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In the last few decades, we have witnessed a steady doubling in the price performance of digital technologies. However, we are reaching a tipping point of this exponential growth, and it is unclear how the cumulative effects of technology will reshape our economy, political systems, and collective future. One thing is clear: in the hands of existing institutions—firms, schools, non-profits, civic institutions and governments—this awesome technology will achieve only a fraction of its potential.
Unfortunately, we haven’t seen the same exponential rate of change in institutions as we have in technology (Unlike computer chips, government and business structures don’t predictably get faster and less expensive). Managerial fiefdoms, rigid hierarchies and tightly scripted procedures remain from the industrial revolution era like vestigial structures; they were important at some point, but it’s unclear what purpose they serve now. In fact, mounting evidence suggests they’re becoming more dysfunctional—witness the significant erosion in return on assets for U.S. public companies since 1965—a trend documented in Deloitte’s Shift Index.
As technological innovation continues to outpace institutional innovation, the greatest determinant of our future may be whether we can close the widening gap. We celebrate individuals who rise to the occasion and innovate to solve problems, but to unlock human potential en masse may require innovating our institutions.
We should go back to the roots and reassess the rationale for institutions. In the 20th century, the rationale was scalable efficiency. But what role do they serve in a world driven by exponentially improving technology infrastructures? Perhaps now it’s time to shift to scalable learning. The answer matters—it can shape choices regarding the architecture of relationships both within and across institutions necessary to support that rationale. The institutional forms we evolve will likely differ significantly from the ones surrounding us today.
The rewards of institutional innovation can be enormous—we may for the first time be able to move from a world of diminishing returns to one of increasing returns. The wealth created from institutional innovation may ultimately trump any rewards from technological innovation. Doubt it? What single innovation generated the most economic value over the past 500 years? It was the development of the limited liability corporation. Of course what the next version of such a landscape-altering institutional form doesn’t yet exist. We have to collectively want it, and create it.
New technologies allow us to leverage our individual capabilities so that even small moves, smartly made, have the power to set very big things in motion. To get to the next level of our techonomic potential, we must create institutions worthy of the technologies changing our world.
John Hagel III, director in Deloitte Consulting LLP, is the co-chairman of the Deloitte Center for the Edge, based in Silicon Valley. John Seely Brown is the independent co-chairman of the Deloitte Center for the Edge.