For more than a decade, business observers have been predicting the coming of a new kind of economy. For more and more managers, who have been witnessing recent changes in their world, that new economy clearly has arrived.

General Motors, buffeted by the turbulence of global competition, changes nearly its entire senior management team. IBM, made vulnerable by rapid technology shifts and the arrival of smaller, more nimble start-ups, begins the painful process of taking itself apart. Sears, humbled by fragmenting markets and cost-conscious competitors, strives to rediscover in a changed business environment its original retailing success. Across the corporate landscape, in every industry and at every level, managers are struggling to adapt to unfamiliar circumstances and new strains of competition.

The remedies at hand make up a familiar menu of corporate change: total quality management, continuous improvement, downsizing, outsourcing, business process reengineering, focusing on core competences and capabilities. The same set of programs is proliferating at nearly every company.

And yet, managers may be forgiven if they feel that something is missing. The sum of all these programs is somehow less than the whole. Companies may embrace a “change process” but still not change the essence of the company. Managers may install new programs but still not understand the larger point of the exercise, the context into which programs must fit.

In effect, managers have been offered a variety of answers—but no one has asked the all-important question: What does it really mean to be a manager in the brave new world of business competition? Or put more simply, what’s so new about the new economy? To answer that question requires going to the heart of the matter—to decode the logic of the new economy, to define the new work of the manager, and to grasp how managing in the new economy requires not just change programs but a changed mind-set.

The books and other documents discussed here, some by America’s most prominent business thinkers and corporate executives, represent the most comprehensive attempt to date to spell out the managerial logic of the new economy. Their starting point is the fundamental proposition that a qualitative shift is taking place in the ways companies compete, managers manage, and business is conducted. At one level, that shift has familiar elements—for example, from mass production, mass marketing, and mass organizations to flexible production, niche marketing, and networked organizations. But even shorthand descriptors such as these don’t capture the power of the change and the enormous implications for managers.

The move to a new economy takes managers on a journey. It’s a voyage that begins with technology and leads inexorably to trust. If that pairing sounds paradoxical, it is because the new economy is founded on paradox.

The logic goes like this: the revolution in information and communications technologies makes knowledge the new competitive resource. But knowledge only flows through the technology; it actually resides in people—in knowledge workers and the organizations they inhabit. In the new economy, then, the manager’s job is to create an environment that allows knowledge workers to learn—from their own experience, from each other, and from customers, suppliers, and business partners.

The chief management tool that makes that learning happen is conversation. But the work of conversation introduces its own twist: it brings the character of the individual to the foreground of the work-place. If the job of the manager in the new economy is to eliminate fear, foster trust, and facilitate the working conversations that create new knowledge, then the authenticity, integrity, and identity of the individual turn out to be the most critical managerial assets.

Even as it sweeps away old assumptions about management and work, the new economy brings to center stage age-old human virtues and truths. The ultimate paradox of the new economy may be that it is not so new after all.

On Managing in the New Economy The Twilight of Sovereignty: How the Information Revolution Is Transforming Our World, Walter B. Wriston (New York: Charles Scribner’s Sons, 1992). Intelligent Enterprise, James Brian Quinn (New York: The Free Press, 1992). Post-Capitalist Society, Peter F. Drucker (New York: HarperCollins, 1993). Liberation Management: Necessary Disorganization for the Nanosecond Nineties, Tom Peters (New York: Alfred A. Knopf, 1992). The New Paradigm of Business: Emerging Strategies for Leadership and Organizational Change, edited by Michael Ray and Alan Rinzler (Los Angeles: Jeremy P. Tarcher/ Pedigree Books, 1993). The Virtual Corporation: Structuring and Revitalizing the Corporation for the 21st Century, William H. Davidow and Michael S. Malone (New York: HarperCollins, 1992). “To Our Share Owners,” a letter from John F. Welch, Jr., and Edward E. Hood, Jr. in The General Electric Company 1991 Annual Report (February 14, 1992). Twenty-First-Century Management: The Revolutionary Strategies That Have Made Computer Associates a Multibillion-Dollar Software Giant, Hesh Kestin (New York: The Atlantic Monthly Press, 1992).

