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The Virtues of Virtual

Ubiquity, Volume 2003 Issue May, May 1 - May 31, 2003 | BY Ubiquity staff 


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Abbe Mowshowitz talks about virtual organization as way of managing activities and describes the rise of virtual feudalism.

Abbe Mowshowitz talks about virtual organization as a way of managing activities and describes the rise of virtual feudalism.

Abbe Mowshowitz is a Professor of Computer Science at the City College of New York, a member of the doctoral faculty of the CUNY Graduate Center, and the author of several books, including his most recent, "Virtual Organization: Toward a Theory of Societal Transformation Stimulated by Information Technology."

UBIQUITY: You coined the term "virtual organization," back in the late 1970s. How did that idea come to you?

MOWSHOWITZ: I noticed how large multi-national firms operate by shifting their facilities from place to place, generally taking advantage of favorable economic conditions in different parts of the world, like cheaper labor in one country versus another. It struck me as an interesting analog of the functioning of a computer's virtual memory system where you can achieve leverage by distinguishing between logical memory and physical memory. I can't say definitely that I was the first person to introduce the term but as far as I know I was.

UBIQUITY: Clearly, your social views developed out of your computer science background.

MOWSHOWITZ: Yes. I introduced a course on the social impact of computing back in the early 1970s in the computer science department at the University of British Columbia. A book came out of that, "The Conquest of Will," which is one of the earliest comprehensive studies of social issues in computing. But I wanted to do more than just describe the computer's role in society. So I began to think about building a theory offering greater precision and predictability in the relationship between technology and social institutions. I believe the notion of virtual organization offers the basis for such a theory. It provides a sharp lens through which to view the social relations of information technology.

UBIQUITY: Your concept of the virtual organization is much broader and different than the typical view, which thinks of it as an organization without walls.

MOWSHOWITZ: Yes, it is very different. The typical view defines virtual organization by extension, identifying features like absence of physical boundaries or heavy reliance on computer-communications. I view virtual organization as a basic principle of management. The features of virtual organization observed by others can be seen as consequences of the use of the management principle. This principle calls for making a logical distinction between the requirements of a task and the ways in which those requirements can be met. I call these ways "satisfiers". As with virtual memory, this method of structuring a task makes it possible to leverage limited resources, reduce operating costs, and to achieve greater flexibility. These advantages derive from the ease with which the assignment of a satisfier to a requirement can be altered, thus allowing for the exploitation of competitive advantages such as lower cost goods and services in the marketplace.

UBIQUITY: What's new about this concept?

MOWSHOWITZ: What is new is structuring tasks so as to permit managers to exploit competitive advantages in a systematic way. Managers have always seized on opportunities to lower costs by changing suppliers, for example. But this was typically done in an ad hoc fashion. With virtual organization opportunities for making substitutions are pursued systematically. You manage so that personal relationships between you and your counterparts in other companies do not interfere with making free choices in the marketplace. In other words, you select the best and/or cheapest product or service that meets the needs of the task at hand, not necessarily the one sold by your buddy.

UBIQUITY: What are other advantages of virtual organization?

MOWSHOWITZ: The biggest advantage of this way of organizing is the flexibility you can achieve, because you're systematically looking for opportunities to change (or 'switch') the satisfier that you have assigned to a requirement. That's why you need to make a logical split. If you don't make a logical split, you won't be looking systematically at opportunities for finding better ways of meeting your requirements. If you set things up so that you're systematically trying to exploit the opportunities of switching, then you can achieve lower costs and greater flexibility in response to changes in the marketplace.

UBIQUITY: Explain your use of the term "switching."

MOWSHOWITZ: Switching is the key feature of virtual organization. It is the assignment of a new satisfier to a given requirement. Theoretically switching is warranted whenever an advantage can be gained by changing the assignment of a satisfier to a requirement. Advantage can mean lower cost, better quality, improved reliability of supply, etc. Switching calls for soft rather than hard wired connections between the parties to a transaction, and can be used effectively in a wide range of business activities from assembling products to structuring an entire enterprise. It is perhaps easier to see how production or assembly tasks can be modeled in terms of switching, but the architecture of a business can be modeled in the same way. Take the case of a network of cooperating firms located in different places, an arrangement that is often equated with virtual organization. Such networks may be established to enhance the business opportunities of the individual members. The network arrangement helps member firms to join forces to form a consortium to bid on projects. A certain type of design or manufacturing project may be undertaken by consortium X at one time and by consortium Y at another time. Switching in this context means assigning a new subset of member firms to a project type.

UBIQUITY: What are the costs of switching?

