Why People Are Gaining Power Over Organizations in the Age of IT

Intel co-founder Gordon Moore described what became known as Moore’s Law in a 1965 paper where he observed that the number of components in integrated circuits had doubled every year since their invention in 1958, and predicted that the trend would continue for at least 10 years, a prediction he subsequently changed to a doubling every two years.

The semi-log graphs associated with Moore’s Law have since become a visual metaphor for the technology revolution unleashed by the exponential improvements of just about all digital components, from processing speeds and storage capacity to networking bandwidth and pixels. This technology revolution has been accompanied by massive improvement in the price performance of computers, from inexpensive mobile devices to powerful supercomputers.

But, while the dramatic advances in digital technologies have been well measured and quantified, their impact on firms, economies and individuals has been more anecdotal.  We talk about how this digital revolution has been transforming just about every aspect of business, society and our personal lives, bringing us both near-magical products and services as well as their accompanying creative destruction and pain.  But, how can we quantify this revolution beyond its technological foundations?

What if, as it turns out, the transformation made possible by digital technologies is accruing more to well-connected individuals–whether workers, consumers or citizens—than to the companies that employ and sell to them?

Measuring these impacts is the task undertaken by Deloitte’s Center for the Edge in its ambitious Shift Index project.  The Shift Index is an attempt to quantify the long term impact of the digital revolution through 25 metrics grouped into three overlapping waves of deep change which are referred to as the Big Shift.  First published in 2009, the study has been updated twice since, most recently in November 2011.  The study is led by the Center’s co-chairmen John Hagel and John Seely Brown.

The Foundation index captures the first wave.  It measures the fast moving advances in technology performance and infrastructure penetration, as well as the shifts of global public policy that are reducing the barriers to entry and movement.  The Foundation index has been growing at a 10%  compound growth rate since 1993, and is the primary driver of all the other changes.


The Impact index is a measure of the transformations underway in markets, firms and people It aims to quantify the ways the overall economic environment is changing, as well as how those changes impact companies and individuals.  This third wave has been significantly lagging the first two, growing at a much slower 1.5% compound growth rate since 1993. The intensified competition and increased pressure on business performance caused by the first two waves accounts for the lagging growth of the third wave.

These three waves and their accompanying indices are highly interrelated.  The Foundation index can be viewed as a measure of the potential for change and improved performance made possible by the increasing power and capability of the digital infrastructure, while the Impact index measures the actual realization of that potential in companies and the overall economy.  There is clearly a very large gap between the two—10% compound growth rate vs. 1.5%.

The Flow index can then be viewed as a kind of gear box between the potential for change at the technology level, and actual change in the marketplace.  It is an intriguing and elegant concept that nicely captures the essence of the knowledge economy.

The Flow index measures the flows of knowledge enabled by advances in the digital infrastructure–including inter-firm collaborations–as well as the movement of people so they are in close proximity to each other, including the migration of talent to creative cities.  It further captures the impact of what it calls  flow amplifiers, a measure of how engaged or passionate workers are in what they are doing, as well as the impact of social media activity in helping people connect and enhance their knowledge.

One of the report’s key findings is this baffling paradox.  The economic performance of U.S. companies has been steadily declining over the past decades, as measured by Return on Assets (ROA), a general indicator of a company’s profitability.  It is now 75 percent lower than the levels in 1965.  This negative ROA trend is happening in virtually all companies and industries tracked in the Shift Index, and reflects the deep structural changes that have been taking place in the U.S. economy.

At the same time, labor productivity–the goods and services that a worker produces in a given amount of time–has continued to rise and is now more than double what it was in 1965, as you would expect given the technology advances during this period.  But, the benefits of this productivity improvements are accruing, not to the firm, but to their creative talent and customers.

As competition intensifies, customers have been gaining market power, and they are using that power to find the best positive deals.  Similarly, the compensation for talented employees continues to rise as companies compete to attract and retain them.  The balance of power has been shifting from companies to increasingly well-informed consumers and well-educated workers.

The impact of this intensified competition and volatility on firms is further captured in two additional findings.  First, the gap in ROA performance between those companies doing well, and those lagging behind has increased over time, with the winners barely maintaining their previous performance levels, while the losers experience rapid deterioration in performance.  And, the topple rate–which tracks the rate at which companies change rank–has more than doubled, suggesting that winning companies have a tough time keeping their leadership position for long.  Business feels more and more like a contact sport.

What does this all mean?  Let me summarize my views, starting with the obvious.  There is indeed a Big Shift taking place, as we transition from the industrial to the knowledge economy, a transformation initially driven by the huge advances in information technologies, but now spreading to markets and society in general.

Well connected individuals–whether workers, consumers or citizens–are being empowered by the knowledge flows made possible by digital technologies.  Increased transparency helps people make better informed decisions.  Social collaboration levels the asymmetry between individuals and large institutions.  But, this same hyper-connectivity is also driving volatility and polarization in economic, social and political arenas.

The traditional way of doing business is under siege and must change.  The hierarchically organized firms of the past century were optimized to achieve economies of scale.  They must now evolve from the scalable efficiencies that characterized the industrial economy to the scalable learning of the knowledge economy.  They must take advantage of digital infrastructures and knowledge flows and reach out to all the expertise and talent out there, including employees, partners and clients.  They must develop and encourage passionate workers at every level of the organization.

Let me conclude with a paragraph from the excellent Foreword to the report by UC Berkeley professor and author Henry Chesbrough which nicely summarizes the essence of this challenging and important study.

“The final dimension of the 2011 Shift Index I wish to highlight is its fundamental orientation towards people, not towards technology. While there is a lot of technology in these pages, the whole perspective is anchored in a humanistic approach.  Focusing on the passion of your people is vital to effective innovation performance.  Being connected, both within your own organization and especially outside to many other people, organizations and institutions, is central to accessing the knowledge flows that bring prosperity.  And today’s business empires, or autocratic states, are only temporary structures, destined to be undermined by the fundamental human desire to open up, to connect, to inspire, and to collaborate with one another.”



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