Saturday, March 05, 2011

Reading :: Knowledge Capitalism

Knowledge Capitalism
By Alan Burton-Jones

As new economy books go, this one is a bit long in the tooth. Burton-Jones, who heads an Australia-based consultancy, published it in 1999. That's centuries in Internet time - and yet Burton-Jones does a great job of explaining some of the characteristics of the post-industrial society, identifying some of its trends, and discussing how the firm outsources non-core functions to different markets: flexhire, mediated services, dependent contractors, and independent contractors. Since I have been studying the latter lately, this discussion was especially helpful to me: I see multiple points of contact with coworking. I also appreciated the care in which Burton-Jones documented his evidence for the discussion.

Let's start with the key notion of "knowledge capital." The author starts by distinguishing between goods and services - although he concedes that the distinction is becoming harder to draw. But "as manufacturers outsource non-core functions to specialist service organizations, employment in services increases and employment in manufacturing declines" (p.4). The difference between goods and services has become harder to draw, though, because although the traditional definition of "service" is something that is consumed as it is produced, not all services fit that definition, "particularly those that can be electronically time-shifted" (p.4). So "as both goods and services become more knowledge and information intensive, the distinction between them is becoming both less apparent and in many cases less relevant. Knowledge is becoming the defining characteristic of economic activities" (p.4, my emphasis). So "the central tenet of this book is that knowledge is transforming the nature of production and thus work, jobs, the firm, the market, and every aspect of economic activity" (pp.4-5). He urges us to understand knowledge better (p.5), drawing distinctions such as knowledge-about vs. know-how, explicit vs. tacit, and stickiness vs. absorptive capacity (p.7).

To drive the point home, the author provides statistics: "In 1900, less than 18 per cent of the total workforce in the USA were engaged in data- and information-handling tasks. By 1980 it had risen to over 50 percent. ... On present trends, over 80 percent of the workforce are likely to be involved in information-handling tasks by 2020, of whom a higher proportion than at present are likely to be engaged in knowledge-building and decision-making activities" (pp.8-9; but see Brown and Hekseth for a more skeptical view of such predictions). The author provides a table illustrating give stages of IT from the 1960-2000, with focus changing from centralized file handling to local and global networking (p.9). Along with that focus change has been a change in the economy, and the author identifies three economic trends: symbolic goods, demassification, and boundaryless empire (pp.12-16). And he identifies a significant trend away from job orientation and toward career orientation - that is, industry-wide standardization (e.g., a standard word processing package used by secretaries across all companies) has led to less firm-specific knowledge, leading to more circulation among jobs. "In effect, careers owned by individuals will progressively replace jobs owned by firms. By the same token, firms are becoming less dependent on the idiosyncratic knowledge of particular workers, when the same/similar knowledge can be obtained more cost effectively, either through automation or on the open market" (p.20). (Some readers may be reminded of Castells' notion of generic labor here; Burton-Jones does cite Castells' work, but doesn't specifically draw on Castells' work on generic labor.)

So, the author argues, we're entering an economy based on knowledge (p.20). He identifies four regional variants (p.20), but believes that they will converge (p.22).

In the second chapter, the author explores the question of how the firm will develop in the knowledge economy. During the Industrial Revolution, firms internalized functions to aid efficiency and effectiveness, and transactions within the firm increased (p.25). During the 1970s, digital technologies reversed this trend, and firms began decentralizing operations, saving costs and reducing administrative complexity" (p.25). Through the 1980s, organizations became "leaner and flatter," and "as a result, the commercial firm of the late 1990s is less inhibited by geographic, industry, or technical boundaries, employs fewer people on a full-time permanent basis, and often has fewer tangible assets" (p.25). So: in the knowledge economy, how do transactions changes? Which transactions stay in the firm vs. the market? (p.26).
Knowledge-based theory predicts that economic activities containing high levels of explicit non-firm-specific knowledge ... will move into the market (externalization). Conversely, those with high levels of tacit and specialized knowledge will remain in the firm (internalization). Firm-specific knowledge embodied in routine functions can be expected to reduce, due to automation. Routine firm functions requiring little firm-specific knowledge, such as office cleaning, equipment maintenance, and security, are already commonly outsourced. (p.32)
Again, we can see parallels with Castells here, but Burton-Jones sharpens the distinction a bit. He also notes that firms are moving away from proprietary systems and networks to standard ones (think Google Apps for Your Domain). "These factors tend to imply an overall shift toward proportionately greater market-based coordination" (p.33).

One consequence is that we're now seeing a reconvergence of ownership and control: "Sole proprietorships, small partnerships, and private companies involved in service activities and low-scale production generally have both their ownership and their decision making concentrated in a few key individuals," so "ownership and control are typically united" - in stark contrast with larger firms (p.40).

