Or<\/p>\n\n\n\n
How cooperation works<\/p>\n\n\n\n
\n“Come back!” the Caterpillar called after her. “I’ve something important to say!” This sounded promising, certainly: Alice turned and came back again.<\/em><\/p>\n\n\n\n
“Keep your temper,” said the Caterpillar.<\/em><\/p>\n\n\n\n
“Is that all?” said Alice, swallowing down her anger as well as she could.<\/em><\/p>\n\n\n\n
“No,” said the Caterpillar.<\/em><\/p>\n<\/blockquote>\n\n\n\n
No, indeed, we saw in the last essay that value creation most of the time comes from horizontal cooperation, not vertical hierarchy in business organizations. Cooperation is not a new concept of course, although in the world of business it is often considered like an anarchist in a well-ordered firm, a left-wing fast food-idea at a fine business lunch, a screaming activist at a shareholder meeting. Look, this is all stupid talk. Cooperation can be \u2014 as already shown \u2014 found everywhere and is fundamental in business. What you can do with it, is something we will discuss in this essay.<\/p>\n\n\n\n
Easiest to discover is cooperation in your everyday business organization \u2014 your company, or mine: Gummy Bear Inc. for example. It’s easy because it is in the definition of an organization \u2014 every, not just, but including business. Communication, willingness and purpose are the only things that are really needed to form an organization. Purpose is clear and we talked about that before. You need something you want to do \u2014 like making gummy bear or achieve world peace. And there needs to be the intention to do something \u2014 unless you are the world organization of nihilism but then you also want to do something, promoting nothingness. The first \u2014 communication \u2014 is probably the most interesting one because it doesn’t just have to be there it also sets the organization’s boundaries regarding size. It’s actually mathematics. An organization of 5 people has to deal with 10 relationships (A-B, A-C, A-D, A-E, B-C, B-D, B-E, C-D, C-E, D-E) if you double the number of people you are not just doubling the number of relationships; it jumps to 45 (A-B, A-C, ha, thought I would write that out, didn’t you). Just to show off: as a formula it would be n(n-1)\/2. Chester I. Barnard discusses this problem in his 1938 book “The Functions of the Executive”. He did a great analysis of cooperation in companies and he was no egghead. He was a manager, self-educated in social theory.<\/p>\n\n\n\n
Barnard pointed out some important characteristics of how people interact within an organization. And he also made clear that although there is interaction, individuals always exist outside all organizations. Individuals do not come into being once they do something within a company, they are there before and after and also during. Individuals have relations to the organization, but they are never fully absorbed into it. That is important because it does away with the machine-like picture that we discovered and disregarded in the last essay (input, process, output). But my organizational setup seems very machine-like, you might say, we have org charts and processes and such. That is the formal organization and it is true, but beside each formal organization there is also an informal one. Don’t know how to work the printer? Just ask Steven. He can tell you. That is possible because both you and Steven exist also outside the \u2014 formal \u2014 organization. So you can act outside of your role in the machine. Of course Steven’s printer advice is just one of the gazillion things that an informal organization does. And see that is not a workaround, it’s just always the case, each formal organization also has an informal counterpart. And just to be clear: both organizations are needed and require each other. The formal organization would collapse if informal activities were not present. And the informal organization cannot exist in a vacuum. Now what does all that have to do with cooperation, well especially informal organizations work almost always on a horizontal level, because hierarchy is something formal.<\/p>\n\n\n\n
We already heard from Margaret M. Blair and Lynn A. Stout when we looked at what business organizations are. Their team production theory emphasizes that the horizontal or lateral interaction \u2014 as they call it \u2014 is crucial to business organization. According to them hierarchy alone cannot explain how value is created. Most of what it does is coordinate or enable, not create. So while it might be needed to keep the interaction running smoothly, the lateral interactions themselves are creating the value. Even some of the coordination \u2014 the classical hierarchical function \u2014 happens cooperatively.<\/p>\n\n\n\n
This begs the question: what are some of the mechanics in the hierarchical structure that make it problematic and drive horizontal activity. For that permit me to introduce you to the law scholar Yochai Benkler and his very cool paper “Coase’s Penguin, or, Linux and the Nature of the Firm” from 2002. One of the things Benkler describes is how information flows can explain some of this whole horizontal thing happening in vertical organizations. See all formal organizations handle information really badly by design. Benkler calls it lossy, but I call it badly. What happens is that hierarchy-based systems discard all information that did not arrive through the authorized or formal channel from a formal source. Problem is of course that a lot of information does not travel in a formal way \u2014 have you heard what is happening in Finance? Steven, about that printer. So the hierarchy is bad at transmitting information within the organization. It is like a person who only listens to information delivered in exactly the right format, and ignores good advice just because it didn’t arrive that way. So a lot of information has to flow via a horizontal structure outside the hierarchy.<\/p>\n\n\n\n