Self-Cancelling Technology

For a glimpse of just how the new economy is different from the old, consider the following story told by former Citicorp chairman Walter Wriston in his recent book, The Twilight of Sovereignty. In the 1950s and 1960s, Wriston recounts, communications between the company’s Brazil operation and its New York headquarters were more an adventure than a job. There were so few international telephone lines that often it took several days just to get a circuit. And once a connection was made from Brazil to the United States, Citibank staffers would stay on the line reading newspapers or books, filibustering to keep the line open until someone actually needed it. The local situation in Brazil was so desperate that Citibank Brazil even created a new job category known as “dialers”—squads of Brazilian youth who did nothing but dial phones all day long.

Citibank Brazil hired squads of Brazilian youth who did nothing but dial phones all day.

Of course, all that has changed irrevocably. In a time frame roughly equivalent to the careers of a generation of managers like Wriston, information and telecommunications technologies have transformed not only how companies do business but also what kind of business they do. These technologies have created a new economy of information that collapses the traditional boundaries of space and time.

The global information economy lives on the telephone and the computer network, engaged in what Wriston terms an ongoing “global conversation.” According to Wriston, every hour, over 100 million telephone calls, using some 300 million access lines, are completed worldwide. And estimates suggest that the volume of phone transactions will triple by the year 2000. “The entire globe is now tied together in a single electronic market moving at the speed of light,” writes Wriston. “There is no place to hide.” Those who are most plugged into this global conversation stand to gain the most from it. Those outside the conversation—by virtue of political ideology, personal choice, poverty, or misfortune—risk total economic failure, a fact that is as true for countries as it is for companies.

But perhaps even more important than the obliteration of traditional boundaries of space and time by information technology is the way that the information economy redefines traditional assumptions about business and the economy. Information is the new raw material. And as that material is applied to products, companies, and entire businesses, everything changes.

Take the example of what is perhaps the archetypal “old-economy” product: steel. In the past decade, information has cascaded through the steel industry, transforming the product, the processes by which it is made, the economics of the industry, and ultimately what it means to be a steel company.

In the 1980s, the conventional wisdom had it that the U.S. steel industry was dying, the victim of the higher productivity and lower costs enjoyed by a new generation of integrated steelmakers in Japan and other parts of the Pacific Rim. The only alternatives seemed to be injecting government intervention in the form of protectionism and massive investment in more efficient, large-scale, integrated steelmaking facilities—or ceding comparative advantage in steel to Asian competitors.

And yet today, the world’s lowest cost, highest quality steel is produced in the United States. This outcome was the product of neither intervention nor investment but of innovation—the rise of a new generation of “minimill” steel companies like Nucor and Chaparral Steel. The minimill steelmakers applied information to steel. As Wriston aptly puts it, “A piece of steel, whether raw or as a part for a new automobile or skyscraper, is very different today from what it was a generation ago. It still contains a lot of iron mixed with other metals, but it contains a great deal more information.”

By developing qualitatively new kinds of production processes, the minimill companies reinvented the technology of steelmaking and redefined the economics of the industry. For example, the minimum profitable capacity of a minimill is only about 200,000 tons per year. Optimal capacity is only 1 million tons, as opposed to 7 million tons for a typical integrated steel mill.

Finally, the minimill steelmakers created a new kind of steel company. They changed the design of the organization, the location of the mills, the relationships with the work force and customers. And as these new steel companies have prospered, the industry has fundamentally changed.

What’s true for steel is true across the entire economy. Technology is blurring our traditional distinctions and ways of understanding the business world. Consider the conventional distinction between “manufacturing” and “services.” Not so long ago, observers predicted with confidence the arrival of a “post-industrial” service economy, where the central role played by manufacturing in the economy would steadily be replaced by new service industries and service jobs. Now we know that the real impact of the information economy is to explode the distinction between manufacturing and services altogether.

No one grasps this new reality more clearly than James Brian Quinn, professor at Dartmouth’s Tuck School. In Intelligent Enterprise, he argues that “leveraged intellect and its prime facilitator, service technology, are reshaping not only the service industries but also U.S. manufacturing, the country’s overall economic growth patterns, national and regional job structures, and the position of the United States in world politics and international competition.”

