The Rise of the Knowledge Capitalist

Bill Zoellick
11 December 2001

The business environment for knowledge intensive companies has changed. The changes started with the decline in dot.com fortunes. They accelerated greatly after the September 11 attacks on the Word Trade Center. The general perception is that we have returned to fundamentals in some way, that we are back in touch with core values and reality.

Whatever the truth of this with regard to cultural and spiritual affairs, this is almost certainly not the case with regard to business development. Here the situation is less one of turning back than of moving forward to a new phase, with new difficulties.

A recent set of articles by Peter Drucker and a four year old book by Arie de Geus shed some light on the situation. The short statement of the problem is that for software companies, financial services firms, pharmaceutical companies, and any other organization that depends heavily on use and production of knowledge, the relationship between employer and employee has changed. The dot-com boom served to mask those changes for awhile -- but that is over.

In this brief article Bill Zoellick identifies the problem and suggests that a close look at de Geus' thinking is a good way to get started toward a solution.

The story on the street is that dot.com is dead, dead, dead. Heck, you can't even sell books about how you used to be dot.com and then got wise when you went dot.bust. The whole thing is so yesterday. As trend watcher John Schwartz reports in the "Sunday Styles" section of The New York Times, September 11 was the final blow to an era that was already fading fast. [1]

Greed is now bad once again; public service is good again. The pundits say that now people are looking for fellowship and human bonds. Firemen are in, VCs are out. College graduates are no longer looking for stock options and a Ferrari, but are looking for fulfillment and meaning.

It is almost as if we are returning to a pre-internet time when companies and markets will once again work like they used to work. Maybe the 50s are coming back around. General Motors is showing signs of life again, we have a Republican in the White House ...

Whoa. Not so fast.

It was around forty years ago that Peter Drucker coined the term "knowledge worker." The fact that he had to invent a new term indicates just how radical the notion was, back then, that the means of production could depend on knowledge rather than on capital or labor. Now, at age 92, Drucker is still thinking more freshly about the impact of knowledge work than most analysts. The Economist, in its issue for November 3, 2001, published a special section on "The Next Society" containing Drucker's recent thinking on knowledge, demographics, manufacturing, and the future of the corporation. It is worth finding a copy on the Web if you missed it. [2]

Drucker is at his best in this series of articles when he is talking about the shift from manufacturing to knowledge work. In 1960, when Drucker came up with his new term, manufacturing was the heart of the U.S. economy, accounting for about 30% of the gross domestic product (GDP) and a similar share of the workforce. By the end of the century both numbers had been cut in half -- manufacturing's contribution to GDP is now smaller than that of the financial sector. And the shrinking is not over. When all is said and done, manufacturing is expected to account for just 10 to 12% of the workforce in developed countries. [3].

In short, this is not your father's economy. Getting that old Rocket 88 to turn over and purr again just isn't going to happen. What is different, as Drucker says so well, is that knowledge workers are the new capitalists -- they are the people who own the means of production.

It is a commonplace among people who manage software companies, financial services companies, and other companies where knowledge is both the input and the product, that the company's assets walk in the door in the morning and out again at night. What is less well understood is that this fact -- that the company does not own its own means of production -- leads to fundamental changes in the structure of the company, the nature of management, and in the way that companies reward and retain valuable employees.

One key fact about knowledge is that it loses its value quickly unless it is kept up to date. Surgeons stop doing surgery when they no longer keep up to date on new techniques. A programmer who stops learning about new tools for three or four years is in serious trouble.

Another fact is that knowledge workers identify more with their profession than with the company that they work for. The surgeon thinks of herself as a surgeon, not as a member of a particular hospital's staff. An attorney is first an attorney, and second a member of a firm. An HR specialist thinks in terms of his career in HR, not in terms of identity with one of the usually numerous companies that he may work for during that career. The same is true for network security experts, Windows experts, database gurus, and so on.

