The network effect is generally seen positively. It refers to the idea that as a network gets bigger it becomes more valuable.
The value of owning the first fax machine is effectively zero because there is no one to send a fax to. But add a second fax machine and there are two faxes that can now be sent (A to B and B to A). Add a third and it goes up to six, add a fourth and it increases to 12. By the time you add a fifth fax machine there are 20 different faxing possibilities. Buying a fax machine when there is already a large network of fax machines is far more valuable than buying the first. The value of the network grows as it gets bigger.
But there is a flip side to the network effect. As networks grow in size and complexity, maintaining communication and coordinating activity becomes harder. If we were to frame this in terms of business, by the time you reach the status of ‘medium sized business’ and hire your 20th member of staff, you have created the potential for 380 different one on one interactions within your organisation. This means that for every message that is sent there are 379 opportunities for another message to conflict with yours.
Complexity grows exponentially as your business grows and as complexity increases communication suffers. That’s why we end up spending so much time in email and (often pointless) meetings. Research by organisations such as McKinseys and Harvard Business School indicate that in larger organisations, less than 45% of the average employee’s time is spent doing the work that matters to customers.
The rule of three and 10
Hiroshi Mikitani, the CEO of Japanese online retail giant Rakuten, came up with a rule that elegantly captures the challenge of growth. The rule of three and 10 simply stated is ‘Every time a company triples in size – Everything breaks’.
The processes and systems that work well for a sole operator won’t suit a team of three. What works for a team of three will be ultimately unsuitable for a team of 10, and if that team of 10 grows to 30 everything will break again.
Although the organisation only got three times bigger, at each point it becomes 10 times more complex and difficult to manage. This means that as the organisation grows, each member of staff spends more time managing (or being managed) and less time doing the work that matters.
The digital advantage
Thankfully, just as the industrial revolution created new ways to scale production, the digital revolution is creating solutions to address these information challenges.
The digital revolution is a broad shift away from people using predominantly analogue technologies such as pens, paper, typewriters and Australia Post to using Information Technologies such as apps, tablets, keyboards and email.
These Information Technologies, or I.T., have three distinct advantages over analogue technologies in terms of speed (information can be shared faster), cost (common processes can be automated), and accuracy (information is less likely to be misunderstood).
Put another way, digital is the antidote to things that are either slow, expensive or potentially wrong. All of which are considerable barriers to future growth.
If you represent a Not-for-Profit or values-driven business dealing with the challenges of growth, you might be interested in applying for the 2020 Digital Champions Club scholarships. The Digital Champions Club is where I help SMEs find and implement digital solutions to growth problems. If you don’t represent one of these types of organisations you might be interested in checking out the program anyway.