Software as an Institution

The rules of the game, known to economists as institutions and to managers as corporate culture, usually entail inoperable ideas. That is, any country or business has some rules, but these rules coincide neither with optimal rules nor with leadership vision. Maybe with an exception of the top decile of performers or something like this.

This inoperability isn’t surprising since the rules have obscure formulations. Douglass North and his devotees did best at narrowing what “good institutions” are, but with North’s bird-eye view, you also need an ant-eye view on how changes happen.

An insider perspective had been there all the time, of course. Organizational psychology and operations management organized many informalities happening in firms. In general, we do know something about what managers should and shouldn’t do. Still, many findings aren’t robust as we’d like them to be. There’s also a communication problem between researchers and practitioners, meaning neither of the two cares what the other is doing.

These three problems—formulation, coverage, and communication of effective rules—have an unexpected solution in software. How comes? Software defines the rules.

Perhaps Excel doesn’t create such an impression, but social networks illustrate this case best. After the 90s, software engineers and designers became more involved in the social aspects of their products. Twitter made public communications shorter and arguably more efficient. In contrast to anonymous communities of the early 2000s, Facebook insisted on real identities and secure environment. Instagram and Pinterest focused users on sharing images. All major social networks introduced upvotes and shares for content ranking.

Governance in online communities can explain success of StackExchange and Quora in the Q&A space, where Google and Amazon failed. Like Wikipedia, these services combined successful incentive mechanisms with community-led monitoring. This monitoring helped dealing with low-quality content that would dominate if these services simply grew the user base, as previous contenders tried.

Wikipedia has 120,000 active editors, which is about twice as many employees as Google has (or alternatively, twelve Facebooks). And the users under the jurisdiction of major social networks:


So software defines the rules that several billion people follow daily. But unlike soft institutions, the rules engraved in code are very precise. Much more so than institutional ratings for countries or corporate culture leaflets for employees. Code-based rules also imply enforcement (“fill in all fields marked with ‘*'”). Less another big issue.

Software captures the data related to the impact of rules on performance. For example, Khan Academy extensively uses performance tracking to design the exercises that students are more likely to complete — something that schools with all the experienced teachers do mostly through compulsion.

Finally, communication between researchers and practitioners becomes less relevant because critical decisions get made at the R&D stage. Researchers don’t have to annoy managers in trenches because software already contains the best practices. Like at that employed algorithms to grant its employees access privileges based on the past performance.

These advantages make effective reproducible institutions available to communities and businesses. That is, no more obscure books, reports, and blog posts about best practices and good institutions. Just a product that does specific things, backed by robust research.

What would that be? SaaI: software as an institution?

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