In the knowledge-based firm, Burton-Jones expects the following:
  • The firm's principal functions will be "knowledge coordination, protection, and integration"
  • "Transactions involving high levels of specialized and tacit knowledge will be internalized"
  • "Transactions involving high levels of explicit knowledge will be externalized"
  • "Ownership and control will converge"
  • "The links between education, work, and learning will converge" (p.43)
Due to these trends, Burton-Jones argues that "by the year 2000 at least 30 per cent of the American workforce are likely to be working under ... non-standard [non-full-time, non-permanent, non-employee status] arrangements" (p.46). He shows the trend with a table of non-regular employment across countries, 1973-1993 (p.48). And he argues that the nature of employment contracts is changing from relational to transactional contracting:
  • output-based performance
  • results, not time
  • location-independent (p.52)
"For the core knowledge workers in the firm, the focus will increasingly be on team or firm performance," he concludes (p.52). Most employees will be incentivized to maximize personal productivity for personal gain, not corporate goals; relations between employees and firm will be more arm's-length (p.52). He develops a Knowledge Supply Model[TM] - yes, he trademarked it - in which the Firm (a core group surrounded by an associate group surrounded by an affiliate group) is surrounded by the flexhire market, the mediated services market, the dependent contractors market, and the independent contractors market (p.58). These four markets perform different functions. For instance, independent contractors
provide support for functions requiring high levels of tacit and/or explicit knowledge, but low levels of firm-specific knowledge. Such support typically involves technical, professional, and specialty services. The value of the knowledge provided by this group, in terms of its potential impact on firms' operations, is high. The frequency of demand by the firm for such knowledge is typically lower than for that supplied by dependent contractors.

Members of this group include self-employed individuals (both incorporated and non-incorporated), micro firms, and small businesses. They are usually not dependent on any particular firm for their major source of income. Members of this group frequently form independent business networks comprising a mixture of individuals and firms. (pp.60-61).
Burton-Jones expects all types of contracting "to grow at the expense of all forms of direct employment" (p.64). In the subsequent chapters, Burton-Jones explores each of the markets. Although he has interesting things to say about all of them, let's focus on Ch.7, which discusses the independent contractors market.

The independent contractors market includes independent contractors, micro firms, and business networks (p.131). "The independent contractor is one whose income is ordinarily derived from multiple sources and is not normally dependent upon the maintenance of a relationship with one or a few specific clients" (p.132). They are involved in "contracts with firms that are 'arm's-length,' explicit, transaction oriented, and measured by outputs or results, rather than inputs" (p.132). Increasingly, they handle work involving a high order of knowledge and skills, but unrelated to day-to-day operations of the firm. "Small businesses are likely to be better qualified to provide such skills than the general market and to compete effectively with larger outsourced specialists, particularly when the independents' lower overhead structures provide a cost advantage" (p.133). Stunningly, "over three-quarters of those in self-employment in the West have no direct employees" (p.133). And this brings us to business networks, in which individuals and small businesses network with each other, forming non-contractual, nonhierarchical relationships (pp.137-138). Such networks involve "trust, informality, redundancy, commitment, and interdependency" (p.138). They involve "horizontal, cooperative relationships" in which "knowledge exchange is frequently ad hoc, informal, and designed to assist with problem solving" (p.141). Indeed,
future knowledge entrepreneurs are likely to grow their businesses through cooperating with other resource owners rather than by seeking to employ them. ... For those in the fast-growing knowledge-intensive industries such as IT and in the professions generally, self-employment is already more prevalent business growth already occurs through loose groupings of associates or partnerships, rather than vertically organized business structures (p.143)
Is there a better description of what I've been seeing at coworking sites?

In Chapter 8, Burton-Jones reminds us that the firm itself is being redefined as well. Non-core functions are externalized, but the core is internalized, refined, and concentrated. This process is redefining the firm: it "is becoming physically smaller, but intellectually larger, as it reorganizes its use of externalized and internalized resources" (p.151). Or if you prefer: all edge. That means: less physical infrastructure; greater use of workers' personal resources; workers as suppliers rather than employers; more financial agility (p.152). Such characteristics imply a limit to the firm's growth (p.154). The firm is becoming a knowledge producer (p.155), an integrator of knowledge (p.156). He predicts a structural convergence between business networks and firms (p.190).

In the last chapter, he emphasizes the "learning imperative": "work and learning are becoming increasingly interrelated and interdependent" (p.199). "Education," he says, must become a global business rather than a public service (p.204).

He also warns:
A fundamental characteristic of the knowledge economy is the way that it will empower and simultaneously isolate the individual. The implications of this 'splendid isolation' need to be taken into account in explaining and promoting ways to handle changing economic conditions. Learning, rather than being educated, for example, will be foreign to many people. Others will find the prospect of an independent workstyle a daunting prospect. For those unaccustomed to operating without supervision, the message has to be one of encouragement and support, both to take control of their own careers and to suggest independent sources of counselling and assistance. For others it will be a case of encouraging and publicly rewarding knowledge entrepreneurship. (p.232)
Again, is there a better description of the support aspect of coworking?

Overall, this book was helpful in at least three aspects. First, Burton-Jones provides a broad, well-grounded discussion of structural changes in work brought on by the increased importance of knowledge work. Second, he provides a well developed taxonomy of externalized markets for talent, and his discussion of independent contractors in particular is helpful, providing remarkable insights into the independent contracting and coworking characteristics I've been studying. Third, his 1999-era sources give me ideas for finding and handling similar but more contemporary sources. Overall, an excellent and insightful read.

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