CHAPTER 1

From Physical to Digital: Fundamental Questions for Radical New Answers

We now realize with special clarity, how much in error are those ­theorists who believe that theory comes inductively from experience.

—Albert Einstein, Physics and Reality, 1936

A theory can be proved by experiment but no path leads from ­experiment to the birth of a theory.

—Albert Einstein, from Sunday Times, 1976

This book is being written at the beginning of 2019. As I write, all the major English-speaking newspapers, magazines, TV channels, and blogs try to illustrate the catastrophic events that seem to be shaping the future of the western world: the inability of the European Union and North America to deal with the issue of mass migration, the blindness of governments toward looming environmental risks, the development of new and entirely artificial barriers to trade, the call for physical walls that should keep countries safer, the multiplication of unbridled ambitions to regain local sovereignty, changes in consolidated post-WWII alliances, meddling in elections, and so on.

In order to keep up with these events, an incessant flow of ­information is produced to provide every last detail in the evolution of situations; all good, but is this information capable of providing insight into what is likely to happen next? Is this tsunami of news helpful in helping us ­predict what the outcome of a situation is going to be?

On a much smaller yet far from irrelevant scale, this is what happens in the life of organizations: Management drowns in data and information. These are by the way two very different categories—information is the result of the application of a thought process to the reading of data: a train timetable is data; the 5 pm from platform 3 is the information you seek when looking to get to Grand Central from Yonkers by 6 pm. While drowning in information and data, Management seems to be oblivious to Knowledge. Maybe it is useful to recall the difference: As Don Wheeler has said, “Information is random and miscellaneous; Knowledge is orderly, cumulative (and has a temporal spread).”

To be knowledgeable as leaders in the digital age requires understanding the problems raised by complexity, that is, a reality that is highly interconnected and interdependent. A great deal of management is, instead, “mechanistic.” We are living in an age of “management crisis” because so many leaders are unaware of the appropriate knowledge to manage the complexity. This knowledge exists and this book aims to present it. Management knowledge can only come from solid theory; this knowledge advances thanks to the continuous feedback that takes place between the theory and the experience gained from its application on the field.

Knowledge, Theory, and Experience

Before I began working in the field of management, I was educated as a physicist. However, it is not necessary to be a scientist to appreciate that from Galileo Galilei and Newton onwards, all the things that we know (as opposed to those “that we think we know”) and any meaningful advance in the human condition came from formulating a Theory and validating its realm of applicability. It is called the Scientific Method and it is high time for Management to fully embrace it.

We can start by understanding that Knowledge is built on Theory, a set of assumptions that allow prediction. A Theory has a realm of validity. This validity must be challenged by observation, and the boundaries of its applicability must be constantly revised.

In order for Knowledge to be useful, it needs Operational Definitions because they provide a way of putting communicable meaning into a concept, of translating a concept into a measurement of some sort.

Why does Management need Theory? Because Management must be rooted in prediction: without theory, the job of managers becomes a “whack-a-mole” exercise devoid of any ability to predict the outcome of their actions. Management also needs Theory because nothing can be learned from examples and experience without Theory; without it we would not be able to interpret the results of our observations. For this reason, studying case histories, as many Business Schools ask their students to do, makes little sense. And although thousands of examples do not make a Theory, one example that contradicts a theory is sufficient to redesign the boundaries of a Theory’s validity. This is how science advances.

The kind of Knowledge that we need and that should inform ­leaders in Industry, Government, Health Care and Education, was put forth by Dr. W. Edwards Deming (American statistician and physicist) in his seminal book The New Economics and takes the name of the Theory of ­Profound Knowledge (TPK).

What it advocates is for management to commit to take a ­knowledge-based stance, to understand the “field of forces” that shapes the reality of an organization and to position events within the right framework. TPK moves management from the quicksand of empiricism (experience, opinion, examples) to the safe shore of epistemology (Knowledge).

