Organizations as Technologies

When we hear the word “technology,” we generally think of inventions such as the steam engine, the transistor, the computer, artificial intelligence, and various improvements thereof. We don’t usually think of organizations themselves as technologies.

That’s a mistake. Organizations are technologies for coordinating human effort. Like every technology, organizations solve certain problems well, solve others poorly, and eventually get replaced when a better technology comes along.

The modern corporation did not simply evolve because people preferred bureaucracy. It evolved because, for more than a century, bureaucracy was the most effective technology available for organizing large numbers of people. Managers, departments, reporting chains, committees, and middle management were all engineered solutions, as was the firm itself.

Nearly 90 years ago, Nobel Prize-winning economist Ronald Coase asked, “why do firms exist at all?” His answer was that coordination is expensive.

Markets require buyers and sellers to find one another, negotiate contracts, enforce agreements, and share information. Firms exist because, beyond a certain point, it becomes cheaper to organize those activities under one roof than to conduct them continuously through the market.

Peter Drucker spent much of his career explaining how these organizations should be managed once they existed. Questions like span of control, reporting relationships, and decentralized decision-making became the central management problems of the 20th century.

But both Coase and Drucker were writing in a world where information moved at human speed, ascending and descending via a hierarchy of managers. That hierarchy was dictated by the rule that one manager could not handle more than half a dozen or so direct reports.

AI moves much faster than human speed, and doles out information not to the half-dozen people directed by a manager, but to anyone on a network.

Artificial intelligence summarizes meetings, routes information, prioritizes tasks, coordinates projects, finds expertise, explains anomalies, and answers routine questions.

In this way, AI is revealing that most of what managers did was not making decisions. It was moving information from one human being to another. Thus understood, the bureaucratic hierarchy was an obvious candidate for replacement by an automated system. AI is that replacement.

Not all managers will disappear. But their ranks will thin as the question, “how many people can one manager supervise?” becomes “how much coordination can AI absorb before another layer of management is needed?”

When the technology enabling an organizational form changes, the enabled organizations change as well.

The railroad turned local markets into regional, then national markets.

The telephone enabled geographically dispersed companies. The internet enabled communication at an unprecedented volume and speed, as we have argued previously, radically reducing those very market costs that Coase said inspired the firm.

Artificial intelligence will be the next great organizational technology—not because it thinks better than people, but because it helps people think together. It will upend hierarchies that did little more than facilitate communication—and slow communication at that.

The first evidence is already appearing.

Small, AI-enabled teams routinely produce software that once required much larger engineering organizations. Developers using AI coding assistants iterate faster. Customer service systems resolve issues automatically that once required several layers of escalation. Project management increasingly happens through continuously updated software rather than periodic meetings.

None of these developments look revolutionary in isolation. Together, they are overthrowing the essential organizational principle of the last 150 years.

It turns out that the managerial hierarchy was not the endpoint of economic evolution. It was simply the best organizational technology available—until something better came along.