To be able to assess new kinds of corporate
organization, like Intrapreneurial Groups, in a more theoretical
context, the framework of the wide spread method of Transaction
Cost Analysis, combined with a comparative institutional analysis,
will be presented. We refer to the classical book by Oliver E.
Williamson, who, at the end of the last century, has applied the
transaction analysis approach to all types of enterprises engaged
in material production. He not only investigated contemporary
firms, but enterprises of the 18th and 19th centuries as well.
Pinmaking was used as a case study, as other famous scholars have
done before. Adam Smith and Charles Babbage were only two of them.
Different from the approach adopted by the group of Radical Economists
which had a somewhat distorted view by looking at the production
process in terms of power between capitalists and the workers
only, and different from the mainstream economists tied to Neoclassical
Theory who neglected power completely, Williamson gave evidence
that not only power is not only a category which is responsible
for changes in organization of work but of efficiency as well.
He virtuously developed criteria for the analysis and evaluation
of efficiency in a manner rather loosely connected with the traditional
categories of class struggle and property relations preferred
by Marxian economists. These criteria are listed and explained
below. The objects of his analysis, six alternative work modes,
represent an analytical framework of six "Idealtypen"
(Max Weber's "ideal types"), where any newly created
and invented one can be placed, located, and evaluated.
The six types are grouped into pairs by different
types of station ownership relations, called entrepreneurial,
collective ownership, and capitalist.
1. Entrepreneurial Modes
Each station is owned and operated by a specialist.
1.a Putting-Out system
A merchant-coordinator supplies raw materials, and makes contracts with the individual entrepreneurs. They, separated by location, use their own equipment at their homes, and perform specialized operations. They are not independent entrepreneurs, but hirelings, tied to a particular employer, for whom they work at a price fixed in advance.
Example: Spinning and weaving in Silesia, cutlery manufacture of Solingen and Thiers in 18th century, performed by dispersed cottage labor.
1.b Federated
The stations are closely located in a common building or area. Material flow between the stations is set by contract. If buffer inventories fall below prescribed levels, penalties are due.
Example: Leasing space and power in a mill
to individual artisans, common in 19th century England.
2. Collective Ownership
Work stations or land are owned by the entire group of workers.
2.a Communal Mode - every person for him/herself
Every person has a claim to the output associated with his/her own labor. Workers move from station to station at prescribed intervals, each bringing his/her own work-in-process inventory with him and selling his/her final product on the market. Resources are pooled. There is no specialization among workers.
Example: "Artels" in Russia, 19th century.
2.b Peer Groups
Workers are not compensated on the basis of their own product but are paid in accordance with the average turnover realized by the group. Workers may or may not rotate between stations. They may elect temporary leaders (in rotation) to improve logistics and administration. Strategic decisions remain with the Peer Group.
Example: Co-operatives, "socialist firms"
(Ernest Mandel).
3. Capitalist Modes
Plant, equipment, and inventories are owned by a single party.
3.a Inside Contracting
The management of a firm provides floor space and machinery, raw material and working capital, and arranges for the sale of the final product. The production job is delegated to inside contractors, who hire their own employees and receive a negotiated piece rate from the company.
Example: Construction industry, 20th century.
3.b Authority Relation
Capitalist ownership of equipment and inventories, employment relationship between capitalist and worker.
Example: Average capitalist firm, 20th century.
The above six modes may be rearranged by analyzing
them from a different point of view. Williamson looked at them
as well by using the concepts of contracting and hierarchy. The
following figure shows his result for a refined view of contracting.
While I have filled the matrix by the modes of organization in
the way Williamson has linked them to rows and columns, one can
see that even more refinement in principle is possible by separately
showing the degree of reliance on contractual detail (column)
from the time structure of the bargaining (row). A closer look
will show that one off-diagonal element will nevertheless remain
empty, however. The reasons for that are the inertia of organizations
and the limited capacity to process information. The framing contract
between the members of an organization cannot be changed in a
continuous manner, because the necessary psychological adaptations
to a changed consensus would stretch them too far (lower left
corner of the matrix). In a similar manner, the periodic and fundamental
change of contracts for all the details of the production and
remuneration process would burden the members by an information
overflow to which they cannot react appropriately (upper right
corner of the matrix).
time-structure of bargaining contracts degree of contractual detail | continuous contracting | periodic contracting |
comprehensive contracting | Putting-Out (1.a),
Federated (1.b) Inside Contracting (3.a) | |
contracts as a framework | Communal Mode (2.a)
Peer Group (2.b) Authority Relation (3.b) |
For hierarchy Williamson found it useful to
distinguish between a hierarchy of contracts and a hierarchy of
decision-making. Contractual hierarchy is strong if only one or
a few agents are responsible for negotiating all contracts; it
is weak if each agent negotiates each interface separately. The
decision-making hierarchy is great, where the responsibility for
effecting adaptations is concentrated by one or a few agents;
it is slight where agents are themselves responsible for adaptations,
or they are subject to collective approval. The table following
shows the rank ordering of modes from least to most hierarchical
in contractual and decision-making terms.
