Building Semi-Autonomous Organizations

Imagine a nearby future with mostly autonomous organizations. All strategic decisions are made by a small group of employees at a departmental or organizational level, while execution and ancillary support is performed entirely by autonomous programs.

The finance industry has already experienced this paradigm shift, gradually moving from traders to algorithms that are faster, cheaper, and more reliable. When UBS closed its trading floor in Stamford, Connecticut, last year, it took a Twitter-posted image to remind most people that it once housed over 5,000 traders.

Such is the nature of the knowledge economy; when inputs and outputs are information-based, jobs are inherently replicable by programs. This, in turn, invites automation that improves both cost and performance. At the extreme end of the spectrum, it is possible to automate entire departments.

Smaller companies already do this with human resources, accounting, and payroll through various software-as-a-service (SaaS) platforms. By stringing together these automated departments, it is possible to create an entire company—or at least major portions of a company—using nothing but software.

This potential will shape the way organizations evolve, in the same way that the initial wave of information technology once forced organizations to become global companies, because it became easy—and thus necessary—to coordinate across geographies. Autonomous business departments will annul the competitive advantages that scope, speed, and scale grant. This creates an environment that obviates many of our current strategic best practices. We already see this with smaller quantitative trading firms like Jane Street, which can compete in lock-step against significantly larger players because scale and scope are much less relevant in the digital environment.

However, managers are still unable to fully embrace autonomous organizations due to the limits of their infrastructure. The traditional server is simply too fragile to automate an entire company. This is especially true for smaller organizations that can’t invest in sophisticated facilities that protect these servers. Although it may seem counter-productive, given the apparent reliability of modern technology, traditional servers still bear the following considerations:

  • Digitally automating a company’s vital functions has significant security implications. When a company is reduced to a set of computer instructions, there is immense exposure to ethical risks or mistakes. Remember Knight Capital? In 2012, the market maker was brought to the brink of bankruptcy by a trading software glitch that triggered a selling spree that cost the firm US$440 million, nearly four times its 2011 profit. And there are plenty of other stories about how a single line of wrong or corrupt code has lost companies millions of dollars. For a company that is entirely digital, this exposure increases dramatically.
  • If a company is completely digital, any downtime will result in millions of dollars in value destroyed in the precious few seconds it takes to fix the problem. Every digital company using a traditional server will have an Achilles’ heel in the form of its physical hardware and its link to the web.
  • Then there’s the problem of transparency. Auditing the functions of people in an organization can be painstaking but straightforward because employees can remember and report their actions. Computer programs, on the other hand, do not inherently keep an audit trail unless programmed to do so. This requires creating audit functions that lead to higher costs and slower development cycles.

Ultimately, autonomous organizations require digital infrastructure with a level of robustness and security not readily available today. That’s where the potential of next-generation protocols like the blockchain becomes important.

A blockchain is essentially a database distributed across many independent servers. These servers can be configured to run programs, creating a decentralized computing network. By decentralizing the computing function into multiple synchronized nodes, many of the barriers that prevent autonomous organizations are inherently solved.

“Ignoring the impact of these new technologies is equivalent to pretending that the Internet was of no importance to business back in 1999.”

For example, programs running on a blockchain network have less of a concern regarding code integrity because they run simultaneously on multiple servers. Synchronicity is achieved through a consensus algorithm, usually in the form of a democratic vote. Before any decision is made, a majority of servers must agree on a result. Therefore, even if the function of a single node is compromised, it will be overruled by the other uncompromised nodes on the network. This means that a rogue or absent-minded employee would need to compromise not just one server, but the majority of servers on the network. This is tremendously difficult because of the hundreds, if not thousands, of independently maintained nodes in the network, each potentially located in a different geography or with its own security mechanism.

This distributed, simultaneous operation also gives blockchains an inherent robustness against downtime. Even if a single server is disabled, the other nodes of the network will continue the operation as normal. To disable a digital company on a blockchain network, you will need to disable every single server in the network.

The nature of blockchains also creates an inherent audit trail. The blockchain itself is a chain of data blocks (hence the name). It works by chaining together new data or instructions behind the previous set of data and instructions. This results in a chain that ranges from its inception all the way to the current moment. Therefore, every iota of instruction that a blockchain ever receives is recorded, creating an audit trail that can be reviewed by simply travelling backwards along the chain.

Along with cloud computing and artificial intelligence, blockchain is commonly considered the next generation of digital infrastructure. In fact, blockchain is often heralded as “Internet 2.0” by industry observers because it promises to revolutionize the way data is communicated and stored. All three of these technologies will likely be used to make the autonomous organization possible, with the blockchain acting as the backbone that the other two technologies are built upon.

Today’s business managers need to carefully observe and understand how these paradigm shifts can reshape the organizational structure of their firms, their competitors, and the industry as a whole. The potential gains are astonishing, whereas ignoring the impact of these new technologies is equivalent to pretending that the Internet was of no importance to business back in 1999.

About the Author

Yizhe Xia is a consultant who has performed blockchain and digital advisory for the United Nations, the Colombian government, and a major Canadian bank.

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