If that claim seems extreme, Quinn backs it up with a wealth of examples to make the case. Clothing manufacturers who create permanent press and wrinkle-resistant fabrics are building services directly into their manufactured product. Companies like Boeing, Xerox, Apple, and Motorola, who include customers in the design of a new product, are integrating services into R&D and product development. “Smart” products like self-diagnostic elevators, computers, or copying machines use the information-processing power of the microchip to detect the likelihood of failures before they occur—thus extending the reach of the company across the boundary of the sale into the servicing of the product. And in their pursuit of “total quality,” even the most traditional manufacturing companies are redefining their internal processes as services, complete with internal “customers.”

The end point of this process of technological transformation is a curious paradox. Think of it as the “self-cancelling technological advantage.” As technology transforms the logic of competition, technology disappears as a sustainable source of competitive advantage. As what has happened in steel happens everywhere, and more and more companies enter the information economy, the ability of any particular company to master the new technologies ceases to confer any particular competitive advantage. Instead, technology drives the logic of the new economy to the next step—to people, the knowledge workers, whose skills, abilities, and commitment will ultimately determine whether a company can be successful.

As a celebrator of business’s technological revolution, Wriston well appreciates this paradox. “Intellectual capital will go where it is wanted,” he writes, “and it will stay where it is well treated. It cannot be driven; it can only be attracted.” In the end, the location of the new economy is not in the technology, be it the microchip or or the global telecommunications network. It is in the human mind.

Workers as Knowledge

In 1946, Peter Drucker published Concept of the Corporation, the first study of the theory and practice of management at a major business corporation, General Motors. In Drucker’s most recent book, Post-Capitalist Society, he tells a story about the making of his earlier classic that is as evocative as Wriston’s depiction of Citibank Brazil. While he was researching his earlier work, Drucker informs the reader, the General Motors public relations department tried hard to conceal an embarrassing fact: “A good many of [the company’s] top executives had gone to college. The proper thing then was to start as a machinist and work one’s way up.”

General Motors tried hard to hide the fact that top managers had gone to college.

Post-Capitalist Society explores the economic and managerial implications of a world where not only senior executives but also workers at all levels are highly educated, highly skilled knowledge workers. In the new economy, Drucker argues, knowledge is not just another resource alongside the traditional factors of production—labor, land, and capital. It is “the only meaningful resource today.” And the primacy of knowledge requires managers to rethink the fundamental practices of management.

In an economy based on knowledge, says Drucker, the knowledge worker is the single greatest asset. That central proposition defines the chief source of competitive advantage in the new economy and the new work of the manager. “An organization is always in competition for its most essential resource,” Drucker writes, “qualified, knowledgeable, dedicated people.” And that fact, in turn, reverses the traditional relationship between the organization and employees.

According to Drucker, there is a fundamental tension between knowledge workers and the organizations in which they work. On the one hand, knowledge workers are independent. They, not the company, own the means of production—their knowledge—and they can take it out the door at any moment.

Thus it becomes the job of the organization to market itself to the knowledge worker. Managers, therefore, have to attract and motivate the best people; reward, recognize, and retain them; train, educate, and improve them—and, in the most remarkable reversal of all, serve and satisfy them.

Organizations also have to invest in the necessary information tools to support their knowledge workers and make them productive—investments that generally cost far more than those for the capital goods that support productivity in a traditional manufacturing economy. At the same time, that capital investment is worthless unless and until knowledge workers apply their knowledge. Managers cannot force knowledge workers to be productive. As Drucker puts it, “Knowledge employees cannot…be supervised.”

And yet, knowledge workers need organizations in order to do their work. In this respect, they are not like the autonomous independent professionals of the past. Organizations provide a structure and an order in which knowledge workers can apply their knowledge. In particular, they provide contact with other knowledge workers and the dialogue that knowledge workers need to refine and improve their ideas.

To manage this tension between knowledge workers and the organization, managers must first accept that in a knowledge economy, employees are responsible for their own productivity. Knowledge workers know more about their own work than anyone else. Their decisions constitute the company’s strategy and directly affect the company’s performance.