Rank | Contractual | Rank | Decision-making |
(1) | Federated (1.b) | (1) | Federated (1.b) |
Communal Mode (2.a) | Communal Mode (2.a) | ||
Peer Group (2.b) | |||
(2) | Putting-Out (1.a) | (2) | Putting-Out (1.a) |
Inside Contracting (3.a) | |||
(3) | Inside Contracting (3.a) | (3) | Peer Group (2.b) |
Authority Relation (3.b) | |||
(4) | Authority Relation (3.b) |
One can see that the contractual order is not
completely the same as the decision-making order. Peer Group makes
the main difference.
Williamson developed eleven simple criteria
on the efficiency of an institutional arrangement within an enterprise.
They refer to three types; product flow; assignment attributes;
and incentive attributes. Following is the listing and a short
explanation of each.
Product Flow
1. Transportation expense: The cost of the
physical transport of the raw, intermediate, and final product.
Modes that save on these costs are favored. The rule is true only
under the condition of ceteris paribus.
2. Buffer inventories: To separate activities
at stations distant from each other, buffer inventories are installed.
The lower the buffer minimum level, the better.
3. Interface leakage: The amount of actual
or effective losses of product during manufacturing. The lower
the leakage (e.g. by embezzlement, by hiding true quality attributes),
the better.
Assignment Attributes
4. Station assignments: When workers are not
equally skilled at every task, modes are favored that make discriminating
job assignments on the basis of comparative advantage.
5. Leadership: Modes that economize on coordination
needs and make discriminating leadership assignments are favored.
6. Contracting: The capacity to aggregate demands
and contract experts to serve the needs of many stations (e.g.
maintenance workers) is the focus of this point. The more easily
contracting is accomplished, the better.
Incentive Attributes
7. Work intensity: Modes that encourage workers
to give their best are favored.
8. Equipment utilization: Modes that disfavor
equipment abuse and neglect are favored.
9. Local shock responsiveness: Modes that facilitate
quick recovery from machine breakdown or workers illness are favored.
10. Local innovation: The more process improvements
that can be carried out at low cost, the better.
11. System responsiveness: Modes that adapt
easily to changing market conditions and permit cheap improvements
are favored.
One can see that Williamson's criteria refer
to a technology which is focused on material production. As modern
multimedia computer technologies and electronic networks have
become of paramount importance and ubiquity, his criteria have
to be modified to take into account the tremendous progress which
was made in the exchange of information of all kinds. The new
technologies influence not only management methods, but logistics
and cooperation between workers as well. Let us discuss Williamson's
eleven criteria on efficiency under the influence of new electronic
technologies, when the production process has mainly changed from
physical production to processes of information generation, retrieval,
consumption, transport and exchange. Today such processes account
for the majority of work activities performed in the modern offices
of the developed world. In essence, the above "station"
can be a work station in the office, a personal computer at the
telecenter, or a personal digital assistant at home, as telework
has started to boom after some initial reluctance.
Thus one has to adopt the content of Williamson's
key terms to the electronic age. In contemporary information society
the raw, intermediate, and final products consist of packages
of bits and bytes coded into electric potentials, currents, electromagnetic
waves or modulated light beams. The former term "station"
now refers to a computer screen and keyboard, an intelligent TV
set, AI-assisted tele- or visiphones and virtual-reality booths.
In the same way as Williamson, and before him, Adam Smith, has
used a characteristic example to illustrate his analysis, pinmaking,
we have in mind the immaterial phases of hypertext production
as the prime example. The assumed steps necessary are: reading
of other related texts, papers and books on screen; data acquisition;
creative writing; translation; correction; and layout.
By the transformation from material production
to an electronically mediated service economy, some of the above
criteria become redundant, and one can skip them; some of them
experience a change in importance and weight, and some of them
have to be modified in content. The adapted list of criteria and
their content is shown below.
Information Flow
1. Transportation expense: The cost of information
exchange between distant stations becomes a neglectable item in
total cost. The modes do not differ with respect to information
exchange costs. Thus this criterion becomes irrelevant if the
appropriate communication infrastructure is provided.