Another point he is making is about what the role of management is in a business. Whenever there is uncertainty about what to do \u2014 and there often is in companies \u2014 the manager tells us what to do, he commands. But where does this command come from \u2014 the content I mean. It actually comes from the market. See the manager’s job is to translate the market into business internal actions \u2014 Produce more red gummy bears, they sell good. But this is not different than what the market alone would tell us, management is basically just a very well paid translator. This is important to note because this translation function can also be taken over by other roles than the manager and is not necessarily tied to the activity of command. After all, a translation app is not commanding me, it’s just giving me information. So that if I feel really fancy I can call my company Societas Ursorum Gummosorum, but I don’t have to. Just to make this clear: That last point is my reading of Benkler, not his exact claim.<\/p>\n\n\n\n
The way cooperation can improve classical hierarchy-based structures can best be shown with one example, although there are many. Xerox used to have a simple setup for informing its technicians about its photocopiers. Have the engineers write a manual with all the possible failures they could think of and give it to the technicians to read. Problem was that the engineers did not think of everything that could go wrong. All technicians together knew everything that could happen with these machines, but each individual technician was on his own. They lacked a way to pool their collective knowledge. So Xerox invented an electronic system where technicians could post all the cases, and specialists and other technicians could support them and discuss the cases. By integrating a horizontal cooperation \u2014 or peer production as Benkler calls it \u2014 Xerox made the instruction-following technicians into knowledge creators, they added value to their support process which was still nested inside a classical company.<\/p>\n\n\n\n
Thinking back to Coase and how markets \u2014 individual interactions with high transaction costs each time \u2014 and firms \u2014 cheaper bundled interactions \u2014 work, peer production or cooperation gives us a third possibility to use in traditional business organizations.<\/p>\n\n\n\n
So it works within normal companies that are mainly hierarchically structured. But are there any forms of organization that are structured on horizontal cooperation exclusively or mainly? Yes, there are and the idea comes from very different directions.<\/p>\n\n\n\n
When V\u00e1clav Havel in 1978 discussed political philosophy he was not just critical of the system he lived in \u2014 communist authoritarianism, he actually called it post-totalitarian \u2014 and the systems he observed elsewhere \u2014 democracy \u2014, he also proposed a sort of post-democratic structure as solution to both. He imagined that a system that was run by small organizations, small enough to ensure personal trust and responsibility would be more open and flexible instead of the strong bureaucracy that would lead to a dehumanization and eventually a collapse of the system. Organizations would also have to be temporary, existing only as long as their purpose had to be fulfilled in order not to be consumed by the mechanism of the form. They would have to be plural \u2014 meaning with the intention of there being many doing the same rather than monopolistic. And most importantly these organizations would have to be task-driven \u2014 purpose-driven as I call it \u2014 not being loyal to the organization itself. That also means leadership would empower those who are best suited for the task, not the ones holding an office or being at a specific position on an organigram.<\/p>\n\n\n\n
Interestingly what Havel had envisioned was already existing at the time \u2014 at least partly \u2014 and still does today. We will get to that in a moment, but first let me sort of give you a framework for organizations. And I promise to stay really simple and fundamental. We already heard from Benkler and how he continued Coase’s work on the nature of the firm. For Coase there was either the market or the firm \u2014 either individual contracts for every transaction or bundled transactions. Benkler adds a third possibility which is called peer-production. You and I all know that. It is how development of most open source software \u2014 ah Linux, the penguin, now you get it \u2014 is organized. A peer production system falls into the category of self-organization \u2014 at least more or less, but details will follow. Now I promised to give you a framework. Here it is. There are two axes.<\/p>\n\n\n\n
