At 08:36 PM 11/23/2013, Gar Lipow wrote:
> >I'll let the economists here amongst us take up the issues involved in
>Gar's post on a more theoretical level in light of the late Ronald Coase's
>1937 paper, "The Nature of the Firm" (http://www3.nccu.edu.tw/~
>jsfeng/CPEC11.pdf). Coase was basically trying to answer the question of
>why should firms exists at all within a competitive market economy and why
>would they bother to do so many things in house. Why not outsource
>everything?
>
>Coase's theory of the firm is based on transaction costs. And that is
>important.
>But the other point (which Coase deals with to some extent)staying within
>the boundaries of a firm or set of closely related firms is important when
>what you want does not fit into nice neat categories. Coase's example is
>very abstract - the buyer will want to
>
>contractor to take one of several course of action; the contractor is
>indifferent as to which course of action; the buyer does not know in
>advance which course of action he/she will need the contractor to
>take. A contract on these lines is very complicated. It is one of
>those bloodless stories that are so common in economic textbooks. I
>think the way this really happens makes it as important as transaction
>costs.
>
>It is much messier than the 'will need one of several alternatives" To
>start with real life uncertainty is not so nicely sliced as "I will
>need one of these, but don't know which one".Often the manager is not
>100% certain of what she is trying to accomplish. Software of course
>is a classic case of this. If you can find a ready made package that
>does enough of what you want you are better off buying it and living
>with its limitations than trying to custom code. If you can find
>something that almost does enough of what you want and can do the rest
>with a bit of customization, that is 2nd best. But if you really need
>full custom coding, there are going to be all sorts of unexpected
>discoveries in terms of how this need affects that need, and what the
>hell else you need. You don't want someone just trying to meet the
>letter of a contract. You want someone try to fill your needs, which
>includes discovering them as they go along without using the discovery
>process as an excuse for screwing you.
>
>And something else important is going on. There is rival theory to
>transaction costs, the idea of teams. But in the narrow sense you only
>get the benefit of team efficiency in very small groups;only in small
>groups can people know each other well enough to gain huge advantages
>that team theorists usually refer to. But there is a much simpler
>benefit to in-house. People tend to identify with their workplace,
>even when it is a very large workplace. Managers who squeeze their
>workers the maximum possible often do their best to kill this
>identification, and I think austerity has gotten so horrible that it
>happens less than it used, but it is still a real phenomenon. For
>many, their workplace is one of their tribes. Many workers, even if
>they hate the boss or the owners, still think of the corporation they
>work for as we.
>
>And that is something you get inside a firm that is damn hard to get
>with outsourcing. You get people working to meet unstated goals, or
>produce "quality" work ( scare quotes because outside of management
>jargon, the meaning of quality is highly context dependent. You will
>even sometimes see people take the huge risk of trying to give the
>boss what he needs rather than what he wants. ) Yes that means
>workers are contributing to their own exploitation. And I don't want
>to oversimplify: lots of workers get mad at being screwed and screw
>the boss back when they can. But if you are a boss and have a vague or
>difficult to define goal, or worse yet a goal you need to partially
>discover in the course of meeting it, you have a hell of a lot better
>chance of succeeding using people who you employ directly who see
>themselves are part of your business than using outside contractors.
>
>I won't say that never happens with contracting. I know one woman who
>contracted with an illustrator. That illustrator ignored several terms
>of the contract to give much better results. But the amount of mutual
>trust that took. I mean the woman who hired the illustrator could have
>insisted that the work be completely redone. For that matter, the
>woman took a risk in accepting work that differed from the contract.
>Well, they were personal friends and understood each other well. But
>how often, even among case where it is directly one person contracting
>with another does that happen? And how in hell can it possibly happen
>when one corporation is hiring another. (Of course it can happen in a
>very negative way. The executive in charge of hiring is personal
>friends of the someone who works for the contractors, and allows the
>contractor to screw his corporation. Business gets done that way all
>the time. The formal terms for this is principal-agent conflict.)
>
>Now of course this is still oversimplifying. Firm 'boundaries" are
>kind of fuzzy. Corporate subsidiaries. Sub-contractors with only one
>customer - in practice subsidiaries. Sometimes really long term
>relations between a business and a sub-contractor can result in them
>being on the same "team". Also context is everything. In cases of
>class conflict, elite class solidarity can trump major conflicts
>between businesses.
>
>But accepting that it is a rough approximation, I also think it is a
>significant phenomenon. One big advantage of having work done
>in-house rather than contracted is simply that the odds of the people
>doing the work identifying with the company the work is done for is
>much much greater.
>
>That is not to downplay one of Coase's points. It is easier for
>managers to monitor people who work for them than people who they
>contracted with. With an employee, a manager does not need to prove it
>is not being done right; a manager can simply order an employee to
>change course or do something over. Often the difficulty of
>developing meaningful metric is used as an argument against Coase on
>this issue, But in truth, even without meaningful metrics a manager
>can sometimes tell whether good work is being done or not, just
>through experience. It is where meaningful metrics don't exist that
>the transaction advantage of direct hires over contracting is largest.
>Of course the lack of direct metrics results in huge problems when the
>manager is wrong or malicious. But when the manager is trying to
>accomplish the owner's goal, and knows what she is doing, direct hire
>is a huge advantage for the owner over contracting.
>
>And when the manager is malicious or incompetent, direct hires are
>still an advantage for the owner, because the manager can't blame
>problems on the contractor. In fact ,avoiding responsibility is a big
>reason managers often like to hire contractors. When a manager knows a
>project is high risk, let someone else take the blame in case of
>failure. Unofficially, the deal when a manager hires an outside
>contractor is often that the contractor will be allowed screw the
>hiring company big time, in return for acting as scapegoat for the
>failure that follows.
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