“The essence of life is infinitely and mysteriously multiform, and therefore, it can not be contained or planned for, in its fullness and variability, by any central intelligence...” Vaclav Havel
CSA = Knowledge = Innovation = WealthIn The Origin of Wealth, Beinhocker argues that both the natural world and the marketplace are innovation machines. Why? Because the two arenas are the same thing: complex adaptive systems.
A complex adaptive system (CAS) is a decentralized system of many dynamically interacting agents who process information and adapt their future behavior to achieve optimal results based on the results of past behavior. Such behavior means micro-level interactions lead to macro-level patterns.
Implied in the above definition is that CASs learn. They learn what behaviors lead to good results, great results and bad results. They then repeat the “best practices” and suppress “bad practices.” In other words, they generate knowledge – information that is useful and fit for some purpose. (In evolutionary circles, it’s called fit order.)
In economic terms, knowledge is expressed as products and/or services – both patterns of fit order – that consumers need, desire, even crave. In short: CSA = knowledge = innovation = wealth
Injecting Agencies with Knowledge, Innovation and Wealth.
So why do I bring all this up? Well, because a discussion of complex adaptive systems and their benefits – knowledge, innovation, wealth – seem relevant given some agencies don’t know how to adapt to their new environment.
It seems relevant given clients are crying about their agencies lack of innovation. Take my often used quote from John Stratton, CMO of Verizon Wireless, for example: “What you [agencies] have been selling for the last 50 years no longers works.”
Madison & Vine Conference
February 13, 2006
And that of Stephen Norman, global marketing director of Fiat:
"I'm fed up with agencies coming in every few months to say the world is changing. I get that it's changing... (but) other than the speech that things are changing, I haven't seen much evidence of it in how agencies have been spending my money."
Venice Media Festival '07
Finally, it seems relevant as agencies aren’t growing at the rate they’re used to nor are they sleeping on the beds of cash they once did.
All the things agencies need CASs provide: knowledge, innovation, wealth.
In fact, our industry doesn’t bear these challenges alone. It’s a long-term struggle all businesses have and will face. According to sociologist Michael Hannan and management researcher John Freeman, companies are essentially inert. In the 1970s, the two men studied the ecology of markets. Their evidence showed while there is a tremendous amount of innovation and change in the economy at the level of markets, there is much less change at the level of individual companies. Their conclusion was that change in the economy is driven more by the entry and exit of firms than by the adaptation of individual companies.
To use economist William Baumol’s label, markets are “innovation machines.” Most companies are not.
This all boils down to two regularly explored – but still interesting – questions:
1. What prevents companies from being innovation machines?
2. How can we create a company that adapts and innovates as quickly as the world around it?
Discussing this in the larger business context is more than I have time, intelligence or wind for. So I’ll focus on creative firms (which obviously includes ad agencies).
The Big Man System: When Your Goal is Efficiency and Scale and not Innovation.
We are all familiar with The Big Man system, though we know it by a different name: Hierarchy. The Big Man – a term from Native American tribes in the Northwest coast – is the person who sits at the top of an organization dividing labor, coordinating their execution, bring things back together, and allocate the spoils. They dictate what the fitness function is and what the fit order and resources allocation should be.
There are some good things to this system:
1. Big Men work best in stable environments where they can exploit knowledge.
It’s assumed The Big Man is perfectly knowledgeable about the environment. Given this, it’s no surprise hierarchies work best in stable, consistent environments where the conditions for success don’t change much. When an environment’s fitness function is known, a good leader can organize and allocate resources in an optimal way to execute at the most efficient and effective level possible. Accounting firms, law offices and factory management are three stable, consistent business areas that benefit from hierarchy.
2. Big Men create scale
In fact, The Big Man system is the way to create a global corporate behemoth. It’s ability to process and coordinate large amounts of information and activity is unparalleled – that’s why our brains organize information according hierarchies.
However, hierarchies do have their shortcomings:
1. Big Men work poorly in dynamic environments because they slow down adaptation.
As new fitness functions emerge, new information must flow up the chain of command and decisions must flow back down. This is time consuming considering this process must be repeated over and over until knowledge of the changing environment’s fitness function is discovered. But in a dynamic environment, the fitness function is moving target that a hierarchy can never catch up with. A perfect example of this is the story of Razr whose development team had to hide their project from the Big Men at Motorola for fear of red-tape or a cease and desist order.
2. The Big Man system assumes a now debunked principle of traditional economics: the rational man.
Sitting at the top of the pyramid is, assumed, a person who has perfect knowledge of the fitness function, the environment and resources and can coordinate the activities of his/her reports optimally. It goes without arguing that no person is perfectly knowledgeable.
3. The Big Man is human and to err is human.
Even if the Big Man is very knowledgeable about the fitness function, the environment and resources, he is still prone to typical decision-making biases:
Framing Bias: How an issue is framed can affect how we think about it. This is the basis of the book Don’t Think of An Elephant.
Representativeness: Drawing big conclusions from very small and biased samples.
Availability Bias: Making decisions based on data that is easily available rather than data that is hard to find but critical to making a good decisions.
Difficulties Judging Risk: People have a tough time reasoning through probabilities and assessing risk.
Superstitious Reasoning: People tend to look for the most proximate causes of things and often confuse random chance with cause and effect.
Mental Accounting: People often value the same things differently.
4. Employees may work to please the Big Man.
From The Origin of Wealth, “In a Big Man system, the fitness function maximized is the wealth and power of the Big Man (and his cronies), rather than the overall economic wealth of the society. Thus, the creative, entrepreneurial, and deductive tinkering energies of the population are directed toward pleasing the Big Man. The immense mansions and palaces dotting the world, from grand French chateaus to the Hermitage in Russia, that delight tourists with their extravagant displays of riches are testaments to the effectiveness of economic evolution in maximizing the fitness function of Big Man wealth.”
If we all look back on our agency experience, we find the fingerprints – good and bad – of The Big Man system. But the one thing we find little of is true innovation. Sure, we can remember things called “innovation,” but closer inspection reveals them to be marginal improvements spun as innovations. The truth is simple: there are very few punctuated equilibriums in advertising’s Big Man history.
Complex Adaptive Agencies
In all it’s time on earth, humans have been able to create only one alternative to hierarchies: markets.
These two choices of information and activity organization are polar opposites:
1. Hierarchies are centralized systems used to exploit knowledge in the creation of scale in stable environments.
2. Marketplaces are decentralized systems used to explore knowledge in the creation of innovation in dynamic environments.
But when it comes time for humans to organize themselves, The Big Man system is chosen 99.9% of the time. From companies to sports teams to government to science, humans create hierarchies where ever they can.
Why is that?
It may be as simple to say creating a hierarchy is more intuitive than creating a market. As we know, humans operate according to rules of thumb and patterns. Hierarchies offer just that: Put the smart, stronger, more capable people in charge of the less smart, less capable, weaker people. Have them instruct and oversee those below. It’s an easy rule of thumb to remember and the pyramid shape is an easy pattern to remember.
But what about markets? How the hell do you create one of those?
Markets are considered more of an emergent phenomena – an “Oh!? How’d this happen?” type of thing. You can’t consciously create a market. Their complexity of choices and consideration is more than one person can ever hope to compute. So if you want to start an organization, why would you structure it in a way that is too complex for you to manage?
Maybe that’s why people create hierarchies everywhere – even when they are not effective. According to theory and deductive reasoning, a market is fit for creative environments, yet we use The Big Man system. Such a disconnect begs the question:
Is it possible for a creative firm to operate like a market – in other words, a complex adaptive system?
My gut tells me a creative company operating 100% like a market probably isn’t feasible. There needs to be some level of centralization, exploitation and efficient allocation of resources. So maybe the better question is:
Is it possible for a creative firm to operate MORE like a market – in other words, a complex adaptive system?
I don’t claim to know the answer. But if creative firms want knowledge, innovation and wealth, it seems the notion of a Complex Adaptive Agency (CAA) is an interesting and worthwhile topic to explore.