The first axis concerns how something can be organized most efficiently: Market exchange, organizational \u2014 meaning classical hierarchy business organization, the firm \u2014 or via peer-production. Now getting an apple is something so simple that we probably leave it to the market exchange \u2014 I go to the grocery store and buy one. But if I want to have apples delivered each day to all of my office locations I might want to either buy them wholesale or if I think I can organize it more efficiently within my company, I tell HR to organize that \u2014 then it’s organizational. Now if I want to make a website with pictures of all the different kinds of apples \u2014 and there are more than 7’500 \u2014 I might ask the community of apple experts and lovers to contribute pictures that can then be seen on the website. This is certainly more efficient than me traveling all around the world or founding a company for the sole purpose of making apple photographs. Clear so far?<\/p>\n\n\n\n
Good, the second axis evaluates the property system and there are two possibilities. Is it worth owning a resource \u2014 so building\/buying it or defending my claim to it \u2014 or would that cost more than what it’s worth and is it better to share it? Did I lose you? Buying an apple is a simple task. So the implementation costs of me owning an apple are relatively low. I have to go to the grocery store \u2014 that always bugs me a bit. I wish we had replicators at home \u2014 Apple, Granny Smith, cold. But if I own a farm in California, getting water for my apple trees is a different story. I have to get it from a water reservoir. Building my own or buying one might be too expensive or complicated which also means too expensive. So I have to rely on what Elinor Ostrom defined as common pool resources in her 1990 book “Governing the Commons”. I don’t own the water, but I have the possibility to use it.<\/p>\n\n\n\n
Ostrom is quite important in this discussion about cooperation because she laid out a lot of the groundwork. And again a framework \u2014 so sorry, but also kinda important \u2014 which again takes Coase’s firm as option 1. It is a voluntary contract with at least partly the aim to give power to the entrepreneur, the boss man. Ostrom adds a second option which is the state, which can also organize and will do so by a monopoly of force \u2014 that doesn’t have to be actual violence but it can include that. The third option to organize work is then the one she analyzed and described as self-organization, and the reason for it is that, if it can be made to work, it would need neither the state’s force nor the contractual power of the firm to guarantee such things as supply of rules, commitment of the involved parties or monitoring of the rules. Therefore, it would be more cost-efficient. Also interesting that self-organization differs from the firm or the state not just in that it does not use coercion from the top, but also in that it is organizing in the sense of a process, not as the result of a process. Firms and states, on the other hand, are results. This is of course another reason why it is less formal and often simpler and less expensive to self-organize.<\/p>\n\n\n\n
Rule-compliance is a universal problem every form of organizing has to solve somehow \u2014 firm and state solve it with authority from the top, and now we’re about to see how self-organization solves it without that. There has actually been quite a lot of theoretical thinking put into this. And we know just out of episodic experience that it is a real issue when people work together. There are even some formulas \u2014 C > B – S which just means compliance beats breaking rules only if the sanction once detected is greater than the gain. Another issue is if you put in place an external enforcer you would need an explanation for what motivates the external enforcer to enforce. You could monitor the enforcer but who then monitors the monitors and so on. Same issue with the free-riders \u2014 people who just want to profit from an organization without contributing. You would need to monitor them externally and someone would\u2026 again ad infinitum. And there is a connection between the creation of rules, commitment and monitoring. As Ostrom describes: Without monitoring, there can be no credible commitment; without credible commitment, there is no reason to propose new rules. Meaning if you have a problem with one, the whole thing collapses.<\/p>\n\n\n\n
Ostrom has developed some design principles for the cooperative or self-organizations but she approaches the problem by studying real-world examples of successful self-organizations. The examples all have to do with natural resources because remember the thing with ownership not being worthwhile and sharing being more realistic. That happens a lot in these cases. Like the fishery in Alanya, Turkey where on-shore fishing \u2014 especially the fishing locations \u2014 have to be assigned to the different fishers. Over centuries the fishers organized themselves and found an elegant rotation system that was then self-enforced between individuals and within the community.<\/p>\n\n\n\n
