Preface to Japanese Translation of Virtual Organization

November 1, 2005 (Original article date)

Virtual organization presents two different faces to the world. One face reveals an ability to enhance the efficiency and effectiveness of management, and to achieve greater flexibility of action. The other shows the dissolution of traditional relationships in the course of realizing these desirable ends. In a word, virtual organization is a disturbing agent of social change and thus provokes ambivalent responses. It is most clearly evident as an innovation in business management, especially within multinational firms and in e-commerce. But virtual organization has implications for society as a whole and is thus treated in this book in its broad social context.

It is neither possible to understand nor to exploit this innovation effectively without delving into its social roots and implications. The virtual team, for example, can be an effective instrument for leveraging resources within a company in carrying out a project; but it relies on mediated communication, rather than face-to-face interaction, making it more difficult to develop mutual trust among team members. Establishing trust in this new kind of social environment poses challenges of a social and psychological nature that require managers to look beyond normal business practices.

The management principle that underlies virtual organization is dependent upon loose coupling between social units. To achieve improvements in efficiency, effectiveness and flexibility, it is essential to keep cooperating parties at arms length from each other. If, for example, a supplier is bound to a company by strong social ties, it is not possible to switch to a new supplier without serious disruption to the company. It is evident that virtual organization requires computer-communications infrastructure for its realization. Equally indispensable are information markets, standardized organizational interfaces, and risk-management tools needed to support loose coupling between social units.

These innovations challenge traditional patterns of social interaction. Information markets are extensions of labor markets. Just as the latter supplies labor as a commodity, the former serves up knowledge, skill and information in the form of computer-based products and services. One major stimulus to the growth of information markets is software re-use. Although still immature, software component markets are destined to become a major factor in software development. The aim of software re-use is to improve the software development process by lowering costs, increasing efficiency and enhancing reliability. These ends are to be achieved by reducing dependence on human programmers. Such reduced dependence is central to the purpose of information markets in general which aim to substitute computer-based for human-based knowledge in production.

Standardized social interfaces are needed to transform outsourcing into routine management practice. Changes in business relationships entail costs and often cause problems. Switching from contractor S to contractor T for some service, for example, involves at the very least altering database entries in accounting systems, and may also require legal work to produce new contracts. What is more, even small incompatibilities between T’s service and the one provided by S, or misunderstandings between the new contractor and the contracting organization may cause serious problems. These issues are clearly recognized in the literature on outsourcing.

Protocols that standardize interfaces between organizations and individuals will help to resolve these issues in a way that is familiar from the history of standardization in manufacturing. Instead of screw threads, social protocols apply to connections between social units, but the function is the same in both cases, namely, to make parts – whether physical or social – fit together with little or no adjustment.

In addition to information markets and standardized interfaces, virtual organization requires instruments for managing risk. The evolving management paradigm facilitates switching between contractors and partners on a global basis, and switching may intensify the exposure of businesses to political, currency and trading risks. Financial tools such as futures and options contracts have been used for several centuries. These tools have been extended and refined in recent decades to enable the use of sophisticated hedging strategies suited to the risks of conducting business in a fluid international arena. Moreover, global computer-communications infrastructure makes it feasible to offer round the clock electronic trading instead of being confined to the limited hours of the New York, London, Tokyo or other traditional stock exchanges. Being able to buy and sell anywhere at any time further reduces business risks in the often turbulent international environment.

As noted above, the socio-technical innovations needed to realize virtual organization pose a challenge to traditional patterns of social interaction. Implementation of the management paradigm underlying virtual organization favors a particular personality type, one capable of forming and dissolving social ties at will, guided by criteria of self-interest largely devoid of emotional content. Trust and loyalty need to be re-defined for such personality types. However this may be, it is clear that virtual organization weakens attachments of loyalty to persons and places. More generally, it signals the loss of community and attenuates the power conferred by group membership. If the advantages of virtual organization are to be secured without unduly weakening affective ties and group solidarity, some – as yet undetermined – adjustments in its application will be required.

Virtual organization is attractive because it extends personal freedom by allowing organizations and individuals to define and re-define themselves easily. At the same time it poses tough challenges because it tends to minimize affective ties in human relationships and thereby may diminish the cohesiveness of traditional groups and communities. However it unfolds as a socio-technical innovation in the future, virtual organization will be incorporated into the standard operating procedures of management simply because it confers competitive advantage.