Managers also must create a partnership with knowledge workers in which the goal is to make them and the organization as productive as possible. In effect, managers must execute a comprehensive “reversal of field.” Instead of taking the work environment as a given and trying to fit workers into it, they must take the needs of knowledge workers as a given and continuously remake the environment to eliminate the distractions that prevent knowledge workers from being productive.

Managers’ work: change the environment to fit the needs of workers.

Using a variety of examples involving nurses, salespeople, and engineers, Drucker argues that when knowledge workers are allowed to do what they are trained to do and protected from traditional bureaucratic tasks—writing memos, completing paperwork, attending meetings—their productivity soars. And so does their satisfaction with and commitment to the organization.

“Knowledge workers and service workers should always be asked: Is this work necessary to your main task?” Drucker writes. “Does it contribute to your performance? Does it help you do your job? And if the answer is ‘no,’ the procedure or operation is a ‘chore’ rather than ‘work.’ It should either be dropped altogether or engineered into a job of its own.”

Management retains important work of its own: establishing ambitious goals for the organization; focusing the organization’s knowledge and concentrating it to address these goals; and, perhaps most important, seizing on opportunities for change because “it is the nature of knowledge that it changes fast and that today’s certainties become tomorrow’s absurdities.”

Most important, for the partnership to work, everyone must be a communicator. Communication transforms a collection of individuals into a strong, mutually supportive team. Communication builds the important ties that bind people together—inside the organization as well as outside. Information technology may make greater communication possible, cross-wiring departments, functions, customers, and suppliers. But ultimately, it requires people taking responsibility to convert technology into communication. Writes Drucker, “It is the responsibility also of all members to communicate their objectives, their priorities, and their intended contribution to their fellow workers—up, down, and sideways.”

Put another way, the most important work in the new economy is creating conversations.

Work as Conversation

Time was, if the boss caught you talking on the phone or hanging around the water cooler, he would have said, “Stop talking and get to work!” Today if you’re not on the phone or talking with colleagues and customers, chances are you’ll hear, “Start talking and get to work!” In the new economy, conversations are the most important form of work.

Conversations are the way knowledge workers discover what they know, share it with their colleagues, and in the process create new knowledge for the organization. The panoply of modern information and communications technologies—for example, computers, faxes, e-mail—can help knowledge workers in this process. But all depends on the quality of the conversations that such technologies support.

For an accurate picture of how work really gets done in any company, don’t look at the organization chart. Map the company’s conversation flows.

Through conversation, knowledge workers create the relationships that define the organization. Conversations—not rank, title, or the trappings of power—determine who is literally and figuratively “in the loop” and who is not.

This is as true outside the company as inside. Through conversations, knowledge workers also create relationships with customers. And in a world of expanding customer choice, it is such relationships and the affiliations they engender that are the true sources of new value. Conversations are the channel for learning what’s really important to customers, how they feel about the company’s products and services, and how they experience doing business with the company overall.

Finally, conversations inside and outside the company are the chief mechanism for making change and renewal an ongoing part of the company’s culture. One of the many paradoxes of the new economy is that conversation—traditionally regarded as a waste of time—is in fact the key resource for competing on time. Companies that practice the art of conversation are more apt to discern subtle changes in consumer taste before competitors recognize them; more likely to spread that new awareness rapidly through the organization; and by their fast response, be better positioned to shape the new environment to which slower competitors must then respond.

No recent book better captures the central role of conversation in the new economy than Tom Peters’s most recent magnum opus, Liberation Management. The book is a classic Tom Peters production. Nearly 800 pages long, it is filled to excess with excess, overstuffed with exuberant arm waving and breathless enthusiasm. But Peters always leavens his enthusiasm with a dash of surprise in his choice of examples and with his disarmingly self-critical commentary on his observations. And he masterfully brings to life the many ways that conversations provide the animating spirit for managers and companies leaping into the new economy.

Take, for example, Peters’s portrait of McKinsey & Company, perhaps the world’s most prominent management consulting company (and Peters’s former employer). At McKinsey, conversations rewire the company to leverage its knowledge base—so much so that the conversation is the organization.

At McKinsey & Company, the conversation is the organization.