In Japanese mountain villages, the common pool resource is plant-based \u2014 wood and thatch \u2014 and is again distributed by a self-developed system. Again these rules were not given from the outside but developed within the communities themselves. And again the enforcement happens from within. Rotating community members have the duty to act as detectives roaming the forest for any rule-breaking harvesting. The punishment is often in the form of cash and sake going directly to the detectives and so also works as compensation for this monitoring work.<\/p>\n\n\n\n
A bit more complex system can be found in Valencia, Spain where the resource is water for the irrigation of fields. Depending on the subregion, individual rules were defined on how the water is distributed. For any disputes there is a centuries-old water court. Without lawyers, very direct and public decisions are made on the day of court.<\/p>\n\n\n\n
There are dozens more successful examples that have been studied in the Swiss Alps, California, the Philippines, and there are countless more. But Ostrom also looked at the cases where self-organization and cooperation did not work out or were fragile. There is again a fishery in Turkey, this time Bodrum where the local cooperative collapsed by 1983. Before that the government had encouraged the purchase of larger off-shore fishing boats by locals but then did not enforce the 3-mile onshore limit. That plus the intrusion of tourism and hobby fishers overcrowded the fishing locations which had been allocated between the fishers. Another example is a fishery in Mawelle, Sri Lanka, where wealthy entrepreneurs accumulated multiple shares of the fishing rights and disrupted the original equilibrium between the fishers. Or water irrigation in the region of San Bernardino and Mojave in California where a single uniform self-organization was attempted in a very large diverse region. External interference is the most visible threat \u2014 but self-organizations also fail from within, when commitment wears down or monitoring becomes captured by insiders.<\/p>\n\n\n\n
Out of the good, the bad and the ugly Ostrom extracted what works in the setup of the cooperatives and what does not and eventually came up with eight design principles \u2014 seven plus one actually but isn’t that\u2026 whatever: (1) Cooperatives need clearly defined boundaries both in substance and membership. (2) Rules have to match local conditions \u2014 no funny ideas from the outside. (3) There needs to be a forum for collective-decision or choice. The ones affected need to be able to modify the rules. (4) Monitoring has to be directly done by the cooperative members or at least the monitors have to be accountable to them. (5) Sanctions should be adjusted to how serious or repeated the violation is. (6) There needs to be a fast and easy mechanism for conflict resolution. (7) The right to organize needs to be recognized \u2014 at least minimally or at least not contested externally. (8) If the self-organization is very large it needs to be organized into nested enterprises. Sounds kind of detailed? It is, mainly because these are not theoretically developed \u2014 they are the common success and failure factors that Ostrom discovered in actual cases.<\/p>\n\n\n\n
Benkler also has his design principles for peer-production and they differ a bit. But why? Shouldn’t this be the same? One was just looking at common pool resources and the other at information technology. But that is exactly the difference, the resource type. See Ostrom’s resources are things like water, fish, wood and other natural stuff \u2014 also called rivalrous resources. So her organization has to deal with scarcity and depletion and boundaries. Sanctions against overuse are really important. Benkler’s information is nonrival. So his design principles have to cover things like coordination and quality – developers integrating their stuff into a system not fishers overusing a location. He \u2014 and he is a lot less nice and doesn’t give us a straightforward list \u2014 also describes eight points. (1) Modularity means to break work into components that can be worked on independently. (2) Granularity describes that contribution should be possible in different sizes, from a couple of lines of code to month-long efforts. (3) You need to have a low-cost way to integrate the individual contributions. (4) People need to at least partly be able to self-select their contribution \u2014 otherwise it is not self-organization \u2014 but self-selection also has a strong influence on the next point. (5) Motivation comes from many different sources like interest, learning opportunity, social connections and other intrinsic sources \u2014 money, if at all, is only one possibility. (6) Who does what should be largely guided by decentralized information \u2014 trying to centralize all information should be avoided. (7) Where prices and managerial commands are unnecessary or costly, social norms, trust, reciprocity and reputation should coordinate work. The next point is a really interesting one and solves the quality issue I \u2014 as a quality person \u2014 was always wondering about. (8) Participants themselves will evaluate, correct and improve each other’s contributions. That is the peer review model and it is also found in the world of science.<\/p>\n\n\n\n
