Thomas Malone has a talent for predicting how changes in technology will cause changes in business. Back in 1987, for example, the MIT Sloan School of Management professor predicted electronic markets for many kinds of products and the use of intelligent agents for commerce.

Now he has a new set of predictions, partly based on research done at MIT’s “Inventing the Organizations of the 21st Century” initiative, of which, he was a founder and co-director.

In his 2004 book, The Future of Work: How the New Order of Business Will Shape Your Organization, Your Management Style, and Your Life (Harvard Business School Press) Malone says that recent technological advances are bringing about changes in business organization that will be as dramatic as the rise of democracy was to government. He believes the rapid progress of communications technology will enable companies to dramatically decentralize decision-making. What’s more, he believes big companies can get the benefits of small organizations, such as flexibility and creativity, while retaining the economies of scale that we associate with big companies. We found these ideas more than a little intriguing and wanted to know more.

CSC World: What technologies are going to make it possible for big companies to decentralize?

Malone: All the new information technologies — e-mail, instant messaging, the Internet, even long-distance calling and video conferencing — that reduce the cost of communication. The early vision of computers was that they would be electronic brains. But for the most part computers haven’t been used to think or even to do much calculating. The main way they have been used is to help humans communicate with each other across time and space.

That’s what makes it possible for us to enjoy the benefits of large and small organizations at same time. Cheap communication lets lots more people have access to enough information to make decisions for themselves instead of just following orders from someone above them in the hierarchy who supposedly knows more than they do.

CSC World: Communications technology may speed that up. But didn’t the rise of knowledge workers decades ago create the social basis for that kind of decentralization?

Malone: The trend I’m describing has been underway in certain senses for decades and will continue for several decades more. Cheap communication makes it economically feasible for more people to make more decisions for themselves. There are good things that happen when people are making decisions for themselves instead of following orders. For one thing, they’re often more highly motivated and creative.

Now, those benefits of decentralized decision-making aren’t always important in business. In certain situations, like making certain kinds of semiconductor chips, the most important factor in business success is economies of scale. In cases like that I would expect cheaper communication to lead to even more centralization of decision making. But — and here’s the key point that relates to your comment about knowledge workers — in our increasingly knowledge-based and innovation-driven economy, the critical factors of business success are often precisely the same things as the benefits of decentralized decision-making: motivation, creativity, flexibility. So that’s why I think that, even though it won’t happen everywhere, this shift toward more decentralized decision-making will happen in more and more parts of our economy over the coming decades.

CSC World: But many business analysts would say those are soft issues, not the hard issues that count for the people who make business decisions. Won’t the top executives of a big company say, “Do I have to give up economies of scale to give employees flexibility and creativity?”

Malone: You don’t have to sacrifice economies of scale. Cheap communication means you can have access to all the information needed to take advantage of many kinds of economies of scale while still letting lots of people make decisions for themselves. 

eBay is an example of these two things. There are over 72 million active buyers and sellers on eBay, and over 430,000 of them make their primary living from selling on eBay. If these 430,000 people were employees, that alone would make eBay the second largest private employer in the country, after Wal-Mart and ahead of McDonald’s. But the key point is that these eBay sellers aren’t employees. They’re independent storeowners, and they have all the freedom that any storeowner ever had — a huge amount of freedom to decide what to sell, when to sell it, how to advertise and price it. Coupled with that freedom is a scale that would have been unimaginable to any storeowner at any other time in history. eBay sellers can sell to regional, national, and even global markets. So they have both the freedom of a small businessperson and the benefits of scale made possible by cheap communication that lets them advertise to and communicate with anyone anywhere in the world. 

CSC World: OK, but the people who started eBay did it to take advantage of the new technology you’re talking about. What about companies that were formed 50 or 60 years ago? How will they adapt to technologies that didn’t exist when they started?

Malone: It won’t be easy. Senior executives in those companies will have to give power away to take advantage of these technological changes. Some will do that, but I think they will be the exceptions rather than the rule. The ones who do that will understand what I call the paradox of power. The paradox of power says that sometimes the best way to gain control is to give it away.

Lou Gerstner of IBM understood that. He went into an organization that was probably one of the most centralized in American business. It’s not one of the most decentralized now, but I think almost anyone who knows the company would agree that it’s more decentralized now than when he took over.

CSC World: Do you think other big companies will follow Lou Gerstner’s example?

Malone: I think in practice the way these changes will occur more often is that new companies will be started that will be organized in different ways from the beginning. And they will grow and be imitated by other small companies. Eventually they will take over more market share in the industry and then the older companies that haven’t changed much will either be acquired, driven out of business, or will finally begin to imitate the new ways of organizing.

I don’t want to claim that no big companies can proactively change in the ways that they need to. Some will. But my overall feeling is a little bit pessimistic about the majority of big companies making the transition easily.

CSC World: You’re saying the new technology is going to move the whole economy in a different direction from the one we started moving in at the end of the nineteenth century.

Malone: Yes. The theory and model I develop in my book have a surprising implication, which is that cheaper communication enabled centralization at first. Without the telephone and telegraph, we could never have had the large, centralized, hierarchical corporations that were so successful in the twentieth century. But now we appear to be entering a new era, in which continuing decreases will lead to a change in the opposite direction: more decentralization instead of centralization.

CSC World: In addition to the paradox of power, you mentioned the paradox of standards in your book. Could you explain that?

Malone: We often assume that rigid standards are opposed to decentralization and flexibility. But sometimes, rigid standards in the right places can enable decentralization and flexibility in other places in the same system. A prime example of that is the Internet. The Internet is based on a series of protocols, or rules for exchange of information over the network, and at the heart is the Internet protocol, which is exactly the same everywhere in the world. It’s because the Internet protocol is so rigid everywhere that all the flexibility and decentralization we associate with the Internet is possible.

CSC World: How would that apply in business?

Malone: What that means in a business is that standardizing interactions can give people lots more flexibility to make decisions for themselves. Where to standardize will be different in different places. Sometimes the right level to standardize is at the level of financial reporting or product characteristics, or process patterns. But when you can remove choice about some things and make sure those things are guaranteed, then you can often let people have lots more freedom of choice about other things.

CSC World: In your book you say that law firms and consulting firms will be more likely to take advantage of these technological changes. But when they send people out traveling around with laptops, are they decentralizing or just extending the boundaries of the firm?

Malone: There are two forms of decentralization that should be distinguished but often aren’t. One is geographical decentralization, the other is decision-making decentralization. They’re easily confused because cheap communication enables both. Companies can adopt geographical decentralization by, for example, moving people around to be closer to customers. Or they can let workers make their own decisions about where they want to live — to be near family, to be in a particular climate or city, or to choose a particular quality of life. In this case, people have more power and freedom even if their organizations haven’t decentralized business decision-making. At the same time, other companies could decentralize business decision-making, even if everyone still works in the same building.

CSC World: Which do you think is more likely: that new businesses will form on the basis of new technologies or that old businesses will decentralize decision-making to adapt to new technologies?

Malone: I think both will happen. In my book, I also write about loose hierarchies. Which means you still have bosses and a chain of command, but lots of important decisions get pushed down to lower levels. Many law firms and consulting firms are organized that way now. I think we’ll see more of that even in big, traditional companies. Those changes won’t be easy for traditional companies to make, but they’re easier than more radical decentralization. The more radical changes are more likely to happen in new companies.