The central business challenge at McKinsey is to create an organization that can easily take advantage of the knowledge that exists in the firm’s corps of consultants and bring that knowledge to bear to serve client needs. Peters introduces us to a key manager in this effort: Brook Manville, McKinsey’s “director of knowledge management.” His title might just as well be “director of conversations” or perhaps even “internal talk show host.” Manville’s innovation has been to create a series of electronic databases and networks that, when coupled with appropriate incentives to use the systems, make conversations happen at McKinsey.

For example, there is the Firm Practice Information System, which Manville describes as a “marketplace of readily accessible ideas”—specifically, reports on lessons learned by project leaders on particular consulting assignments. Then there is the Practice Development Network—or PDNet—a database of core documents contributed by each of the 31 practice centers.

A third system Peters describes is the Rapid Response Network, which supports McKinsey’s “organizational performance” practice center. The system provides a way for busy consultants in the same practice area to hold conversations. The On-Call Consultant, or OCC, makes the network work. The OCC is a senior consultant with experience and standing in the firm, who agrees to be available, like a doctor “on call,” several weeks per year to answer questions and have a conversation with any member of the practice who is looking for ideas or guidance.

The yield of all these “conversation systems” is the real way McKinsey works. The conversations these systems enable are an overlay on McKinsey’s formal organizational structure. Indeed, they transform the firm into a truly interactive knowledge organization.

If the rarified world of McKinsey & Company seems too distant from the concerns of the average manager, then consider another of Peters’s examples: the Home Depot, a $5 billion supplier of hardware for do-it-yourself home-improvement projects. Home Depot may stock hardware, but the company is really in the “software” business: selling knowledge and relationships. In this case, the conversational medium is the marketing message.

Home Depot may stock hardware, but it sells “software.”

To make the point, Peters takes the reader to a Home Depot store in Sunnyvale, California. It’s 7:14 in the morning, and the first conversation of the day is taking place. The head of the nursery department is teaching a class on the nutritional needs of plants to 26 Home Depot employees.

The purpose of this conversation and others like it, including classes carried over Home Depot’s proprietary satellite television network, is to prepare Home Depot employees for the next one: the conversation with the customer. Home Depot wants any customer walking through any store to expect and receive friendly, courteous, knowledgeable help from any employee. It might be a conversation in which the employee offers some useful information. Or it might simply be a pleasant exchange. The in-house classes equip Home Depot employees with both the information and the context they need to engage in these customer interactions.

At the same time, Home Depot goes out of its way to structure opportunities for conversation with customers. The classes for employees are replicated for customers in the form of free clinics conducted in Home Depot stores. The subject might be how to install ceramic tile or how to fix a leaky skylight. But more important than the subject is the message: Home Depot is a place where customers can have a helpful conversation with a nonthreatening expert who will answer questions, demystify tricks of the trade, and, perhaps most important, reduce the fear factor involved in tackling home improvement projects.

If the new work of the company is conversation, then what is the job of the manager? Put simply: to create an environment where employees can have productive conversations rather than counterproductive ones, useful conversations rather than useless ones. That may sound self-evident, but it takes managers in two unexpected directions.

The first is into the realm of personal experience. In a competitive environment founded on continuous change, where learning and new knowledge are the keys to success, managers must help employees literally “make sense” of their own experience, understand its true significance, and internalize its lessons.

It’s a challenge that some executives understand well. In an essay in The New Paradigm of Business, an anthology on the new economy, Levi Strauss CEO Robert D. Haas describes it this way: “The most visible differences between the corporation of the future and its present-day counterpart will be not the products they make or the equipment they use—but who will be working, how they will be working, why they will be working, and what work will mean to them.” Such an environment, Haas continues, requires managers who “do as much listening as talking.” For it is only through mutual dialogue—Haas calls it “a commitment to two-way communication”—that an organization can create the “common vision, sense of direction, and understanding of values, ethics, and standards,” without which “individual decision making is crippled.”

As Haas’s reference to “values” suggests, the second unexpected place that work as conversation takes managers is into the realm of the emotions. Knowledge and meaning are inseparable from emotions. Ideas are feelings. And nothing could be more personal than a good conversation. In order to create an environment where people can have such conversations, managers must set a tone whereby people are secure enough to say what’s really on their minds and aren’t afraid to expose their ignorance or ask for help.

