There's a very interesting article in the latest Economist on the reinvention of the company. Here's a core part of the argument:
Early in a company’s life, the founders and first recruits own a majority stake—and they incentivise people with ownership stakes or performance-related rewards. That has always been true for startups, but today the rights and responsibilities are meticulously defined in contracts drawn up by lawyers. This aligns interests and creates a culture of hard work and camaraderie. Because they are private rather than public, they measure how they are doing using performance indicators (such as how many products they have produced) rather than elaborate accounting standards.
New companies also exploit new technology, which enables them to go global without being big themselves. Startups used to face difficult choices about when to invest in large and lumpy assets such as property and computer systems. Today they can expand very fast by buying in services as and when they need them. They can incorporate online for a few hundred dollars, raise money from crowdsourcing sites such as Kickstarter, hire programmers from Upwork, rent computer-processing power from Amazon, find manufacturers on Alibaba, arrange payments systems at Square, and immediately set about conquering the world. Vizio was the bestselling brand of television in America in 2010 with just 200 employees. WhatsApp persuaded Facebook to buy it for $19 billion despite having fewer than 60 employees and revenues of $20m.
Reading this, I was reminded of a 2003 article by my friends Bill Klein and Mitu Gulati on the boundary of the firm. They argued that:
A central question of law and economics is how complex productive activity is initiated, organized, and carried out successfully without central planning. What are some of the most important organizational devices and what is their function? The effort to respond to this type of inquiry has led, among other things, to the dichotomy between transactions within firms and transactions across markets - also referred to as the make-or-buy decision or the outsourcing decision. This dichotomy, leading to explanations of the functions of firms and markets, has proved to be a powerful tool in analysis of economic organization. As with most simple descriptions of complex reality, however, it emphasizes some aspects of reality at the expense of others and is not a good fit in certain settings. One such setting is construction, where the organization of the economic activity (the construction project) is mostly contractual (technically, across markets), but where vital organizational ingredients are networks of relationships as well as collaboration and teamwork, generated in large part by pride, commitment, and reputation. The present paper is a case study that examines those ingredients and others that play, at most, a minor role in traditional thinking about firms and markets. This study also illustrates the notion that bilateral contracts are part of a mosaic of such contracts, with the performance of each dependent on the performance of the others, and contractual relationships exist within an industry in which individual projects are of limited duration but the participants are in for the long haul. Perhaps an even more interesting and important observation is that in construction, and no doubt in other economic activities as well, it is not the firm that is the locus for production. Nor does the idea of market exchanges between firms properly describe the productive process. Instead, production is in the hands of teams of people who are associated with various firms but who operate autonomously with respect to their firms. The teams may perform the functions of firms but they lack the critical firm attribute of hierarchical control. Related to this and also important in at least some settings is the manner of selection of team members: the client/owner may contract with, say, an architectural firm but expects to be working with particular, identified individuals within that firm. This raises the question: when a person contracts for services, what is the role of the individual (e.g., an architect or a lawyer) and what is expected of the firm of which that individual is a member? And what does this tell us about the nature and the boundaries of firms? We also offer some observations about fixed fees versus hourly rates and other contingent compensation.
Klein, William A. and Gulati, G. Mitu, Economic Organization in the Construction Industry: A Case Study of Collaborative Production Under High Uncertainty (July 16, 2003). Georgetown Law and Economics/Public Law Research Paper No. 428600; UCLA School of Law, Law & Econ Research Paper No. 03-17. Available at SSRN: http://ssrn.com/abstract=428600
It would be most interesting to compare the model Klein and Gulati studied to the models which The Economist discusses. How do they differ and how are they similar? It's not the sort of project I would take up, so I offer it up to the reader as a possible research project and ask only that you spell my name correctly.