MOWSHOWITZ: Switching is certainly not free. Assigning a new satisfier to a requirement may occasion changes in accounting systems and databases, necessitate the drawing up of contracts, etc. These are direct costs of switching. There are also indirect costs that arise from management of a virtually organized task. These indirect costs include the management resources dedicated to analyzing requirements and scanning the marketplace for satisfiers. The analogy with virtual machines may help to explain the costs. In a timesharing system, paging may exhaust the cycle time of the machine if there are too many users demanding machine resources at the same time. The analog of that in a virtually organized business task lies in excessive switching. Under such conditions the cost might nullify the potential gains that could for example be achieved by switching repeatedly to lower cost satisfiers. Like everything else, there's no absolute good of which you can never have too much. You have to operate within certain boundaries to use switching effectively. Beyond these quantitative costs are human ones. Switching can be effective only if satisfiers can be substituted with ease. This calls for weak human bonds between the parties to a business transaction.

UBIQUITY: When you use the term virtual organization, are you suggesting a necessary connection with the Internet?

MOWSHOWITZ: Not at all. However, the Internet is extremely important because it provides new opportunities, especially through electronic commerce, to realize this type of management.

UBIQUITY: Are there different degrees or levels of virtuality in business environments? In other words, does it vary by context or type of firm, such as General Motors vs. Wal-Mart?

MOWSHOWITZ: Yes, I would say so. Virtuality is not an all-or-nothing-proposition. The essential defining characteristic is the virtually organized task. Some tasks within an organization can be appropriately organized in a virtual way and others perhaps not. It's not a question of an organization being virtual or not being virtual but rather the extent to which management makes use of switching as a tool. The term "virtual organization" is somewhat misleading.

UBIQUITY: Why do you say that? What makes the terminology misleading?

MOWSHOWITZ: It's misleading because the use of the adjective "virtual" to modify "organization" suggests some particular form of organization. I've come to regret my own choice of terminology. We are speaking not of a form of organization but of a way of managing activity. Unfortunately the term is likely to persist, so one must learn to live with it.

UBIQUITY: Is there any necessary implication about a distribution of authority or responsibility?

MOWSHOWITZ: No. That's one reason for my insistence that the term does not imply a particular form of organization. You can have virtually organized tasks or use switching in a setting characterized by centralized control. You can also organize tasks virtually in a situation of distributed control. As a principle of management rather than a form of organization, virtuality is consistent with a variety of control structures. It may turn out that distributed control is better suited to some -- but certainly not all -- kinds of virtually organized tasks.

UBIQUITY: How do you get people to understand the idea that virtual organization is a principle of management rather than a form of organization?

MOWSHOWITZ: I think it is useful to link the concept of switching in virtual organization to "division of labor", a well-known management principle that was elaborated in the factory system. The principle of division of labor doesn't necessarily imply a particular organizational structure, except perhaps in military command and control. Division of labor has been around for a long time so everyone understands it as a way of organizing activities. Switching in virtual organization is relatively new so it will be a while before people appreciate its business and economic significance.

UBIQUITY: How is it conceptually different from division of labor?

MOWSHOWITZ: It's not so much different as complementary. Switching is a new tool in the arsenal of management, to be used together with division of labor to achieve certain economic or business goals.

UBIQUITY: Explain how you use the term "virtual feudalism."

MOWSHOWITZ: I use virtual feudalism to describe a possible emerging future. Virtual feudalism may be the outcome of the globalization of markets. Feudalism is a political-economic system in which power and authority are exercised by private individuals in their own name, rather than in the name of some higher sovereignty. Classical feudalism in Europe and Japan was based on the ownership of land. Virtual feudalism would be based on the control of globally distributed resources, and power would be exercised by organizations (or fictional persons) rather than individuals. Switching in virtual organization furthers globalization and weakens the power of nation states by making it difficult for governments to maintain control over business organizations. In particular, switching can put resources out of reach of the taxman.

UBIQUITY: What are some examples?

MOWSHOWITZ: One example is a company moving its corporate headquarters offshore in order to reduce its tax obligation. Another example is closing down a manufacturing plant in one country and building a new one in another country to take advantage of cheaper labor. The outsourcing of software development and other services by American firms to India and Russia is yet another example. As the global market becomes integrated in a seamless way, the opportunities for making these kinds of switches increase all the time.

UBIQUITY: What's the evolutionary path of this trend?

MOWSHOWITZ: The evolutionary path is defined by governments' reduced ability to collect tax revenue. Part of this reduced ability is unwillingness to interfere with business, the "goose that lays the golden egg". Switching affords opportunities to bypass the taxman. I'm not talking about illegal escapes. Ordinary companies can take advantage of existing tax laws and use switching to lower their tax obligations. This is not altogether new. What is new in this story is the systematic opportunity for beating the taxman offered by virtual organization. It is not hard to imagine that governments will find it increasingly difficult to fund their programs.

UBIQUITY: What do you believe will happen if this trend continues?

