Thursday, January 31, 2008

Wanted: examples of publicly traded companies with accounting solutions that support internal collaborative projects

It's an age-old problem for large publicly traded companies, regardless of industry.

Two groups want a new toolbox (for example)

They can each build their own to a local specification, or they can agree to build one toolbox:

Option I. Build a toolbox to local specification

Group A: $10
Group B: $10
Group A + B: $20


Option II: Build a toolbox to group specification

Group A: $14 (40% over budget)
Group B: $2 (80% cost reduction)
Group A + B: $16 (20% savings)

Options I works.

Option II saves the company 20%, but the manager of Group A is now unemployed and the manager of Group B is now a VP.

Back in Economics 101 we learned how markets solve this particular problem [1], but most publicly traded companies don't have internal markets [2].

I'm interested in examples of publicly traded companies, in any industry, that have made a go at mitigating this problem. If there are no minimally successful examples that's also important to know.

I'd be most grateful for examples of companies to look at, for comments or feedback, or for references to academic papers. Comments to this post or email to me are equally welcome!

(Brad, any thoughts?)


[1] See also: comparative advantage -- aka "I can do it better than you, but I have better things to do.").

[2] Apparently Czechoslovakia was relatively good at this sort of thing before the fall of the Soviet Union.

Update 2/4/08:

I now have run variations of the question: "Do you know of examples of publicly traded companies with accounting solutions that support internal collaborative projects by reducing the "cooperation penalty" problem?" by persons with knowledge of a reasonably large spectrum of public and privately held American corporations.

The answer, so far, is there is no answer. Here's my current summary:
  1. Go head and reinvent the wheel, synergy isn't worth it unless the rewards are very large.
  2. If there's enough money at stake do EBIT credits or some kind of internal accounting either formally or informally. This is rarely done however.
  3. If there's a deep corporate strategic interest assign the synergy task to a very senior exec who can bang heads together.
  4. In rare cases reorganize so the shared resource is under one cost center.
  5. Outsource the service to an outside group who might be able to turn the need into a product or service with a larger market. An interesting variation on this is to decided that these unmet synergies are opportunities for employees to launch their own businesses with an initial guaranteed customer. This does require a robust level of corporate confidence however.

Update 11/25/08: As I worked this problem I became increasingly convinced I was heading into rough territory.

Time and serendipity have revealed the depths of the problem. Those depths include understanding why, on the one hand, large corporations exist, and on the other hand, why we have more than one corporation.

They take one into the Nobel Prize winning Coase Theorem, wonderfully summarized by Bruce Schneier (emphases mine);
In 1937, Ronald Coase answered one of the most perplexing questions in economics: if markets are so great, why do organizations exist? Why don't people just buy and sell their own services in a market instead? Coase, who won the 1991 Nobel Prize in Economics, answered the question by noting a market's transaction costs: buyers and sellers need to find one another, then reach agreement, and so on. The Coase theorem implies that if these transaction costs are low enough, direct markets of individuals make a whole lot of sense. But if they are too high, it makes more sense to get the job done by an organization that hires people.

Economists have long understood the corollary concept of Coase's ceiling, a point above which organizations collapse under their own weight -- where hiring someone, however competent, means more work for everyone else than the new hire contributes. Software projects often bump their heads against Coase's ceiling: recall Frederick P. Brooks Jr.'s seminal study, The Mythical Man-Month (Addison-Wesley, 1975), which showed how adding another person onto a project can slow progress and increase errors. ...
In a related vein consider Coding Horror's discussion of the costs of software reuse.

The best reference on the Coase theorem I've found is from a 2007 Freakonomics article.

The synergy or collaboration tax in a large publicly traded corporation is a manifestation of the general scaling problem; it's one of the reasons corporations have effective size limits. To understand those limits though, we probably have to look beyond standard economics and consider the "military" aspects of corporate size -- the ways one can use size itself as a weapon.

At that point we move from economic theory to "nature red in tooth and claw". I suspect it's this reason that corporations can grow beyond what economic theory might suggest.

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