Once again, the best source for seeing this kind of managerial conversation in action is Peters. One of the most interesting anecdotes in his book concerns Mike Walsh, the current turnaround CEO of Tenneco. In his previous job as CEO of the Union Pacific Railroad, Walsh faced the challenge of taking a highly bureaucratic and functional organization and turning it into a world-class operation. To that end, Walsh spent his first months on the job meeting with some 10,000 employees in 100 “town meetings.” In response to the discussions that took place in these meetings, Walsh issued a call to his management team to produce a “clean-sheet” approach for redesigning the company and creating a brand new railroad.

Then, four months into his job, Walsh learned of an event that could have undermined the kind of organization he hoped to create. Local managers at a Louisiana site had called employees together for a “safety meeting.” When the workers arrived, they were told to lie on the ground and were searched for drugs.

As soon as Walsh heard about the search, he flew to the job site in Louisiana, taking with him his heads of operations and engineering. He apologized publically for the search, then used the occasion to hold another town meeting. In the course of the meeting, some employees complained about a safety problem in the bunk cars where employees live. When local managers started to explain away the problem by detailing how much the company spends on bunk-car maintenance, Walsh interrupted. Why not just visit the cars? But it’s raining out, some of the men replied. “It’s OK,” Walsh told them, “managers won’t melt.” He visited the bunk cars, decided that they were indeed unsafe, and saw to it that they were fixed.

Seen from the perspective of the old economy, Walsh’s behavior might make for good labor-management relations—but it’s hardly central to the task of running a railroad. Seen from the perspective of the new economy, however, Walsh’s conversation with the Louisiana employees is real work. Indeed, it may be the most important—and the hardest—work of all: the work of creating the emotional context within which everyone else can function effectively. It is difficult because this kind of work takes managers away from familiar technical and rational skills—calculating ROI, doing spreadsheets, crunching numbers to calculate discounted cash flow, and the like—and into uncharted territory: the often murky landscape of feelings.

But that is where conversations go. They create and express the emotional environment of a company. Put another way, good conversations are about identity. They reveal who we are to others. And for that reason, they depend on bedrock human qualities: authenticity, character, integrity—the kind of qualities that Mike Walsh communicated by word and deed on his trip to Louisiana.

In the end, conversation comes down to trust. Tom Peters understands this well. He even devotes a chapter to “The Missing ‘X-Factor’: Trust.” And he dramatizes the issue by describing, of all places, a federal prison, where the warden has transformed the emotional environment by creating trust between inmates and correctional workers. There are regular “town hall” meetings with inmates. All proposed regulations go to the inmates first for their feedback. And the prison staff regularly conducts customer—that is, inmate—surveys. Peters even reprints the warden’s 28-point credo as a model for building trust.

At one prison, staff regularly conducts customer—that is, inmate—surveys.

And yet, it is also on the ineffable issue of trust that Peters’s book falls short. It is easy to say that trust is essential to good management in the new economy. What’s difficult—and what Peters doesn’t do—is to provide an honest and tough-minded evaluation of why fear continues to dominate so many organizations, why trust is so hard to achieve and so fragile to maintain. To his credit, Peters acknowledges his own shortcomings; he knows there is something about trust that even a book of 800 pages cannot capture. His prescription: “Read more novels and fewer business books: Relationships really are all there is.”

The Tough Work of Trust

All of these authors agree that in the new economy, trust is a business imperative. As the authors of The Virtual Corporation put it, “Ultimately, it comes to this: The chief executive of a virtual corporation must be able to trust employees in the firm to make responsible decisions. Those employees in turn must trust in the vision for the corporation as devised by the CEO.”

Trust between managers and workers opens up new avenues of contribution and responsibility on both sides. Trust between a company and its customers creates a bond that leads to better products, better service, and ongoing business relationships. Trust is essential in strategic partnerships and joint ventures; without it, nothing can get done. Inside and outside the company, trust creates the invisible ties that bind people and companies together and convert mere transactions into personal relationships.

But describing why trust is important is the easy part. What these books leave out is the hard part. Trust can be messy, painful, difficult to achieve, and easy to violate.

