How much overhead do firms add to economic production?
I worked as an engineer for an engineering firm in Europe, perhaps things are different there, but I kept having this feeling that “things could have been done weeks ago, and much, much easier”.
I am being naive, I know. Firms, like the one I worked in, survive in a competitive environment which forces them to optimize their operation, and this is not easy. But yet, there remain so many blatant inefficiencies in them.
Maybe what occurs is that, perhaps, firms are not that inefficient, but they are indeed optimal; optimal for the environment in which they operate.
Which is this environment?
Firms are production machines made of (relatively) closed groups of people (workers) competing against other groups of people, to make them and their respective stockholders richer by getting clients to pay more for whatever they produce, and by stressing the production chain to produce it more cheaply.
It may sound cruel and unfair, but it’s very efficient. The system somehow manages to balance the power of capital, the interests of the stockholders, and those of the workers and the clients, so that none of them is able to abuse of its own position (to some extent), while a lot is produced in the meanwhile.
This sounds good, but I believe that significant inefficiencies still remain. Here are the ones I find more significant:
Who does what
A significant amount of the effort putted by people involved in these production machines goes to deciding who does what.
It starts with the effort a firm needs to put in publicity and public relations to make potential clients believe that they are their best choice. No matter what the reality is: only matters what the client thinks.
It does not stops there. Once the firm gets the contract from the client, it may do so in combination with other subcontractors and partners, and competition and negotiation still occurs at this level.
And it goes on. Each firm then needs to flow down what was agreed to its different divisions. Further competition and negotiation still happens there, until it reaches the team manager, who finally decides who does what. He or she may even need to hire someone new to do job.
And then, just then, you can start working on that thing you do, the way you love doing it…
… but only for a few moments, though!
you suddenly realize that, what was agreed between clients, contractors, subcontractors and company divisions, makes little sense, and that you will need to send a lot of emails and attend a lot of meetings before you can really start working on that thing you do, the way you love doing it, if you ever get to it.
The problem with this is that it is likely that there is a better redistribution of the work, between companies, business units and team members that would result in a better outcome (a better and cheaper product).
Who knows what
The process above involved high doses of competition and negotiation among groups of people. As information gives advantages, it tends to be protected and this feedbacks itself: the less information is shared, the harder the negotiations, and the messier the competition, and so the more the information tends to be protected.
The problem with this is that a lot of hierarchical levels of expensive managers is needed to effectively excerpt this control on the information.
The problem goes further, as information becomes relevant at the technical level too, when the work is about to be done, this time in the form of knowledge. It’s likely that the task (or a similar one) to be executed by some worker has been already done by someone else inside or outside the company.
The problem with this is that, would the worker had access to this knowledge, he or she would definitely be able to perform the work better and faster. Except he or she doesn’t have this access. Knowledge is protected within firms by limiting the people having access to it.
“If only HP knew what HP knows, we would be three times more productive.” Lew Platt, CEO, Hewlett-Packard
Who decides what
The stockholder + manager + worker structure allows the decision-making process to be able to drive the organization efficiently while nurturing from its different members. Stockholders decide if the CEO stays, the CEO decides where the company should go, managers decide how it should go, and workers take it there. The differences in scope are useful. It doesn’t seems very helpful if the CEO needs to decide on everyday technical matters, or if the whole 200 group of workers is polled to decide the next move on a big negotiation.
The problem with this is that it is likely that there is a better redistribution of decision-making power, among the people in the organization, that would result in a better outcome. Maybe it’s a decision made by the CEO, that a regional manager would actually had taken better, or an architectural design choice, made by some engineer, that is not correct, and would have been avoided if another engineer in another division would have been consulted.
And yet, it seems impractical for the CEO to consult every decision with all the regional managers, or for all engineers to consult their decisions with the rest of the company.
Who owns what
Stockholders own everything, including the risk of the firm going down. Managers own power and high wages, and workers own their salary. Workers are shielded, to some extent, from everything else that is not their job. It’s like if the company were a dome that protects them from the harshness of the market.
The problem with this is that it is somewhat weird that, after 200 people have work in something for several years, that thing ends up belonging to a few persons who didn’t do any actual work, except for betting their money on it.
Any alternative?
Inefficiencies above are, from my point of view, quite clear. And yet the system works quite well, at least compared to any other known alternative.
However, new technologies open new alternatives. Internet and the digitalization of work enables new types of production machines, others than firms, to emerge.
Considering, for example, open-source projects, they surpass firms in two of the inefficiencies mentioned above, but may lay behind in the other two.
The ones that open-source projects improve:
Who does what: this is cleanly solved by letting whoever have the will, ability and time to contribute, to do it.
Who knows what: whoever have the will, ability and time can explore project knowledge (forums, blogs and repositories).
The ones in which open-source projects lie behind:
Who decides what: given the open, multitudinous and non hierarchical nature of the organization, decisions tend to be minimized, and bold decisions tend to be avoided.
Who owns what: the solution here is quite abrupt. Nobody owns anything. This might seem appealing at first, but it has the problem of decoupling the organization from the energy of the stockholders capital.
A Proposal
Projects similar to open source projects, but which solve the who decides what and who owns what in a better way would be appealing.
