Featured Guest Speaker
Dee W. Hock, Founder and CEO Emeritus: VISA
Posted: October 27, 1998
The Birth of the Chaordic Century:
Editor's Note: Dee Hock is responsible for the "chaordic" organizational structure of VISA, which propelled it into the largest credit card company in the world. He has since become both a student and mentor of this organizational architecture, and is one of 30 living laureates of the Business Hall of Fame. Part one discusses the nature of the VISA organizational structure and the background behind its creation. Part two next month will discusses the implications for the future.
Before we begin, a few words about words. Language is only secondarily the means by which we communicate, it is primarily the means by which we think. One can scarcely think or talk about organizations these days without stubbing a mental toe on what leading scientists from many disciplines believe will be the principal science of the next century: the understanding of auto-catalytic, nonlinear, self-organizing, complex, adaptive systems, usually referred to as "complexity."
The word "complexity" is much too vague to describe such systems, yet it is cumbersome to think about them in the long string of adjectives by which the work is described. After searching in vain for a more suitable word, it seemed simpler to construct one. Since such systems, perhaps even life itself, are thought to emerge and exist in the narrow phase between chaos and order, the first syllable of each was borrowed and cha-ord (kayord) emerged.
By chaord, I mean (1) any autocatalytic, self-regulating, adaptive, nonlinear, complex organism, organization or system, whether physical, biological or social, the behavior of which harmoniously exhibits characteristics of both order and chaos; (2) an entity whose behavior exhibits observable patterns and probabilities not governed or explained by the behavior of its parts. By chaordic, I mean essentially the same; the fundamental organizing principle of nature and evolution. The word has become addictive, so please forgive me it's use, even though it may sound a bit strange in the beginning.
I will tell you the tale of how a particularly, rich, robust chaord came into being, relate it to the tornado of technological and informational change that is literally blowing apart our institutions and societies, to say nothing of the biosphere, and what it may portend for the future. To do so, requires weaving a web from elements of history, biography, philosophy, and speculation in order to pose a single, simple question.
It began with an incredibly innocent, naive young Lamb, the sixth of six children born to laboring parents with but eight years of schooling in a small mountain community; a lamb with two grand passions, reading and nature, and necessity to pursue both unencumbered by guide or mentor. With school and church, came sharp, rising awareness of the chasm between how institutions professed to function and how they actually did -- between what they claimed to do for people, and what they actually did to them -- along with stubborn refusal to accept orthodox ideas or be persuaded by authoritarian means. Constant conflict with institutions through twelve years of schooling, a dozen jobs and two years at a small, local college turned the Lamb's awareness of that chasm into obsession.
At twenty, the Lamb fell into management of a small, floundering branch of a consumer finance company. Protected by remoteness, anonymity and insignificance, four lambs, whose average age was nineteen, trashed the company manual, ignored commandments, and did things as ingenuity and conditions combined to suggest. Within two years, the branch led the company in growth, quality and profit. Anonymity was gone and they received their reward -- the iron fists of corporate power and orthodoxy came crashing down, crushing them.
You shall be spared details of the next sixteen years of guerilla warfare between a Lamb irrevocably committed to iconoclastic concepts of organization and management, and three such Industrial Age, command-and-control organizations. Each time, the Lamb was determined to change the company, the company determined to corral the Lamb, and with the same, inevitable result -- just another bit of unemployed mutton bruised and bleeding on the sidewalk. (As an aside, it is with strongly mixed emotions that I must tell you none of those companies now exist. The emotions are joy and happiness.)
Sixteen years of guerilla warfare, combined with constant, eclectic study, led, thirty years ago, to three questions, which have since dominated my life. They seemed relevant then; they are compelling today.
Why, I asked time and time again, are organizations, everywhere, whether political, commercial, or social, increasingly unable to manage their affairs?
Why are individuals, everywhere, increasingly in conflict with and alienated from the organizations of which they are part?
Why are government, society and the biosphere increasingly in disarray?