Complex Adaptive Agency: Rough Thoughts on How to Build One.
Part of the challenge with a firm adopting market-like characteristics is understanding the simple inputs that create the complex, yet innovative, activity.
Here’s a deconstruction of a market:
(NOTE: These come from both The Origin of Wealth and my own personal – yet shallow – knowledge of Complex Economics and open systems. This obviously isn’t my area of expertise so I’m positive this list isn’t 100% correct. If you know better, please help me out.)
1. Agents – These are individual interactors in a system who have the ability to learn and adjust their behavior based on their new knowledge. This could be a cell, an ant, a person or a company. It just depends on how granular you want to get.
2. Resources – Resources are energy, information and matter. These are combined and/or transformed to create value. I once said creativity happens in the collision of information. (Let’s add to that energy and matter.)
3. Openness – Markets are typically open – in other words, they constantly interact with their environment. Information, energy and matter are always flowing into and out of the market. Such a process keeps the market in tune with its changing environment.
4. Value – All markets must have value – a relative measure of worth. In complexity economics view, value is relative to its fit order: higher fit order = higher value. For a real world example, Apple creates things of immense value because their devices are easier to operate and are often better at helping people accomplish tasks – in other words, have a higher fit order.
On another note, value is particularly important as it is the fuel economic activity. Value creates specialization (agents tend to focus on those activities which allow them create the most value) which creates trade (because agents specialize, they must trade their created value for another agent’s created value) which creates cooperation/competition among agents which creates experimentation/innovation.
5. Trade Channels – There must be easily accessible platforms for agents to conduct trade. This is a bazaar, flea market, website, store front, mobile phone, NYSE, etc.
6. Payoff – What someone gets in return for creating value. This can be immediate or delayed; tangible or intangible. The right kinds of payoff lead to healthy doses of creativity bearing competition and cooperation – which are core CAS/market behaviors.
7. Modularity – Modules are the units of selection. Agents select these units and put them in combinations that allow them to create the most value. In business terms, good module combinations are captured as “best practices.” Don’t confuse modules with resources. Resources are the WHAT of market activity (“What will we use to make this product?”); modules are the HOW of market activity (“How could we turn these resources into that product?”)
8. Fitness Function – A fitness function is a particular type of objective function that quantifies the optimality of a solution given an environment’s challenges and needs.
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[WARNING: This is where the coherency of my thinking stops. From here on out, it is loose and arguably sloppy. But the innovation process is seldom tight and neat. What follows are my first steps in thinking about the creation of a complex adaptive agency. After all, babies suck at their first few steps. I’m sure mine won’t be any different.
It’s a big topic with a lot to be said and, as far as I know, no one else is thinking about this kind of stuff. But please let me know if you know of anyone who is.]
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So how might these elements translate into a CAA? Here are some very rough thoughts:
1. Agents – In a CAA, agents would be the employees or a community of volunteers.
2. Resources – In a CAA, there should be stockpiles of “matter” and information for creative people to play with. This runs the gamut of books to movies to guest speakers to “thought of the day boards” to video game consoles to music to idea boards to murals. The point is, there needs to be stimuli all around - stuff for people to play with, create with and/or generally just get their minds clicking. I’ve always said it’d be great to work at a place where I was always tripping over ideas.
(Anyone have ideas on how to create a stockpile of energy?)
3. Openness – In a CAA, the walls would be highly permeable. It would make a point to involve non agency people often. Maybe they bring some of them in to do a sort of show and tell about other parts of life/business/culture/science etc. Maybe they bring in smart, creative non agency people to – gasp! – work on a few projects. Google and Yahoo! are good examples of open companies. Both companies, as most of us know, have hack days which are essentially bazaars of ideas. Programmers bring their software into work and try to sell them through. These ideas don’t always align to overarching product strategies, but, the companies acknowledge, that shouldn’t negate their value.
A CAA committed to openness would also use Web 2.0 to share as much of it’s thinking with the world. Its aspiration would be to become the junction (maybe even a bazaar in of itself) where culture, business and creativity cross-pollinate. Not just a form of self-promotion, such a mechanism would be an incredible repository of thinking, recruitment and great place to seed ideas and flesh them out.