MOWSHOWITZ: Being short of money, central governments will continue to shift responsibility for social programs to local government, without regard to the availability of funds. The US government will reduce grants to the states, without at the same time reducing the states' responsibilities for health and welfare. The states in turn will have revenue shortages, and shift the responsibilities to the counties, cities and local communities. The local communities will be stuck with the burdens but they won't have the funds or the taxing authority to handle the problems. This shift is just one implication of the growing shortage of government revenues accompanying fundamental changes in the political economy. Resources are being placed out of reach and government is playing a shell game. In the near term, probably nobody will pick up the slack. That means reduced funding for education, for health insurance or for programs like Medicaid and Medicare. More people in the United States will fall outside the scope of these programs and there will be a higher proportion of people without educational opportunities, without medical insurance, and without pension plans. As in earlier periods of history, people will turn to private enterprise to ensure their welfare and security, and the authority of government will diminish.

UBIQUITY: Is this forecast limited to the United States?

MOWSHOWITZ: The same thing is already happening in other countries. The financial burdens of social democratic programs in Europe have become so great that European governments simply can't afford them anymore, and thus are trying to reduce public expenditures. The major cause of these cutbacks is an inability, or unwillingness, of governments to get the money they need.

UBIQUITY: Why are governments, as you say, unable or unwilling?

MOWSHOWITZ: The conventional wisdom in political circles is that you should encourage the growth of industry through monetary and fiscal policy. Everyone assumes that things will work now as they have in the past. That is, if you provide the infrastructure and subsidies, if you craft policies that encourage growth, then revenue streams to government will increase and government can meet its obligations. But it doesn't work that way any more.

UBIQUITY: Is tax avoidance at the heart of the problem?

MOWSHOWITZ: You could say that, although tax avoidance suggests something illegal. Whether it's within the law, or outside the law, or on the edge of the law, the situation has changed. There are more opportunities now for businesses to sidestep the tax collection system or to minimize their tax obligation. A long-standing, notorious example of this is transfer pricing, where a company that has subsidiaries in different countries minimizes its tax obligation by means of differential pricing between subsidiaries.

UBIQUITY: How does transfer pricing work?

MOWSHOWITZ: Say, for example, that a subsidiary operates in a high tax country and it purchases components from another subsidiary in the same company. The price of those components can be raised artificially so that expenses in the high tax country are increased, reducing the tax burden in that place. Although this kind of differential pricing may be illegal, it is perfectly legitimate to distribute activities so that the costliest production is done in relatively high tax-rate countries. Through accounting practices there are many ways to minimize tax obligations or to enhance performance figures on a global basis. Enron is an extreme case. The company created a house of cards through the use of complex organizational constructions designed to conceal corporate liabilities and thus create illusory profits. But there are many ways to exploit the provisions of tax and corporation law. As the global marketplace becomes ever more seamless, the opportunities for this kind of action increase. Even though a government may try to plug up one loophole, many more will inevitably evolve.

UBIQUITY: What do you focus on in your consulting practice? What kinds of clients do you have?

MOWSHOWITZ: Government clients, mostly. I've prepared background reports for the defunct Congressional Office of Technology Assessment, and I've done a fair amount of consulting in Europe. While teaching in the Netherlands I consulted for the European Commission on a major network development project that led to the creation of a European agency, the European Monitoring Center for Drugs and Drug Addiction. The network was designed to support the sharing of information between health and justice authorities in the different member states. I've also consulted on automation of the maritime industry for the Port of Rotterdam.

UBIQUITY: There are strong themes among your varied ideas. Are there strong themes in terms of your consulting? Do you have marching orders that you tend to give clients?

MOWSHOWITZ: I don't style myself as a management guru so I don't act that way. But there are underlying themes. One of them is the importance of virtual organization. The work I did at the European Commission was a practical implementation of the concept. I'm talking about information in the form of documents and expertise that was spread across the whole European Union. My advice was to build a distributed network that would allow for the sharing of information across the member states. It didn't quite work out that way but I suppose there is consistency in the kind of advice that I give.

UBIQUITY: Has your consulting, for example in the Netherlands, changed the way you think about anything?

MOWSHOWITZ: Working in the Netherlands, and in Europe in general, has reinforced my view of what I see as the evolution of contemporary political economy toward something resembling classical feudalism. I probably never would have conceived that idea had I not spent time outside the United States. For me, it is very important to get outside one's own culture to be able see things more clearly.

UBIQUITY: Contrast if you could the way your work is seen in the United States with how it's looked at in Europe?