Today, it doesn't take much thought to realize we are in the midst of a global epidemic of institutional failure. Not just failure in the limited sense of collapse, such as the Soviet Union or corporate bankruptcy, but the more pervasive, pernicious form: institutions increasingly unable to achieve the purpose for which they were created, yet, continuing to exist as they increasingly devour resources, demean people and destroy the environment.
Schools that can't teach. Families far from familial.
Unhealthy health-care systems. Communities far from communal.
Welfare systems in which few fare well. Corporations that can't cooperate.
Police that can't enforce the law. Governments that can't govern, and
Judicial systems without justice. Economies that can't economize.
The answer to the three questions has much to do with compression of time and events. Some of you will remember when a check took a couple of weeks to find its way through the banking system. We called it "float," and used it to advantage. Today, we're all aware of the incredible speed with which money moves and the profound effect on us all. However, we ignore much more important reductions of float.
Consider information float. It took centuries for information about the smelting of ore to cross a single continent and bring about the Iron Age. When man landed on the moon, it was seen and heard throughout the world in a bit more than a second.
The same is true of technology. It took centuries for the wheel to gain universal acceptance. Today, countless devices utilizing microchips sweep around the earth like the light of the sun into universal use.
It is no different with culture. Throughout history, it took centuries for the customs and language of one people to materially affect another. Today, that which becomes popular in one country sweeps through others in months, while English rapidly becomes a global tongue..
It is the same with space. In a single lifetime, we moved from the speed of the horse to the speed of interstellar travel. Men and materials now move in minutes where they previously moved in months.
This endless compression of float, whether of money, information, technology, culture, space, or anything else, can be combined and thought of as the disappearance of change float; the time between what was and what is to be, between past and future. Today, the past is ever less predictive, the future is ever less predictable, while the present scarcely exists at all. Everything is change, with one incredibly important exception. Although their size and power have vastly increased, there has been no great, new idea of organization since the concepts of corporation and nation-state emerged three centuries ago.
Although there were many illustrious ancestors, those concepts were fathered by Newtonian science and Cartesian philosophy and mothered by the Industrial Age. Together they spawned the machine metaphor. It has dominated the mass of our thinking in the whole of society for more than two centuries to an extent none of us fully realize. It declared that the universe and everything in it, whether physical, biological or social, could only be understood as clock-like mechanisms composed of separable parts acting upon one another with precise, linear laws of cause and effect.
We have since structured society in accordance with that mechanistic belief, thinking that with ever more reductionist, scientific knowledge, ever more separability and measurement, ever more linear education, ever more specialization, ever more technology, ever more efficiency, ever more hierarchical command and control, we could learn to engineer organizations in which to pull a lever at one place and get a precise result at another, and know with certainty which lever to pull for which result; never mind that human beings must be made to behave like cogs and wheels in the process. For two centuries, we have been engineering those organizations and pulling the levers. Rarely, very rarely, have we gotten the expected result. What we have gotten is all too apparent -- obscene maldistribution of wealth and power, a crumbling biosphere and collapsing societies.
Those sixteen years of bitter experience and continual study also gave rise to several convictions.
First: The real consequence of emerging science and technology was not gadgets, whether satellites or silicon chips, but radical, social change; ever-increasing diversity and complexity in the way people must live, work and relate to one another.
Second: The so-called Information Age could best be understood as the Age of Mind Crafting, since information is nothing but the raw material of that incredible chaord we call mind and the pseudo mind we call computer, while software, the tool with which we shape that information, is purely a product of the mind.
Third: Just as the organs of the human body are composed around a neural communications network so complex as to defy description, so, too, were electronic systems emerging and interconnecting into an equally complex, socio/economic, communications network which would compel the reconception of all institutions and the relations between them.
Fourth, and by far the most important, was conviction that the most abundant, least expensive, most under utilized and constantly abused resource in the world was human spirit and ingenuity. The source of that abuse was mechanistic, Industrial Age, command-and-control concepts of organization and the management practices they spawned.