4. Value – The easy answer is to say knowledge - which we’ve said is defined as, “information that is useful and fit for some purpose.” But I feel like that is copout. Every company values knowledge. But maybe I’m over thinking it. Hmm…
5. Trade Channels – For agents within the CAA, they must have places were they can trade knowledge. There should be two trading platforms: active trading and passive trading.
Active trading could be a CAA version of coffee mornings. Or it could be a project auction block: Rather than assign new projects, the CAA would put a project “Up for sale” and, through some form of trade, find which employees were most passionate about working on it.
Passive trading would be a blog: post some thoughts and wait to hear the thoughts people “trade” back to you.
In fact, Intel has experimented with internal trading platforms. To understand which product to produce at which time at which factory, the company set up a system that allowed employees to buy or sell things internally with each other in a way that helped the company make decisions. Plant managers were the sellers who sold the rights to have products available in the future. The buyers were the Intel salesmen who bought the rights to have those products in the future in the expectation of being able to sell them to the customer. (You can learn more about it here.)
6. Payoff – Payoff, just as it is in markets, should be more sensitive to an agent’s performance in two ways: more proportionate and less response lag. In other words, an agent should receive equal increased (or decreased) payoff for the increased (or decreased) value she/he creates AND that payoff shouldn’t come once a year (as salary increases tend to do). It should come as close to moments of value increase as possible. (This gives the agent a close to real-time metric to gauge his/her performance.)
Maybe the best way to put it is to just say: humans are not altruistic; everyone does something for something.
Let’s explore this some more in the context of salary versus commission. A salary is an upfront guaranteed form of payoff. It’s meant to create security. No matter how poorly you do at your job (with in reason), you will get the predetermined salary as your payoff. But that also means, no matter how well you do, you’ll always get the same salary. On the other had, commission-based payoff rewards risk with bigger payoffs. Charles calls this the “upside of risk.” What you get in the end is a form of payoff (commission) that rewards experimentation, innovation and another (salary) that does not. Salary cocoons agents from the effects their impact and generally promotes the status quo.
That said though, creating a CAA based purely on salary promotes the status quo. But a CAA based purely on a fluctuating payoff has no safety net and can make people fearful of taking risks. The right balance must be struck between performance-based payoff and guaranteed payoffs. For instance, rather giving all employees a salary, maybe you give them a choice between low risk and high risk forms of compensation.
In the above thinking, I’m assuming payoff=money. But payoff could be lots of other things. For instance: publicity. Creative people (not just creatives) like being acknowledged. For great work internally, a CAA could show their love for their top performer publicly.
7. Modularity – In my most popular post “The Perfectly Designed Office,” I argue that a great office to work at would be one that is highly modular because it allows people to organize themselves in the most optimal way. Aside from office design, other things could be modular. Budgets, for example, could be more modular. So often employees birth a great idea, but can’t find financing. If some budget was set aside to finance “pop-up” projects more great ideas would find the light of day. Project teams could also be modular. For example, WL Gore has modular leadership and teams. Gore practices market based leadership: you become a manager by finding people who want to work for you. People choose their managers by choosing who they want to work for. If you’re a dick, you’ll quickly find yourself without a team to work on.
8. Fitness Function – In a CAA, this is more about articulating what a successful agent (employee) in a CAA would do/produce. Setting a clear articulation of “Who and what prospers in the CAA” will cause the CAA, as any market does, to adjust itself to most optimally live into that fitness function.
A cool example of this is Space 150. Every 150 days this hybrid agency rebrands itself. Essentially, their leadership rewrites the agency’s fitness function. The leadership has recognized that the world changes fast and their company and how it’s employees operate must change as well. I don’t know all the details about what happens after each rebrand (other than a big party) but the spirit of the activity is a good.
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Again, this is all REALLY rough. I’m sure I’ll read it again in a week and think myself an idiot. But at least it begins to give structure and actionability to an abstract notion many of us probably carry around...
Labels: Agency Structure, evolution, innovation