Trust is tough because it is always linked to vulnerability, conflict, and ambiguity. Vulnerability is a precondition of trust. Before any two people can form a personal bond, they must first open themselves up, let each other know “where they stand.” But that creates the possibility of disagreement and conflict. Indeed, healthy conflict is a sign of the existence of trust. It shows that two people care enough about what they are doing together to disagree. Finally, trust acknowledges the inevitability of ambiguity. No two people will see the same event in the same way or have the same feelings about it. Trust admits to that ambiguity and strives to negotiate it.

For managers steeped in rationalism, hierarchies, rule-based decision making, and authority based on titles, this triad of vulnerability, conflict, and ambiguity threatens a loss of control. Vulnerability is scary. Conflict seems destructive, a sign of betrayal and disloyalty, the kind of thing that can tear an organization apart. And ambiguity appears to undermine their authority and open them to challenges from subordinates and peers.

For all these reasons, managers have tried to hold the issue of trust at bay, preferring the safety of managing by the numbers. But if that strategy seemed to work in the past, managers can no longer afford its high costs. Traditional management may have kept vulnerability, conflict, and ambiguity at a minimum (at least for the manager), but there was precious little conversation and knowledge creation happening either. Managers have no choice but to work hard at building trust, even as they acknowledge how difficult it is.

The best sources for addressing these complications of trust come not from texts about the new economy but from documents that show managers actually struggling with it. Consider two examples: one from an old, established company in the process of reinventing itself, one from an entrepreneurial, high-tech company hailed as a model of the new paradigm of management.

As chairman and CEO of General Electric, Jack Welch is one of the nation’s highest profile managers. For more than a decade, he has strived to reinvent an old-style manufacturing company as a new-economy competitor. Along the way, Welch has earned a reputation as a tough-as-nails manager—“Neutron Jack,” who eliminated people while leaving the buildings standing. Thus when Welch dedicated his shareholders’ letter in GE’s 1991 Annual Report to the theme of building GE’s future on “mutual trust and respect,” he was met with considerable surprise and skepticism. One newspaper article even described Welch’s change of heart as a “conversion” to “corporate pacifism.”

The reporting missed the point. Welch’s letter wasn’t an example of a “hard” manager turning “soft.” Rather, it showed a good manager grappling with the challenges of managing in the new economy. In the letter, Welch described how GE was becoming a knowledge organization. “More and more,” he explained, “we’re cutting back on useless titles, and we’re rewarding people based on what they contribute—the quality of their ideas and their ability to implement them, rather than on what they control.” But building that kind of organization has clear implications for GE managers. “In an environment where we must have every good idea from every man and woman in the organization, we cannot afford management styles that suppress and intimidate.”

Welch’s letter in GE’s annual report shows him grappling with the issue of trust.

The hardest part, says Welch, is dealing with the people inside the organization who have always performed effectively, made their numbers, and delivered on their commitments, but who do not share the new values of trust that GE requires. “This is the individual who typically forces performance out of people rather than inspires it,” explains Welch, “the autocrat, the big shot, the tyrant. Too often, all of us have looked the other way—tolerated these…managers because ‘they always deliver’—at least in the short term.” But the company no longer has that luxury, Welch argues, and therefore faces a difficult choice. Either these old-economy managers must change and adopt the company’s new values, or else they will have to leave.

It is difficult enough for most executives to dismiss managers, even when they are not performing. How much harder then to part company with a manager who is performing according to the numbers but whose failing is attributable to a conflict over character and values. But the logic of such a choice is clear: getting ideas to flow means thawing out those parts of the company still frozen by fear. Trust and respect can do that but not if there are still managers around who wantonly violate the company’s articulated values. “Trust and respect take years to build and no time at all to destroy,” Welch writes.

Ultimately, every CEO has to choose which way his or her company will face: back to the economy of the past or forward to that of the future. Managers who choose the future must then be prepared to make the hard choices about people and values that will take them and their companies ahead. But even when managers choose the future, their problems are far from over. Choosing to manage on trust means choosing to inhabit a world where there are no blacks and whites, only various shades of gray. It means choosing to confront the consequences of ambiguity.

