Dion Hinchcliffe analyses the twenty-two power laws of the emerging social economy (Contagious ideas by PSST : spreading 2.0 social innovation. Edited by jérémy dumont, strategic planner in FRANCE)

There is a time for big picture thinking and there is a time for details in business and IT, the latter which make business and technical strategy a reality and the former which provides needed direction and focus.

Highlighting the big picture side last week we saw Steve Ballmer’s exploration of the efficiencies he believes are being driven by something he calls “the new normal”. In this view, he tries to frame up how a reset of economic expectations during the downturn has created an environment that is putting pressure on business to do more with less, affecting IT at least as much as the rest of the organization, if not more.

attempt to define the “Big Shifts” in business taking place in this century. Just recently McKinsey published a similar reported titled The 10 Trends You Have to Watch: And What They Mean For IT in the Harvard Business Journal (summary is by Gartner).

If we factor out the commonalities in these views, it highlights a core set of strategic trends in IT and business in 2009, namely:

New resource constraints. Today’s new economic baselines (the downturn, green business, etc) are requiring that we find ways to accomplish our goals using fewer resources. This includes identifying the means to capture opportunity and transform “in process” business activities using newer, more efficient models. Business leaders will need to effectively link IT and business much more so than in the past to accomplish the movement to this new baseline. This also doesn’t mean everything is constrained. As we’ll see on the technology side, abundance is being produced that may address shortcomings in the business side.
Value shifting from transactions to relationships. This is the growing realization that the traditional rote business transaction as the core source of organizational value is diminishing and value is now coming from relationship dynamics. This has many implications including using new management methods (example: from top down command-and-control to community curator and facilitator), tapping into new reservoirs of innovation, adopting new ways of interacting with customers, or driving better tacit interactions. Web 2.0 and social computing will be key enablers of this for business units and IT organizations that want increased relevance.
Industries in flux with new ones emerging. Previously stable industries such as finance and media are feeling the pinch the strongest, but most others are as well. The recession is creating a bigger gap between healthy and unhealthy businesses while many industries are being unbundled or transformed into new ones (traditional software companies moving to SaaS and cloud computing for example or the rise of crowdsourcing competing with outsourcing at the low end.) Again, today’s dynamic Web-driven global knowledge flows and agile online models for computing and collaboration — as well as economic and intellectual production — are now a significant change agent.
Moving from change as the exception to change as the norm. Today we’re seeing faster consumer behavior shifts, quicker pricing changes, more rapid product cycles, and faster media feedback loops. While this can also lead to more extreme market conditions, it also enables opportunities to be turned into bottom-line impact for organizations that can adapt to market realities quickly enough. The network is the culprit (and solution) for much of this again: We now have pervasive social media instantly transmitting and shaping cultural phenomenon and faster financial cause-and-effect in the markets, real-time online markets, and so on. In the 21st century, following a plan is increasingly less important than responding actively and effectively to change.
A shift of control to the edge of organizations. This has been predicted at least as far back as the Cluetrain Manifesto, if not farther. It’s not even really a shift, it’s more like the addition of a new dimension to how we operate organizationally, something I’ve referred to previously as “social business.” This new addition changes the dynamics of where useful information comes from, how decisions are made, and how more autonomy and self-organization will be needed (and tolerated) in modern organizations to meet more dynamic and changing global marketplace.

As I explored recently in “How the Web OS has begun to reshape IT and business”, today’s Internet has become a central driver of how we do things today. It’s the richest marketplace that we all have roughly equal access to (all our customers, all the data, the infrastructure, services, and all our competitors). In short, it’s fast becoming the essential fabric of modern business and economics. I noted in that piece as well:

“IT is going to either have to get more strategic to the business or get out of the way. Businesses too must grow a Web DNA.”

The post-industrial knowledge economy becomes more social

But what are the forces that drive success on the network, either Internet or intranet? It seems like traditional measures of success such as having a high market share, bestseller products, brand dominance, good physical business location, 1-on-1 customer relationships, and a host of other factors are becoming less important. The discussion over the last 5 years with major shifts such as Web 2.0 has instead been famously about things like network effects, The Long Tail, peer production, and even Metcalfe’s Law.

These are fundamentally different ways of thinking about our businesses as the social dimensions in the workplace expand and transform. Note that the social aspect of businesses has always been present in real-life interaction. But now it’s more and more online just as our economies also move away from both manufacturing and transactions to one where creating, managing, and leveraging intellectual capital is the dominant activity. This has sometimes been referred to as the knowledge economy and one of its key traits is an environment where abundance of the fundamental resource (information) is common and scarcity is rare.

Related: Many of these changes are reshaping enterprise architecture as well.

The move to a knowledge economy is already here as we head well into a post-industrial age, at least in developed countries. A detailed 2007 report prepared for the European Union found that 40% of jobs in Europe were already in the knowledge economy and found approximately the same for the U.S, with a 24% overall 10-year growth trend. These are seismic shifts in terms of where and how we focus our business strategy, spending, hiring, and management. Government support for a knowledge economy is essential as well, with policies easily able to penalize firms attempting to make the move to these new models. Like Web 2.0, the impact of this is not months or even years, but a decade or two. See Amara’s law, below.

In the list presented below, I’ve summarized some of the likely rules of a rapidly emerging new “social economy”. While many of the old business rules are still likely to be true (as the second crash shows, bubble economics need not apply), the fact that business is moving to a much more network-driven model has certain inevitable consequences. That these rules are partially responsible for the creation of modern Web giants such as Google, Amazon, Facebook, and now Twitter is almost certain. That we know how to apply them effectively to our traditional businesses is much less so.

Twenty-two power laws of social economics

First a quick explanation of power laws. The term “power law” has a much more specific meaning to those that follow such things. In general, a power law defines when the frequency of an event decreases faster than the increasing size of the event. The classical example is that an earthquake twice as large is four times as rare. Power laws are found throughout nature and human environments and are an active area of scientific research that have attracted widespread interest.

However, the list below is more informal and though a number of power laws are on the list, I’m using the term merely to imply that these principles and relationships drive directly to the heart of way network-based social systems function. There are two components at interplay here: the network and us. The way they interact and entangle is what is increasingly both interesting and important to the knowledge economy. This is especially true of a distinct and burgeoning part of it I’m called the “social economy” here for convenience. As I explored earlier this year, it’s a rapidly growing part of the overall knowledge economy, yet there many poorly understood implications to this. Ultimately, the social economy comprises all things we call enterprise social computing, social media (at least in terms of its application to business), and Enterprise 2.0.

Many of these have a great deal of research, data, and math behind them (Reed’s Law) while others are just statement of apparent social truths (The Tinkerbell Effect) that can inform our thinking. While the former makes structured thinkers, determinists, and architects more satisfied that the social part of the knowledge economy can be controlled and quantified, it also appears that the more intangible aspects of the way people work that often drives the real success of social systems. See last week’s discussion on community management as a prime example.

Here then, are some of the rules that seem to guide this new social economy, in alphabetical order.