Those convictions were argued at every opportunity. The few who would listen smiled and yawned. You can understand why, self-confidence in tatters, I decided to change occupation, choosing the most popular, modern career, retirement on the job, selecting as victim a Seattle bank where a modest living might be had at the cost of a pleasant demeanor, conformity and fractional effort. It only proves how foolish Lambs can be. Within the year, the bank took a credit card franchise from the Bank of America and I was pressed into management of the program.
BankAmericard began in the nineteen fifties as a California service of the Bank of America. In 1966, concerned with erosion of their customers, five California banks launched MasterCharge. In turn, Bank of America began franchising BankAmericard. Other large U.S. banks launched proprietary cards. Action and reaction exploded. Banks dropped tens of millions of unsolicited cards on an unsuspecting public, while television screamed such nonsense as "the card you won't go crazy with," a challenge the public accepted with enormous enthusiasm.
Within two years, the infant industry was out of control. Losses were thought to be in the tens of millions of dollars. In the midst of the mess, the Bank of America called a meeting of licensees, which swiftly disintegrated in acrimonious argument. In desperation, the bank appointed a small committee, of which I was one, to look into a couple of pressing problems.
A complex of regional and national committees was swiftly formed, which had but one redeeming quality -- it allowed organized information about problems to emerge. They were enormously greater than imagined -- far beyond possibility of correction by the existing organization. Losses were not in the tens of millions, but the hundreds of millions and accelerating. It became necessary to reconceive, in the most fundamental sense, the concepts of bank, money and credit card. Several conclusions slowly emerged.
Money would become nothing but alphanumeric data in the form of arranged electrons and photons that would move around the world at the speed of light, at minuscule cost, by infinitely diverse paths throughout the entire electromagnetic spectrum. Credit card was a misnomer. It must be reconceived as a device for the exchange of value in the form of arranged electronic particles. The demand for that exchange would be lifelong, global, twenty-four hours a day, seven days a week. The essential insight then emerged. We didn't have an operating problem or a credit problem, we had an institutional problem. In fact we didn't have a problem at all; we had an incredible opportunity. An organization that could globally guarantee and transfer monetary information in the form of arranged electrons and photons would have a market, every exchange of value in the world, that beggared the imagination.
No bank could do it. No stock corporation could do it. No nation-state could do it. In fact, no existing form of organization could do it. To create the value envisioned would require a transcendental organization linking together in wholly new ways an unimaginable complex of diverse institutions and individuals. It was beyond the power of reason to design such an organization, or the reach of the imagination to perceive the complexities it would encounter. Yet, it seemed to me nature was infinitely able to toss off much more complex chaords -- bodies, brains, immune systems, rain forests, marine systems -- with seeming ease.
I asked three others to join me to address a single question based upon a single assumption. If anything imaginable was possible, if there were no constraints whatever, what would be the nature -- not the structure, but the nature, based on biological concepts and principles -- of an ideal organization to create the world's premier system for the exchange of monetary value?
We isolated ourselves for days and nights of intense discussion and could agree on nothing. It became necessary to go into the depth of our understanding about the nature of organization itself. The realization slowly dawned that an institution cannot be perceived with any of the senses. Institutions have no reality save in the mind. Healthy institutions are nothing but a mental concept to which people are drawn in pursuit of common purpose; a manifestation of the very old, very powerful idea called community. Unhealthy institutions are no less a mental concept, but one to which people are compelled by necessity or force, rather than drawn by vision and desire.
Thus, the success of any healthy institution has infinitely more to do with clarity of shared purpose and principles, and strength of belief in them, than to all assets, technology or management practices, important as they may be. To the direct degree that such shared beliefs exist, constructive, harmonious behavior is induced. To the direct degree they do not exist, behavior is inevitably compelled. It is not complicated. The alternative to shared belief in purpose and principles is tyranny. And tyranny, whether petty or grand, whether commercial, political or social, is inevitably destructive. People who are not self-organized and governed are inherently ungovernable.