For a vivid portrait of this ambiguity, consider Twenty-First-Century Management by former Forbes correspondent Hesh Kestin. The book is an in-depth profile of Computer Associates, a $1.5 billion software company that, Kestin maintains, has largely been ignored because of its revolutionary management practices. As Kestin describes it, the company’s operating philosophy is a kind of primer for management in the new economy: “Since all assets but one are commodities, and thus equally available to competitors, concentrate on the one asset that is unique: good people.” And because “technical skill, education, and experience may be liabilities in a world of rapid change,” then “the single most valuable characteristic of good people is trustworthiness.”

Equipped with these simple precepts, Computer Associates’s managers hire people on instinct. As one manager puts it in response to a question from Kestin, “How [do] I hire? It’s off the wall how I hire. It’s gut.” Once hired, employees are given as much responsibility and opportunity as they can handle. Meanwhile, the company’s founder and CEO Charles Wang reorganizes the company constantly, bans meetings and memos, pays big salaries to big performers and buys everybody doughnuts for breakfast. Wang describes the corporate culture he’s trying to build this way: “You’ve got to have a relaxed kind of driven. Driven but relaxed.”

But Kestin’s portrait unwittingly reflects the ambiguity of running a company in this fashion. In one brief story, he reveals how double-edged a sword trust can be. A Computer Associates manager was charged with opening a new company office in Israel. The manager hired a woman to be controller, negotiated a compensation package with her, and shook hands on the deal.

The next day, the woman came back with a complaint: she had compared notes with another new hire and discovered that his compensation package included a car. Now she wanted one too. When he heard this, the manager told her that not only wasn’t she getting a car, she wasn’t getting the job either. “I said, ‘I’m sorry, but you’ve shown me CA doesn’t want you,’ and I hired someone else. A deal is a deal.” To which Kestin adds, “It may be harsh, but it must be honest.”

Maybe, but maybe not. In fact, to a neutral observer, the story seems more about ambiguity than honesty. Seen from the manager’s perspective, the new hire was reneging on a deal. There had been a handshake; a person’s word must be her bond. Seen from the woman’s perspective, however, the company had just taken unfair advantage. She wanted equal treatment. And if the company prides itself on trust and openness, what’s wrong with an employee asking tough questions without having to be afraid of being fired?

The example, designed by Kestin to illustrate how scrupulously honest Computer Associates is, may also be an example of how precipitously unscrupulous the company can be. And it shows how ambiguous managing on trust can be as well. Companies that hire on “instinct” may well be the most ethical of employers. But it is just as likely that hiring on instinct can lead to implicit and systematic biases against certain types of people. Little wonder that most managers retreat to the safer ground of bureaucratic rules and regulations that at least provide the protective cover of objectivity—no matter how spurious that objectivity might be.

But the ultimate ambiguity that comes with managing on trust is the ambiguity of outcomes. In the old economy, management by fear was leavened by the mitigating factor of security. For all its promise of freedom and empathy, management by trust does nothing to guarantee economic security. The new economy may indeed be a “carnival” (Peters’s favorite metaphor). But at least in a real carnival, we can assume that if we get on the roller coaster, we’ll return safely to the place where we started. In the new economy, nothing could be further from the truth. Granted, the ride is exhilarating, fast, and sometimes scary. But there is also no promise that the car won’t leave the tracks or lose some passengers along the way.

For many people, this hard fact diminishes the value of making the effort to manage through trust. Why should a manager demonstrate vulnerability, navigate conflict, and negotiate ambiguity if the outcome may only be employee layoffs, management downsizing, or corporate failure? Since these books never really take on the hard part of managing in the new economy, this question is never explicitly asked—let alone answered.

But perhaps there is an implicit answer offered in one form or another in every one of these texts. It is another paradox: the value of insecurity or, put another way, the security of risk. The sense of personal engagement that comes with managing and working on trust has transcendent value, whatever the economic outcome. It is an experience that, to borrow from Peters’s title, is quite simply “liberating.” In the new economy, individuals at all levels of the company and in all kinds of companies are challenged to develop new knowledge and to create new value, to take responsibility for their ideas and to pursue them as far as they can go.

People who manage in the new economy and companies that compete in it live in the creative tension of creative destruction. What’s more, they tap into the emotional energy that comes from wrestling with their own destiny. In the end, that’s a job description that most people would welcome.