A bit more on Coasian hells

The Yorkshire Ranter

This is a follow up to a post covered here a few days ago which looked critically at outsourcing, starting from the fundamental question first posed by Coase on what organisations should do and what they should buy. This second post is at one level a short summary of the first one, but it’s also rather more than that. It puts forward a slightly different way of framing the question, making the point that time and uncertainty are relevant to the decision, as well as pure transaction cost narrowly defined.

There are transactions, which are in the moment, and imply no further commitment or relationship. There are contracts, which are a commitment to future transactions, and depend on shared assumptions about the future conditions in which those transactions will happen. And there are organisations, which exist in the space beyond contractual precision and certainty.

To complete the hat trick, there is also a separate post applying this thinking to Capita. Even for those less interested in the company, it’s worth reading to the end to get to the punch in the punchline:

In important ways, this is the service that Capita provided and still provides: the ability to blame problems on computers and computer people, while ignoring the physical reality of policy

In The Eternal Inferno, Fiends Torment Ronald Coase With The Fate Of His Ideas

The Yorkshire Ranter

Organisations, including governments, follow fashions. Some of those fashions change on short cycles, others move more slowly, sometimes creating the illusion of permanence. The fashion for outsourcing, for buying rather than making, has been in place in government for many years, but there are some interesting signs that change may be coming. One immediate cause and signal of that change is the collapse of Carillion, but that happened at point when the debate was already beginning to change.

This post goes back to the roots of the make or buy choice in the work of Ronald Coase on the nature of the firm. The principle is simple enough, that it makes sense to buy things when the overhead of creating and managing contracts is low and to make them when the overheads are high. The mistake, it is argued here, is that organisations, particularly governments, have systematically misunderstood the cost and complexity of contract management, resulting in the creation of large businesses and networks of businesses whose primary competence is the creation and management of contracts.

One consequence of that is that it becomes difficult or impossible to understand the true level of costs within a contractual system (because prices quickly stop carrying that information) or to understand how the system works (because tacit knowledge is not costed or paid for).

All very thought provoking, and apparently the first in a series of posts. It will be worth looking out for the others.