a huge amount of existing businesses, and I don’t know how we resolve that, and so essentially this is a singularity of its own. 

In terms of media and entertainment, the online sports media and the online subscription models are going to be huge. The winners are going to be the social networks, this is where virtual reality and augmented reality now will start to play a real game because we are within about two or three doublings of having a virtual reality headset where the resolution is higher than the human eye and is indistinguishable from reality. If you look at the modern Playstation 4 games, it looks like a movie. So, once we cross that threshold, we will have incredible opportunities.

Ludovisi: Everyone has been talking about healthcare now. Do you think the system is going to change in the next 5-10 years?

Ismail: I think it will, and it has to, and where we will end up is with the rise of citizen doctors. Today, we have crowdsourced reviews for restaurants on apps like Yelp, which we can use to decide where to go without needing a review from an expert. Similarly, GitHub has a gamified system where I can rate your coding and you can score my code, and this also bleeds over to the question of higher education. If you are a software developer in Silicon Valley today, your salary is not determined by your university degree, the school you went to, or the grades you got; it is 100% your GitHub rating, which is an open peer-to-peer meritocracy rating. So, the value of a Computer Science degree went to zero basically, and we’ll start propagating that across more. When I go to healthcare, I’ll start scoring people’s healthcare recommendations because people are doing their own analysis of clinical trials and so on, and it will profoundly change the system. 

The second massive impact in healthcare is going to be the use of AI. Today, there are 2,500 cancer research papers published per day. If you are a cancer doctor, you can’t keep track of even five of them, let alone 2,500 per day. You need AI help to filter all that information, and make sense. So, we are going to see a radical transformation in online services. Telemedicine will explode in the next few years. The immune system problem is present here too. Two years ago, the state of Texas banned telemedicine because the doctors’ guild won and said for any little thing, one has to go and see a doctor. That will indeed be challenged in today’s world, and now, more and more will be doing telemedicine. 

Ludovisi: For those who haven’t identified that MTP[MOU1]  can start to get them out of their belly gazing and thinking broader about the world, what are some steps that people can take to define what their MTP is and think about how that can serve the rest of the world?

Ismail: There are few easy questions that you can ask: If you were given 10 million dollars to solve a problem, what problem would you solve, would it be curing cancer, would it be food for everybody, would it be abundant energy, or would it be getting to Mars? The next is, what will have you get up at 6:00 a.m. every morning to work on? What problem will be interesting enough to work on? Success, as we know, comes from sheer persistence and a huge amount of time. When Larry and Sergey were pitching investors for getting money for Google, it was hard because there were 12 other search engines out there. A few people know this but they did 350 investor presentations before somebody funded them. What if they had stopped at 340? How many other people stopped at 340 and gave up? So, a lot of persistence is needed. What gets you excited enough to persist and keep going? Those are two or three kinds of parameters and rails that you can give to get to the answer a little bit.

Ludovisi: What is your vision of education in the next 5-15 years?

Ismail: I think we are going to see a massive transformation in education. All of our education systems are designed for jobs but the problem is we don’t know what a job looks like. Secondly, their holdover is from the industrial era when we were training people to be factory workers and we do factory education. There are different types of learners- some are more visual learners while some may be more audio-based learners. Then some people are dyslexic who won’t find a space in our education system even if they are geniuses, because the education system doesn’t recognize those differences. We have had a lot of issues with our current system. If you wanted to drum all creativity out of an individual, you would design the system the way we have designed it.

 We are shifting from push-based learning systems, that is, educational systems where we are gathering kids into a classroom and trying to cram algebra into them, towards a pull-based learning system. The idea is of pulling down the learning that you need for a particular job. From the perspective of higher education, this is pretty challenging because we use very little of our higher education in the workplace. They have taught us how to think, but it’ll be profoundly interesting and profoundly more relevant if we can learn patterns on how to think.

What we have to do in schooling and education is to create edge organizations, edge systems, and let those become the gravity centre over time. I think that is the most profound outcome we will have, besides the fact that the shelf life of education is low now. Masters’ degrees in some of these technical topics like advanced robotics or neuroscience or biotech are becoming outdated by the time a student finishes their degree.

This is a profoundly interesting time and we will see a radical change in educational systems. The educational system might break along with the rest of the economy in this particular thing, and we are trying to use this point as an inflection point. Our leaders are going to try and take us back to the way we were, and we’ll try to go back to the world where we can’t deal with the climate, we are not taking care of the economy, the ecology, etc. and we are trying to have this inflection point galvanise the world’s smartest people and have them point to something better, and that’s what we’ll be trying to do over the next few months.

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