There are four foundational elements that make up Deming’s Theory. I have taken the intellectual liberty to (slightly) adapt Deming’s elements in light of the last 25 years of on-the-field development:

1. Systems Theory (how the whole can be bigger than its parts)
2. Theory of Variation (that provides a rational foundation for understanding process behavior)
3. Theory of Knowledge (how we know what we know—Philosophy of mind, Epistemology, and Neuroscience operate/act according to a theory so as to have a reasonable conceptual handle on the outcome of our actions)
4. Psychology of the individual and the organization, the role that ­emotions play in human cognition and behavior (and massively impact process variation) as well as the collective psychology of the organization

These four elements are all interdependent and what emerges from understanding how these interconnections operate is nothing short of a new organizational and economic paradigm.

This new paradigm is based on cooperation, whole system optimization, a win–win mindset all along the value chains, and openness and transparency in every aspect of work and business interaction. It calls for an understanding of complexity and a radical overcoming of the silo mentality that still rules much of corporate life; it is firmly focused on designing, sourcing, producing, and distributing goods and services that improve people’s lives; it rests on the assumption that humans are intrinsically motivated to do good, take pride in their work, and have an innate desire to learn and be part of something bigger than themselves.

This New Economics that Dr. Deming brings is one of sustainability. It is a radical departure from the Wall Street fantasies of deregulation and greed. The sheer inability to understand the consequences of deregulation and greed have propelled us into the neurological meltdown we are still experiencing in terms of unsustainable inequality.

Sustainability is predicated upon our understanding the laws that govern complexity—what happens when we begin to interact. The New Economics becomes, then, an economics of integration, where the network-like nature of our economies is understood at its most fundamental level.

The New Economics is based on well-studied and understood ­elements of Knowledge; sadly, these are still largely ignored in Business School curricula that are still mainly based on Finance and Cost ­Accounting principles and the mindset of local optima that they create. As Dr. Deming used to say, “Business Schools teach how to raid NOT how to lead a company.”

So, why bother? Why this seemingly quixotic quest for “Profound Knowledge?”

The Digital Age

In the last 10–15 years, two major technological step-changes have taken place that have impacted drastically our reality: digitization and decentralization. Digitization is affecting (almost) every aspect of the human experience. Intimately connected with digitization, the way we work is becoming increasingly decentralized.

For most of the 1990s, a good portion of our daily interactions was physical: we would read papers, buy our clothes in shops, receive letters (with stamps!), use CDs and DVDs, go to meeting places with the goal of encountering other humans, even take pictures with “films,” and pay with cash. There was a physics (mostly solid state) that would explain how things would work and a relatively well-tested psychology that would account for human interactions. Even computer programming languages had some level of connection with the physical circuits that would ­execute their commands.

The chain of events that would move an idea to its fruition followed a series of steps that were, in some way, under some level of our cognitive control. Even the most ethereal of business activities, Marketing, seemed to follow some “real life” cycle. Activities intimately connected with an (almost) entirely physical reality were aided by very precise structures: buildings, offices, organizational hierarchies, well-defined careers, and spans of individual control. With some exceptions, even the thought process guiding our actions was reassuringly “linear.”

Today, we live most of our lives online and our cognitive experience, especially in millennials or younger, is dramatically influenced by it. The traditional workplace is being replaced by much more virtual and decentralized forms of collaboration. The mental covenant that binds us to the organizations we work for is changing and is more and more influenced by the idea of “personal branding” and icons and illustrations are rapidly replacing traditional reading materials in the learning process. The network of networks we are all part of, linguistically and otherwise, obeys mathematical laws that challenge our intuition and that we struggle to grasp. When so hard pressed by the need to make faster and much more complex choices, our brain just gives in and we succumb to a multiplicity of “cognitive tunnels.”

We are not in Kansas anymore and we could certainly do with a ­yellow brick road. There is a growing number of beautifully labeled magic potions, all aimed at making us more Agile and Lean, impervious to the perils of VUCA, more adept to the inevitability of having to SCRUM, chained to ever-growing and decentralized Blocks, and so on.