For me this makes so much sense because when I first read Ostrom I was constantly thinking, well that does not apply to my \u2014 mainly information-driven \u2014 work, how can I apply this fishery cooperative mechanism to my way of working. And then I discovered Benkler and all of a sudden that works a lot better. Which is in itself an important point. In practice, hardly any real activity is purely one or the other \u2014 most work involves a mix of both kinds of resources. Time and budget often behave more like Ostrom’s natural resources whereas information or knowledge \u2014 Benkler \u2014 are present in most business processes anyway.<\/p>\n\n\n\n
So if self-organization sometimes makes sense and if there are good real-life guiding principles, the logical next question is how to get from here to there \u2014 from a traditional hierarchical organization to a cooperative or self-organized organization or part of it? First it is important to remember that there is no true empty or fresh slate. There truly isn’t, believe me. Even if you found a start-up you will find yourself in a certain environment with certain structures in place. In addition we cannot just erase what was and start fresh. It is always just a change or \u2014 what I like to call it \u2014 a transformation of what is into what you aspire to. Ostrom found this in many cases she studied. Organizational change is successful if it happens in incremental, sequential small steps which involve low initial costs, therefore also being low risk. Eventually changes will accumulate and the commitment risk will rise but this happens gradually. It is also important that each step needs to build the incentive structure for the next. You cannot build a monitoring system if you are not sure how the monitors will be compensated. A central precondition from both Ostrom and Benkler is information sharing and discussion. While a forum for discussion alone is no solution it is required for self-organization. We have already discussed and will again how important information gathering and information sharing are for meaningful \u2014 or better solution-oriented \u2014 discussion.<\/p>\n\n\n\n
So eventually after the transformation everything will be self-organized cooperatives? Sounds fun, doesn’t it? No, that’s not the point and it is not the point of any of the named authors. Self-organization, peer-production, and cooperation are additional ways to organize business activities or complete business organizations. Please note that I didn’t say option because I think it is more sort of a logical decision what is best suited than any choice of flavor.<\/p>\n\n\n\n
See we had Benkler’s framework with the axes. On one side the way something is most efficiently organized – market, firm or self-organization and on the other side if it is cost-wise better to own a resource or share it from a common pool. So we have five different options. Ha, got you again, it’s six of course. Permit me to use my all-time favorite example of making gummy bears to fill the options.<\/p>\n\n\n\n
If many people own gummy-bear machines and recipes and resources are easily available on the market, we are in the market and owning category. Because resources are cheap and easily available and the process is simple, organizing internally or peering would just add unnecessary cost and complexity \u2014 so market wins by default. (Other examples: a farmer’s market or Amazon Marketplace)<\/p>\n\n\n\n
Now if there are still many people with their own infrastructure and simple process but they have to use a freely available resource like the forever known recipe for gummy bears or the red color extracted from the common red jumping spider, the best setup would be that of market transactions and sharing resources. (Or freelance photographers or street musicians)<\/p>\n\n\n\n
In a situation where making gummy bears is a really complicated, multistep process that requires a shitload of R&D and machines and a tightly coordinated team effort and one mistake might turn the gummy bears into cement rabbits, but resources are still available on the market, it seems best to go all classic firm and owning resources structure. (Or Tesla or Zara or a lot of other traditional companies with a lot of in-house activities)<\/p>\n\n\n\n
But what if under the same stupidly complicated but needed process you still need those damn common red jumping spiders and they are just jumping around everywhere. Or, more realistically, the gummy bear machines have to be located in a community-owned huge hangar-like building because they are as tall as thirty houses. Then you would still need a firm to coordinate your process but you need resources that are better to be shared, because your company cannot build a huge building, or because it’s stupid to buy spiders on the market when you can just collect them off the street. (Or an airline sharing airports)<\/p>\n\n\n\n
Now what if a lot of people have gummy bear leg machines and a lot of people have gummy bear belly machines and a lot of people have gummy bear head machines and so on. These people, of course, also know how to make these parts because they have their recipes. Given that you’ll need one central machine \u2014 owned by a company \u2014 that can combine the legs, bellies, and heads to give you a complete gummy bear, and resources are available on the market \u2014 you know the stuff the gummy bears are made of \u2014 that would then be a logical example of self-organization and owning resources. (GitHub or knowledge-sharing platforms that are owned by a company like LEGO Ideas)<\/p>\n\n\n\n
