The Death of the Firm

How Will You Differentiate?

The “Firm” — perhaps more recognizable as a modern corporation — is a relatively new concept. Coined by political-scientist-turned-corporate-academic, Robert Coase in 1937, the basic premise was largely summed up by “companies are more effective than sum of their parts since there are no transaction costs.”

Said even more simply: it’s easier to have people on payroll (accounting, HR, etc.) than it is to procure, negotiate, manage and bill separate entities. So even if the IT team is A) not the most cutting edge, or B) goes greatly under utilized, either of these cases offer better results than the ad-hoc, death-by-a-thousand cuts that would otherwise ensue.

Fortunes and empires have been built by tightly coupled, “full-stack” firms that manage every step of a complicated process — Walmart is the perfect example of a company that derives competitive advantage via vertical integration But what happens in a modular, frictionless [zero-marginal-cost, winner-takes-all] world?

Enter the “AWS-ification of Everything”.

New Economy

In the new economy — where scarcity has been replaced with a Cambrian explosion of choices, a curious dynamic evolves. Is the choice the new thing? Or the specialization and availability? Different firms are better served by creating and competing in highly specific markets. Further advantage is often presented by specializing to serve only one industry. Rather than providing a monolithic offering — with something for nearly everyone — and benefiting from the associated scale, it’s go smaller, more niche, and more nimble. Veeva systems is my personal favorite: Salesforce, but only for bio & pharma reps. (Probably a favorite to Veeva’s backers, who allegedly 300X’ed their investment, too.)

When an offering aligns precisely with the needs of a specific function, something curious happens. This ability to outsource a key function, can go wildly mainstream, propelling evolution with it. The early growth of Amazon’s AWS is an ideal example — an internal system, with many quirks, for quickly procuring compute. But a pain felt by many, many companies. Hardly a replicable formula, but a sound example of new economy success.

Now, instead of the old ideals of scale (think IBM), the new niche star is able to tailor and dominate their slice of the market, offering “self-service” style offerings to the whole world. At rapidly growing, nearing world-scale, firms can deploy resources to 1) improve the product to drive more adoption and integration and 2) ride the price curve until formerly-competitive opportunities are pushed away.

Beyond just adoption, AWS continued to grow their product offering — offering faster and better ways to do things, only available to their customers who embrace their ecosystem in whole. Why spend the time and effort to move away, if the service will just keep improving and the price keep dropping? (Zynga comes to mind as a notable example who started to leave…and eventually returned in full.)

Most of all, AWS provides the best commercial kind of offering: use as you need, with no minimums or guarantees required.

AWS’s Lambda functions (pay per function compute v.s. paying per machine hour) continues to abstract away any notion of anything that would look like the service of a traditional firm, measured in servers in a center, and employees to look over them.

So in a world where there’s a single clear winner (who has or ought to take all), for each and every business problem, what’s left? If everything is abstracted to a clear per-usage billing price — a price far lower than other alternatives might offer — will Coase’s transaction costs still hold the notion of the firm together?

While we are in the earliest days, this practice is being applied to many areas that formerly looked stable and predictable:

· WeWork provides small — and increasingly medium-sized — companies workspace at a price and ease hard to duplicate alone.

· Stripe provides an international payments team via an API.

· Rainforest delivers software QA teams on-demand.

· Zenefits (or whoever takes their place, post-controversy) provides many of the functions of an HR administrator.

· Clara provides an always-on, AI-augmented assistant for a scaling subscription price.

These aren’t just tools to get things done anymore. These AWS-style firms are replacing areas that are deeply ingrained as “work” that would take place within an organization — chipping away individual roles and teams in small and growing firms. Call it “Workflow-as-a-Service”. (WaaS?)

What’s left?

So founders and managers — what is the core work that your company uniquely does?

Now’s the time to understand this and double down — because firms that don’t will soon find themselves replaced by new entrants reaping the benefits of focus, or displaced entirely by the niche-winners dominating the landscape.

Don’t count on the big players, either. As one independent CEO noted:

“As competitors get bought, that’s one less company that’s uniquely focused on what we do.”

Six months later, this firm would announce their own acquisition by Oracle.

I will bet that SAP loses $10B in the next 10 years — due to lack of focus and specific market leadership. So how will you differentiate?

Thanks to Adam Marchick and Chris McCann for reading drafts of this.