Slowly, painfully, as we worked with such notions, a dozen or so fundamental principles emerged, a sort of institutional genetic code, if you will. Let me give you just a few examples.
Power and function must be distributive to the maximum degree. No function should be performed by any part that could reasonably be done by any more peripheral part, and no power vested in any part that might reasonably be exercised by any lesser part.
It must be self-organizing. All participants must have the right to organize for self-governance at any time, for any reason, at any scale, with irrevocable rights of participation in governance at any greater scale.
Governance must be inclusive and distributive. Deliberations and decisions must be by bodies and methods that represented all relevant and affected parties. No individual, institution or combination of either or both, particularly management, should be able to dominate deliberations or control decisions at any scale.
It must seamlessly blend both cooperation and competition. That is, all parts must be free to compete in diverse, unique, independent ways, yet be linked so as to sense the demands of others and cooperate when necessary to the inseparable good of the whole.
It must be infinitely malleable, yet extremely durable. That is, it should be capable of constant, self-generated modification of form or function, without sacrificing its essential purpose, nature or embodied principle, thus releasing the human spirit and human ingenuity.
In the beginning, no one, self included, thought such an organization could be brought into being, but the principles pulled us on. There followed an intense, two-year effort involving a great many people and disciplines. In June 1970, we proved ourselves wrong and the VISA Chaord came into being.
In order to illustrate a simple truth later, you should know a few things about it. It began with a handful of modest banks in a dozen U.S. states. Today, it is equitably owned by twenty thousand financial institutions in more than 220 countries and territories. Ownership is in the form of perpetual, non-transferable rights of participation, thus, it cannot be bought, raided, traded or sold.
It espouses no political, economic or social theory, thus linking people and institutions of every conceivable language, custom, race and religion, every conceivable political, economic and cultural persuasion, in a self-organizing, chaordic structure within which they combine the most intense cooperation in essential elements with the most intense competition in all others. Six hundred million people now use VISA products at twelve million merchant locations, producing $1.2 trillion of business annually, certain to rise to $2 trillion by the end of the decade, since compound annual growth exceeds 20%, with no end in sight.
Its products are among the most universally used and recognized in the world, yet the organization is so transparent its ultimate customers, most if its affiliates and some of its members do not know it exists or how it functions. No part knows the whole, the whole does not know all the parts, and none has any need to. The entirety, like all chaords, including those we call body, brain and biosphere, is largely self-regulating.
A staff of less than a thousand scattered throughout the world coordinated this system as it skyrocketed past a hundred billion dollars a year. They received modest salaries and could never acquire wealth for their services. Yet, without consultants, those people selected the VISA name and completed the largest trademark conversion in commercial history in a third the time anticipated. And they built the prototype of the present communications systems in ninety days for less than $25,000; systems that now clear more electronic transactions in a week than the entire U.S. Federal Reserve system does in a year.
These few things are related to illustrate a simple truth we have somehow lost sight of in existing institutions. The truth is, that given the right chaordic circumstances, from no more than dreams, determination, and the liberty to try, quite ordinary people consistently do extraordinary things.
I believed then and believe today that we were creating an archetype, however clumsy, of organizations of the next century. I believed then and believe today that the power inherent in chaordic concepts of organization is immensely greater than the success of VISA would indicate, for we did not get it a quarter right and it has regressed substantially since.
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From: firstname.lastname@example.org (Allan Baktoft Jakobsen) Date: Mon, 31 May 1999
It's interesting to see how the new paradigm of the knowledge society is forcing its way. For the philosophical minded people, this is another exampel of Kant/Hegel dialectical principle:
Thesis + Antithesis = Synthesis
The thesis here is order, management thinking, and traditional organizations. The antithesis is chaos, e.g. complex relations between individual human beings, leadership, and networks. In the (complex) twillight zone a battle goes on as the synthesis is formed. Individualisme + Organization = Self organization
Best regards, Allan Baktoft Jakobsen
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