What if you have individual gummy bear parts contributors and the parts can be easily and cheaply combined \u2014 not with a machine but just with some spit. And resources \u2014 like recipe and gummy bear material and spit and the spiders \u2014 are mostly common and freely available. This would then be a form that is both self-organized and sharing resources. (Wikipedia or the Linux Foundation)<\/p>\n\n\n\n
Some of these categories might sound niche to you, but that is not because they have no potential. The problem is rather that certain structures have become predominantly used and are often misapplied. The classical hierarchy\/firm and ownership structure is often applied when conditions would encourage a more self-organized structure. In the field of information technology there have been examples like Microsoft Encarta trying to capture knowledge the way Wikipedia did later. AOL trying to organize the Internet \u2014 by using a walled-garden, centrally curated portal. Other times it is not a question of failure but a question of what would work better \u2014 cheaper or more efficient. Take Unix \u2014 originally developed and owned by AT&T, then fragmented into various commercial variants often being complicated to buy and operate for customers \u2014 and Linux \u2014 free and readily available in many versions. Often we don’t see the cheaper alternative because that structure has never been applied to that business activity. In the book business it was forever thought that the production and distribution system made publishing houses a requirement. But then self-publishing was enabled by modern printing machines able to produce single or small quantities of a book. Online booksellers made distribution more accessible and e-books shook up the old structures again. Now that does not mean that self-organization is perfect for everything. Self-publishing has its fair share of problems \u2014 quality control being one of them, marketing another. But it opened up new possibilities. See also gummy bears can be made by Gummy Bear Inc. They can hire 5 new food designers to make new flavors and forms. But you will only get what 5 people could think of. If you take all the 500 million gummy bear lovers on the planet with their own kitchens and knowledge and experience you might get a lot more ideas for new gummy delights.<\/p>\n\n\n\n
Again cooperation is not the exclusive form for business organizations, it is a third possibility. It is certainly underused although clear criteria are available. Eventually what matters is what makes most sense when looking at costs, both for organization and for ownership. The logic itself is fairly straightforward once you know to look for it. Meaning we should just look at our organizations and be honest if we really have found the most cost-effective structure to use and set aside fixed stereotypes. We need to experiment more with more open structures. These experiments can be very confined to specific areas of our business \u2014 remember small incremental steps are important \u2014 but they do need a real fighting chance which brings me to one last point that Ostrom makes on probably the biggest threat any self-organization faces, and that is undermining from the outside. Self-organizations need an environment in which they are accepted as a valid option in the business world, not a marketing gag that often gets misused and destroyed.<\/p>\n\n\n\n
Another important point is that large numbers of people, with diverse knowledge, often benefit value creation which is \u2014 as we have already seen \u2014 central to business activities. You know the 500 million gummy bear lovers. You might get that whiskey-infused grizzly gummy or the “Lil’ Nitro” or the 5-kg gummy bear.<\/p>\n\n\n\n
With more open business structures we have the possibility to accomplish what Havel wanted for the political system: a more flexible, trustworthy and social way of doing business. Havel was talking about political resistance, not business. The pressures and incentives are different, but the basic principle still applies. But just to be crystal clear, as he made that point himself: no institutional design can guarantee moral actions. Structures alone cannot save us. We might get a better vessel \u2014 for some weather conditions at least \u2014 but we still need to get the sailing right. That’s what we’ll talk about next \u2014 how we work together better.<\/p>\n\n\n\n
Don’t just take it from me, here is some good stuff to read:<\/p>\n\n\n\n
Carroll, Lewis. “Alice’s Adventures in Wonderland”. 1865.<\/p>\n\n\n\n
Barnard, Chester I. “The Functions of the Executive”. Harvard University Press, 1938.<\/p>\n\n\n\n
Blair, Margaret M., and Lynn A. Stout. “A Team Production Theory of Corporate Law.” Virginia Law Review, vol. 85, no. 2, March 1999, pp. 247\u2013328.<\/p>\n\n\n\n
Havel, V\u00e1clav. “The Power of the Powerless”. 1978.<\/p>\n\n\n\n
Ostrom, Elinor. “Governing the Commons: The Evolution of Institutions for Collective Action”. Cambridge University Press, 1990.<\/p>\n\n\n\n
Benkler, Yochai. “Coase’s Penguin, or, Linux and the Nature of the Firm.” Yale Law Journal, vol. 112, no. 3, December 2002, pp. 369\u2013446.<\/p>\n\n\n\n
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