e typical large business 20 years hence will have fewer than half the levels of management of its counterpart today, and no more than a third the managers. In its structure, and in its management problems and concerns, it will bear little resemblance to the typical manufacturing company, circa 1950, which our textbooks still consider the norm. Instead it is far more likely to resemble organizations that neither the practicing manager nor the management scholar pays much attention to today: the hospital, the university, the symphony orchestra. For like them, the typical business will be knowledge-based, an organization composed largely of specialists who direct and discipline their own performance through organized feedback from colleagues, customers, and headquarters. For this reason, it will be what I call an information-based organization.
The large business 20 years hence is more likely to resemble a hospital or a symphony than a typical manufacturing company.
Businesses, especially large ones, have little choice but to become information-based. Demographics, for one, demands the shift. The center of gravity in employment is moving fast from manual and clerical workers to knowledge workers who resist the command-and-control model that business took from the military 100 years ago. Economics also dictates change, especially the need for large businesses to innovate and to be entrepreneurs. But above all, information technology demands the shift.
Advanced data-processing technology isn’t necessary to create an information-based organization, of course. As we shall see, the British built just such an organization in India when “information technology” meant the quill pen, and barefoot runners were the “telecommunications” systems. But as advanced technology becomes more and more prevalent, we have to engage in analysis and diagnosis—that is, in “information”—even more intensively or risk being swamped by the data we generate.
So far most computer users still use the new technology only to do faster what they have always done before, crunch conventional numbers. But as soon as a company takes the first tentative steps from data to information, its decision processes, management structure, and even the way its work gets done begin to be transformed. In fact, this is already happening, quite fast, in a number of companies throughout the world.
We can readily see the first step in this transformation process when we consider the impact of computer technology on capital-investment decisions. We have known for a long time that there is no one right way to analyze a proposed capital investment. To understand it we need at least six analyses: the expected rate of return; the payout period and the investment’s expected productive life; the discounted present value of all returns through the productive lifetime of the investment; the risk in not making the investment or deferring it; the cost and risk in case of failure; and finally, the opportunity cost. Every accounting student is taught these concepts. But before the advent of data-processing capacity, the actual analyses would have taken man-years of clerical toil to complete. Now anyone with a spreadsheet should be able to do them in a few hours.
The availability of this information transforms the capital-investment analysis from opinion into diagnosis, that is, into the rational weighing of alternative assumptions. Then the information transforms the capital-investment decision from an opportunistic, financial decision governed by the numbers into a business decision based on the probability of alternative strategic assumptions. So the decision both presupposes a business strategy and challenges that strategy and its assumptions. What was once a budget exercise becomes an analysis of policy.
Information transforms a budget exercise into an analysis of policy.
The second area that is affected when a company focuses its data-processing capacity on producing information is its organization structure. Almost immediately, it becomes clear that both the number of management levels and the number of managers can be sharply cut. The reason is straightforward: it turns out that whole layers of management neither make decisions nor lead. Instead, their main, if not their only, function is to serve as “relays”—human boosters for the faint, unfocused signals that pass for communication in the traditional pre-information organization.
One of America’s largest defense contractors made this discovery when it asked what information its top corporate and operating managers needed to do their jobs. Where did it come from? What form was it in? How did it flow? The search for answers soon revealed that whole layers of management—perhaps as many as 6 out of a total of 14—existed only because these questions had not been asked before. The company had had data galore. But it had always used its copious data for control rather than for information.
Information is data endowe