Sunday, August 22, 2010

The Corporation - what next?

In my seventh year within the fascinating, feudal, emergent machinery of a classic publicly traded corporation I volunteered to write a white paper about supporting internal collaboration for shared services. I wrote a post in 2008 asking about examples of systems to enable such collaboration.

I can't share the final paper here, but the conclusions were unsurprising. I think they are true of any corporation of significant size.

In the absence of internal markets, contracts, and currencies, true corporate collaboration requires either accounting system reorganization, or serious executive pressure, or some sort of baby-sitting coop style internal currency. All of these things are very hard to do; ironically collaboration outside the corporation is easier (see also - outsourcing) [3]. For example, executive power, like Presidential power, is a limited currency that must be used sparingly. [1]

I felt when I wrote the paper that I was walking old ground, but my real expertise is in health care and more esoteric domains. I didn't know how to follow this trail.

Later I learned I was intersecting the path of Ronald Cause and his 1937 paper The Nature of the Firm [3]. Alan Murray describes the paper in a recent WSJ article on the future of the corporation ...
The End of Management - Alan Murray -
... British economist Ronald Coase laid out the basic logic of the managed corporation in his 1937 work, "The Nature of the Firm." He argued corporations were necessary because of what he called "transaction costs." It was simply too complicated and too costly to search for and find the right worker at the right moment for any given task, or to search for supplies, or to renegotiate prices, police performance and protect trade secrets in an open marketplace. The corporation might not be as good at allocating labor and capital as the marketplace; it made up for those weaknesses by reducing transaction costs.
Mr. Coase received his Nobel Prize in 1991—the very dawn of the Internet age. Since then, the ability of human beings on different continents and with vastly different skills and interests to work together and coordinate complex tasks has taken quantum leaps. Complicated enterprises, like maintaining Wikipedia or building a Linux operating system, now can be accomplished with little or no corporate management structure at all...
I wasn't quite following Ronald Coase however; I was intersecting him. Seventy years after his paper was published, I came from a world where intra-corporate transaction costs were higher than extra-corporate costs. By 2007 collaboration within a typical large corporation had become more difficult than similar collaboration with an external agent.

Why did this happen? That's a rather interesting question. I expect there are publications on it, but they'd be hard for me to find. I wouldn't be be surprised if the costs of intra-corporate transactions are higher in 2007 than in 1937, and that the costs of extra-corporate transactions are substantially lower. The balance has shifted.

So why does the Corporation persist?

Well, for one thing, entrenched institutions are like cities of the northeast or trees tangled in the tropical canopy. They don't collapse overnight just because their sustaining systems are gone. The publicly traded corporation is deeply embedded in American law (including taxation law), accounting standards, international treaty, and politics (senatorial ownership). It's going to be around for decades to come.

Beyond mere inertia, however, Corporations are awfully good at economic warfare; a mode of operation more in the province of Macchiavelli's The Prince than standard economics texts [4]. Microsoft was once the master of this economic warfare, Intel still is. This mode of operation actually destroys customer value, but it's not going away.

Even though the 20th century Corporation will persist, but better and for worse, it's clear we're in one of those times of cranky dissatisfaction where the ancient Monster of the Market is looking vulnerable. We can at least hope there will alternatives.

Murray's sources don't know what those alternatives will be, and they seem reluctant to speculate. His prescriptions are a rehash of the usual management book pap - "agile, flexible, ruthless, cut their losses, lots of bets, Google [5], inspire, entrepreneurs, push decision-making down, wisdom of crowds, feedback, change, innovation, adaptability" , blah-blah-blah.

For my part I've been looking for good speculation since 2006, and I haven't come across much. I wrote up some of my thoughts last June, and some speculations by Iain Banks yesterday. I'm behind on reading Clay Shirky's 2008 book, I suspect I'll have some follow-up posts when I do that.

I'm guessing that we'll somer interesting variations emerge over the next decade. Some of them will resemble Apple (Singaporean model of the brilliant tyrant in what's effectively a public-private corporation), some Google (natural selection - creates sharks and tapeworms), and some may come from China (what is Foxconn [6]?).

I'm hopeful that within a decade I'll be able to invest in privately held companies where the owners have major organ systems in the game. I wouldn't mind working for or owning a part of one of those companies.

Interesting times.

See also

Gordon's Notes
[1] I concluded that any collaboration must be informal. This can work because are many employees will, for a minuscule amount of recognition and commendation, happily share their work. (Unless their private knowledge becomes job security - which is a bit of a big caveat.)
So the question becomes how best to enable informal networks of internal collaboration at a time when personal connections within corporations have greatly weakened.
If I were (heaven forfend) running a publicly traded company I would require my IT department to choose a network sharing environment that supported search and discovery, and I'd train people to use it. I think you could actually do this on a large scale using an improved version of Microsoft SharePoint wiki (the rest of SP is an unredeemable disaster) and its companion search and discovery services.
This is hard stuff to do in hard times of course, and in easy times it does not seem necessary.
[3] Yes, all these Wikipedia links do have special meaning in this context.
[4] Christiansen's original Innovators Dilemma is one of the very few business books worth reading; his follow-up books are not nearly as good. Machiavelli's The Prince is still the champion though.
[5] An unfortunate example considering the tragic mess they've made of so many of their projects. Apple is conspicuously absent from the list of examples. As always, omissions are interesting.
[6] And why is its english Wikipedia entry so very brief?

Update 8/22/10: I rewrote my original post after I'd thought about it for a while.


chrismealy said...

This just in from Google Reader:

John Gordon said...

Interesting article, thanks for the referral!

JGF said...

In Oct 2010 I wrote again on this topic: