Digital Transformation – Part I: It’s All About Networks

In his recently published book, The Seventh Sense: Power, Fortune, and Survival in the Age of Networks, Joshua Cooper Ramo relates the story of one the most closely guarded secrets during the early years of the Cold War: If the Soviet Union had engaged in a nuclear first strike, it was highly likely the United States would have been unable to respond.

That’s because the American field officers and their commanders in Washington would have had no way to communicate with each other. Consistent with the technology at the time, the American radio and telephone systems were highly centralized, which made them also highly vulnerable.

One of the key structural problems of centralized systems is that each regional center has the potential to become a single point of failure that can disrupt the entire system, as often happens when air traffic across a nation is snarled because of unexpected weather at a major hub. Fortunately, this national security vulnerability was corrected with an innovative solution: the distributed network.

Recognizing the urgency of this challenge, Paul Baran, who at the time was with the joint venture between the U.S. Air Force and the Douglas Aircraft Company known as RAND, devised a way of building messaging systems without any central hubs. Each message would be able to find its own path from point A to point B. Thus, if any part of the system was disrupted, the remaining pathways in the network could resiliently adapt to route all the traffic in the system with minimal disruption. This structural shift from centralized systems to distributed networks, which solved a critical military problem in the 1950’s, would turn out to be a harbinger of a dramatic phenomenon that would shape the early twenty-first century: digital transformation.

Digital Transformation

There is no topic that is both more important and more confusing to business leaders than digital transformation. With the deluge of articles and keynote speeches on how the digital revolution is accelerating radical change, you would think that there would be more clarity about this pervasive phenomenon. Instead there is general sense of confusion reminiscent of the Buffalo Springfield lyric: “There’s something’s happening here; what it is ain’t exactly clear.”

What we do know is that none of us could live without what are now necessary gadgets that just a mere decade ago were figments of our imaginations. We also know that these marvels are changing our lives more profoundly than any of the progression of the twentieth-century gadgets spotlighted in Disney World’s Carousal of Progress. What isn’t clear, however, is the extent to which the technology revolution has not only transformed our gadgets but also the fundamental fabric for how the world works. And until business leaders understand the full extent of the profound changes spawned by the technology revolution, digital transformation will remain an elusive enigma.

More Than a Technology Revolution

The first thing we need to understand is that digital transformation is not just a technology revolution; it is far more importantly, the most significant socioeconomic revolution in human history. We are in the middle of an unprecedented inflection point in the development of civilization—the transition from the first human epoch where centralized hierarchies that leveraged individual intelligence were the basis of social organization to the second human epoch whose social structures will be highly sophisticated distributed networks capable of rapidly leveraging human and artificial collective intelligence. This fundamental architectural shift from hierarchies to networks is the essential evolutionary dynamic of digital transformation and is changing the world rapidly and profoundly, and there is nothing that can stop this change.


In the next decade, we will experience two of the most consequential events in human history: the connection of all humans and things via a common digital network and the proliferation of human collective intelligence via artificial intelligence systems. This transition represents a seismic qualitative shift in the human experience because humanity itself will be transformed. The key building blocks for solidifying this shift are already in place; they just need to be configured. 

An Architectural Shift

The next thing we need to understand is how networks work. That’s because, as Paul Mason presciently observes in his book Postcapitalism, “the ‘intelligent machine’was not the computer but the network.” In other words, it’s not the gadgets that are intelligent, but rather the underlying networks of people and data that connect to the gadgets. What makes the gadgets so powerful is that for the first time we have the wherewithal to rapidly aggregate and leverage the global collective intelligence of human and data networks. And now that we have this capacity, an inevitable evolutionary shift has been set in motion, and when it is complete the fundamental architecture and the basic rules for how all our socioeconomic institutions work will be radically transformed.

When we think of architecture, what comes to mind are beautiful buildings or elaborate edifices. We rarely think of architecture as something that explains how societies or economies work. And yet without social architecture, much of what we experience as everyday life would not be possible.

A fundamental social architecture must answer two questions: 1) How does power work? and 2) How do things get done? In hierarchies, power belongs to those in charge and things get done through the application of centralized control mechanisms. Thus, hierarchical structures leverage the individual intelligence of the elite to organize the work of large numbers of unconnected people.   In networks, however, power belongs to the connected and things get done through the application of collective intelligence dynamics that enable the self-organization of work among large numbers of people. Thus, the prime distinction between hierarchies and networks is that hierarchies are designed to leverage the “power of one,” while networks naturally enable the “power of many.”

Networks Outperform Hierarchies

Hierarchies and networks are not equal alternative structures in a hyper-connected world. Networks tend to outperform hierarchies by a wide margin in terms of both intelligence and speed, as we learned in the summer of 2011 when Firas Khatib, a biochemist at the University of Washington, turned to Foldit to solve a stubborn molecular puzzle that had stumped the world’s best scientists for over a decade.

Foldit is a collaborative online video game developed by the University of Washington that enlists players worldwide to solve difficult molecular problems. What’s most interesting about Foldit is that many of the more than 250,000 players have little or no background in biochemistry. There are no special requirements for joining the Foldit community—all comers are welcome. 

The stubborn puzzle involved figuring out the detailed molecular structure of a protein-cutting enzyme from an AIDS-like virus found in monkeys. Cracking this puzzle could be the breakthrough needed to arrest the medical malady. When Khatib presented the molecular challenge to the Foldit community, what had evaded the world’s best individual scientists for ten years was amazingly solved by the collective intelligence of a diverse group of online gamers within only ten days.

The Network Effect

Although, it may seem counterintuitive, networks are far more effective and efficient than hierarchies because, by leveraging the distributed intelligence of the many rather than the smarts of the elite few, networks accelerate the path to knowledge. This acceleration is a byproduct a what is known as the network effect, which is achieved when networks reach a sufficient level of critical mass to give rise to the sequential evolution of three laws:

·     The law of connections: the simple act of connection changes the fundamental dynamics for how power works by shifting the locus of power from elites to peers.

·     The law of self-organization: When the power shift is complete, peers begin to self-organize their efforts in autonomous and often unexpected ways.

·     The law of collective intelligence: When a network achieves an effective level of self-organization, it develops the capacity to rapidly aggregate and leverage its collective intelligence, often producing extraordinarily intelligent results at incredibly fast speeds.

As the fundamental architecture for how the world works rapidly shifts from hierarchies to networks, our public and private sector leaders are severely challenged because, as Ramo, notes, “We’re at an extremely primitive point in our understanding of networks.” Rapidly increasing our understanding of how networks work and how to lead them is the most important leadership challenge of our day.

Leaders can no longer afford to build centralized organizations where supervisors with the legitimate authority to kill good ideas or keep bad ideas alive become legions of single points of failure. If leaders want to build resilient organizations that have the wherewithal to rapidly adapt to disruptive change, the first task of digital transformation is to learn how to build and lead highly effective distributed networks.


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