MOWSHOWITZ: First of all, European academics and intellectuals tend to be more theoretically inclined. The concept of virtual organization, as I define it, is probably better received in Europe than it is here. This appears ironic at first glance because American-based firms are pioneering the application of virtual organization. On the other hand, it is understandable that those who are preoccupied with doing something don't have the time or the inclination to theorize about it. In addition to being spurred by the catch-up game, interest in the theory is stimulated by European politics. The European Union itself can be seen as an example of virtual organization. It is not a political system in the conventional sense. There is a natural context for Europeans to appreciate the idea because it can be used to advantage in that setting. Whereas, with our federal system in the US, that's certainly not the case. The underlying changes that I believe will alter the nature of the game in the United States are simply not appreciated yet. It hasn't reached the point where public officials ask if it is sensible to pursue the classical policies of fiscal and monetary stimulus without regard to the consequences under conditions of increasing globalization. In other words, some companies may take advantage of the fiscal and monetary stimuli and not contribute to increased tax revenue or more jobs within the United States. So the jobs and revenues may go elsewhere.

UBIQUITY: What do you think is most controversial about your ideas? How do you shock people?

MOWSHOWITZ: One shocking thing is that in the business world one of the consequences of the use of switching is the complete undermining of loyalty to persons, places and organizations. This is one thing that people find very disturbing. People are quite interested and enthusiastic until you pinpoint the human downside. A shocking analogy that I like to use is this: In a way, virtual organization can be seen as the social realization of cut-and-paste operations in word processing. You're aiming for the ability to highlight a function in a company and just click on it and make it disappear. Then you click on an outside third party, a provider, and paste it in place. The idea is to set things up so this kind of organizational cut-and-paste operation can be done routinely, i.e., replacing an in-house operation by an outside party or substituting one outside party for another.

UBIQUITY: It does sound rather cold. How does one achieve cut-and-paste flexibility?

MOWSHOWITZ: A concrete example of cut-and-paste ability is outsourcing. If you're going to outsource labor, you have to bring in people and get them up to speed quickly. The same thing would be true of replacing an in-company service with an outside, third-party vendor. You have to be able to bring it in and get it up and running right away. One of the implications is that you need to develop social protocols, or handles, if you will, that are plug-and-play compatible, so that you can move these social units in and out with great ease and minimal cost.

UBIQUITY: Are there not two different kinds of outsourcing? There's the outsourcing of one step in a manufacturing process, and then there's consulting, which could be considered a kind of outsourcing.

MOWSHOWITZ: Consulting becomes outsourcing if the company has certain expertise in-house and decides that it's too expensive. It then gets rid of the function and hires third parties to handle it. One of the fastest-growing and most important areas in outsourcing is information technology, where network management and other services are outsourced to third-party vendors.

UBIQUITY: Does this cut-and-paste function have clear boundaries at any level? Certainly a basketball coach or the president of a university can be cut-and-pasted.

MOWSHOWITZ: In principle, the only limitations are cost and capability at a given moment. That's why I say there is a need for standards in the organizational domain to facilitate a cut-and-paste operation. Any activity or any group of people who share a common objective within a business organization can be candidates for outsourcing if you can minimize the cost and disruption. This is a desired feature, from the standpoint of management. It extends the concept of standardization in the technical domain to standardization in the social domain.

UBIQUITY: Explain what you mean by standardization in the social domain.

MOWSHOWITZ: One example of standardization in the social domain is a college degree. A person with a degree in electrical engineering can be hired by a firm and expected to plug into a working environment in relatively short order. The level to which this is achieved increases the ability to perform cut-and-paste activities. The firm wants to minimize the amount of time that it takes a newly minted electrical engineer to plug into the work environment within the firm. The same can be said for whole business units such as data processing, which can be achieved in principle more cheaply by an outside vendor. It is analogous to a type of ergonomics specifically focused on developing interfaces between organizational units, whether they're the persons who bear certain skills or organizational units that function within a larger environment.

UBIQUITY: How you would summarize the confusion of people that you've talked to. What is the most misunderstood thing about your thinking?

MOWSHOWITZ: I have trouble conveying the idea that virtual organization is not a form of organization but rather a principle of management. It is a way of organizing or managing activities. An organization is not either virtual or non-virtual, but rather, if management is making use of this principle, it is organizing some tasks in a virtual way. Like other management principles, virtual organization entails a new way of thinking and will thus have far reaching implications for business and society at large. Exploration of the business potential of virtual organization is in its infancy. Outsourcing, a practice that has already assumed substantial proportions, is a notable precursor. Those who are using methods like outsourcing are paving the way to virtual organization. But such pioneers are usually too absorbed in the problems of day-to-day management to see or care about the theoretical significance or the broader implications of what they are doing. Whether or not people understand virtual organization as a fundamental management principle, it is clear that the deeply shared belief in the beneficence of progress will drive acceptance of this principle simply because it confers competitive advantage, and the widespread use of switching will change the way we work and live.

Ubiquity, Volume 4, Issue 11, May 6 - 12, 2003

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