These two facts are related. Part of the reason that people are loyal to their professions is that the value of their knowledge depends on staying in touch with others who share the same knowledge. To be out of touch is to be out of date and to lose value.

What this means is that companies are no longer in the position that Ford was when it owned the rubber plantations, the steel mills, the trucks that shipped the finished automobiles, and everything in between. Back in those days, Ford absolutely owned the means of production and just employed the workers. Today, it is the workers who own the means of production, and the company is faced with the problem of assembling and holding together a collection of workers in order to create and support its product.

The interesting question is, of course, "How does a company do that?" And -- here is the important thing that I think really HAS changed with the fall in dot-com fortunes -- up until now the answer has often been that the company tells employees that it will make them rich while, at the same time, giving them the chance to keep advancing their skills. This is certainly the formula that Microsoft used so successfully during its ten years of rapid growth. Almost notoriously, this became the formula for attracting talent to dot-coms in the late 1990s. And it clearly will not work now.

So, post dot-com and post September 11, how does a company go about attracting and keeping talent?

My bet is that the answer has more to do with Drucker's analysis of what motivates knowledge workers than it does with any suddenly rediscovered focus on fellowship, firemen, and a return to older values. In short, we are still moving forward into uncharted territory. What glue will you use to hold your knowledge company together in the next ten years?.

One potentially useful approach to answering this question comes from Arie de Geus in his book The Living Company. [4] De Geus looks at companies as entities with a life, sentience, and intelligence of their own. The relationship of the company to its employees is much like the relationship that you have to all the microorganisms and systems that are inside you and that enable you to live. You are dependent on each other, but also have distinct lives, awareness, intelligence, and goals. Thinking of companies this way gives de Deus a rich, complex model for exploring the connections between companies and the people that keep them alive.

De Geus uncovers a number of ideas -- metaphors, really -- that are useful in addressing the management issues that arise as the ownership of means of production shifts from the company to the workers. One set of ideas has to do with "membership." De Geus asserts that even in a large, very heterogeneous company like Royal Dutch Shell (where de Geus spent his career), the members of the company immediately recognize other members, and recognize intruders, as a consequence. The analogy is to the human immune system. Not all members are necessarily employees, and not all employees are members -- it is membership that counts.

Another important idea that de Geus explores is "flocking" -- the idea that the organization learns most quickly when the members flock, working and exchanging information as groups and across groups. Note that this mechanism for benefiting the company is consistent with increasing the benefit to individual knowledge workers, who need to learn from each other.

A third idea that de Geus explores is that of "tolerant" systems. In biological terms, a diseased immune system that attempts to attack and reject every foreign cell is an intolerant system. De Geus describes companies where tolerance -- and organizational learning through tolerance -- is built in.

De Geus' The Living Company is recommended reading for anyone trying to come to terms with the facts that Drucker explores so ably in his articles for The Economist. Many companies no longer own the means required to produce their product -- it is the knowledge workers that do. If you run a business that depends on knowledge work, this shift in control affects you directly. If you have not had to deal with the effects yet, you will. What we are seeing in the wake of the dot.com crash and September 11 is the need to face this change more completely. Drucker and de Geus are good guides in getting started on that process.

Notes

1. John Schwarz, "Dot-Com is Dot-Gone and the Dream With It," The New York Times, November 25, 2001 Section 9, page 1.

2. "The Next Society" is available for free on The Economist website (www.economist.com) if you are a subscriber to the print edition (but, then, you probably don't need the Web edition, do you?) For non-subscribers, an electronic version is available for $2.95

3. These numbers are also from the Drucker article, which further explains that, over the same period, from 1960 to the end of the century, actual physical manufacturing output has more than doubled -- a feat that cannot be explained in terms of physical capital or in terms of labor input. It is a function of knowledge. It is expected to double again in the next twenty years as manufacturing employment continues to shrink.

4. Arie de Geus. The Living Company. Harvard Business School Press, Boston, 1997.