Let me make a modest, old-fashioned proposal: let’s try to understand what we are talking about.

Digital technology is the offspring of a precise paradigm of ­togetherness; it is originated by the belief that conversations aimed at creating meaning through language cannot be hindered by filters that do not add value.

Digital technology is reshaping the way we cooperate through more meaningful interdependencies—the way we share information and the way we create possibilities for action. It is the natural consequence of the human drive toward better and more meaningful forms of interaction and communication. Its development was the inevitable, evolutionary outcome of the quest for understanding how our being together, in all its forms, can be enhanced.

The scientific foundation for digital technology can be found in the groundbreaking work of Shannon and Weaver on Information ­Theory; its philosophical roots are in the attempt to overcome the inherent limitation to communication of static devices. Simple (and not so simple) technologies like, for example, APIs are a testament (and an incipit) to this worldview: a new covenant in the way we can share and collaborate.

In order to honor such a covenant and allow it to give birth to the wealth of possibilities it foreshadows, deliberate effort is required from the institutions that should embrace it. Industry, Government, ­Education, Health Care, etc. must rise to the occasion and start rethinking ­themselves in light of these possibilities. This entails a fundamental shift in how we go about management: it requires both a new organizational design and a much more elevated form of organizational and individual consciousness.

Collaborative Work

Digital can (and will) be the trigger for the transformation of the ­current style of management that is embedded in, and epitomized by, the ­hierarchical, siloed organizational structure, into one of whole system optimization. The systems view of the organization that this book proposes reshapes value chains and redesigns how interactions and conversations are possible. It also calls for a complete shift in mindset and advocates an entirely new set of “coordinates” not unlike the ones in the ­foregoing quotation from Keynes. Such coordinates entail a completely different paradigm also in respect of the way we deal with our cognition processes. Digital technology propels and dramatically simplifies conversations and in this way it impresses on human cognition an unprecedented ­acceleration. It is one that is hard for many to cope with.

A blatant manifestation of the entirely new cognitive landscape that digital technology has brought about is the rapid growth of the decentralization of work. Despite all the bru-ha-ha around the alleged importance of a new kind of “coin,” unearthed bit-by-bit from the crevices of computation, the real relevance of the technology that underpins it, Blockchain, is in the entirely new swathe of opportunities it creates for collaborative work.

Truly collaborative work cannot exist and cannot be developed within conventional frameworks such as existing siloed structures or behind the psycho-walls that fuel divisiveness. Decentralized, just like Billy Joel’s New York, is a state of mind. Decentralized is a worldview that emerges as a result of the unprecedented need we have for communication. It underpins a paradigm of speed of flow through an entirely different set of interactions based on trust.

Said in a different way, digital technology is putting individuals and organizations alike under a hard-to-handle level of pressure to change, learn, and generate meaning through language. We need a new framework, a new system of coordinates and a compass to navigate the entirely different waters that the digital world has created.

This is precisely what a Theory provides. Theory, in any educated ­conversation, is not the opposite of Practice; it is what must guide any practice that aims at being sustainable over time.

A Theory to design and manage organizations in the digital age exists, and what follows in this book has the ambition to explain how to apply it successfully.

Summary of Chapter 1

• Leaders and managers are drowning in Information and Data when what they need is Knowledge.
• Without Theory, we cannot interpret information or predict outcomes of decisions and actions.
• W. Edwards Deming’s Theory of Profound Knowledge ­provides the framework we need.
• There is a new paradigm for economic sustainability.
• Digital technology is ushering in a mindset based on value and collaboration.
• Our cognitive experience is shifting from physical and linear to a network of networks.
• We need a new set of coordinates and compass to navigate the digital world and its complexity.
• The pressure to change is unprecedented.
• A theory and method to design and operate organizations in the Digital Age exists and this book aims to explain how to apply it successfully.