2. Buffer inventories: Buffer inventories now
become electronically stored information (text, data, visual or
acoustic information), residing on electronic readable data carriers.
To separate and at the same time to couple activities at distant
stations, central or local servers are installed. Although the
cost of transport of information is negligible, it still remains
an important task to provide adequate and sufficient information
as an input for the next station. The modes differ in their ability
to give incentives to the person at a single station to finish
a task in a coordinated manner, taking into account the time structure
of the next station. That mode will be favored which can perform
the task efficiently, as well as eliminates standstill. The advantage
of the electronic system is that it can be used for the transport
and storage of intermediary information at the same time as for
data related to coordination of the different stations.
3. Interface leakage: As output and intermediary
product now consist of information, a completely different picture
has to be drawn related to fraud and embezzlement. It becomes
a question of survival as to whether confidential data can be
kept under cover and personal data are not available for abuse
(which does not necessarily mean data must stay inside a small
geographical area, but must be kept inside the network of stations
of the enterprise used by the workers or by an authorized subset
of them). In the information age keeping personal data and research
results secret is one major goal of the firm. If only one single
case of violation of privacy is reported to the public the prestige
of an enterprise fades immediately - as does the price of its
stock. The lower the leakage (e.g. by embezzlement, by hiding
true quality attributes), the better. While much can be done by
cryptographic means (a standard of public key systems is now established
world-wide), there is still the risk of information abuse by employees
of the firm who have official access privileges to qualified data.
Thus it is of vital importance to establish high standards of
trust in the enterprise, as well as satisfying working conditions
and a high degree of co-determination to bring up a convergence
of individual goals of the workers and those of the enterprise.
An example of the importance of security and safety is that many
firms still do not transport their data by electronic networks
but use human couriers for this purpose.
Assignment Attributes
4. Station assignments: When workers are not
equally skilled at every task, modes are favored that make discriminating
job assignments on the basis of comparative advantage. This criterion
remains valid, although the means to perform the task have changed
considerably, by the high degree of electronic connectivity reached
all over Europe for the private and public enterprise sector,
private households and public institutions. Services for personal
evaluation and staff recruitment are provided by a flourishing
industry founded around the year 2000. It is still of great importance
to create qualifications which exactly fit the tasks to be performed.
The more the mode can succeed on this level, the better.
5. Leadership: While electronic networking
assists management in its coordinative functions, the problem
of leadership assignment is only dealt with by a better database
on available staff. The final decision still remains a highly
volatile art.
6. Contracting: The European Electronic Network
allows for tele-consulting and tele-repair, in particular for
software and hardware problems. The more easily contracting is
accomplished, the better.
Incentive Attributes
7. Work intensity: Modes that encourage workers
to give their best are favored.
8. Equipment utilization: A particular threat
has developed as the result of the new information technology:
Computer viruses and hacking. Modes that disfavor equipment abuse
and neglect are favored.
9. Local shock responsiveness: Modes that facilitate
quick recovery from machine breakdown or workers' illness are
favored.
10. Local innovation: The greater the ability
to use the potential of information technologies for process improvement
at low cost ,the better.
11. System responsiveness: Modes that adapt
easily to changing market conditions and permit cheap improvements
are favored.
Because of the need to perform the overall
task in a continuous manner, without interrupts and breaks (the
latter refers to the overall process of production only, not to
the single individual), a 12th criterion must be stated.
12. Susceptibility to inference: As electronic
technology is not determined entirely by its technical parameters,
there is a high degree of freedom for the organizatorial mode
to set the degree of reliability of the production system. The
flexibility of the mode to handle the likelihood of standstill
time is of crucial importance, not for one single operation, but
on a statistical basis, in the average period of, say, one year.
It has to be mentioned that the modified eleven
criteria should help to determine optimal or at least appropriate
organizational arrangements. There are two procedures possible.
First, they could be selected from the list of the six modes at
the beginning of the report, or second, a new organizational mode
could be invented which is designed and appropriately tailored
according to the highest scores in fulfilling the criteria.
Let us look now at the first method. We shall
evaluate the six modes of organizations under the condition of
contemporary electronic technologies and apply the modified criteria
to them.
As the result of the advent of communication
and network technologies, we can observe a basic difference to
the former material production technologies. The potential is
now evolving for a less hierarchical interaction between the members
of a production unit, in particular on the operational level.
Networking technologies will not be favored by management if they
have to defend some monopoly on information. Strongly hierarchical
organizations will thus experience great difficulties in appropriating
the potential fruits of networking in view of the higher speed
of formal and informal information flows, the shrinking "distance"
between the members of the firm ("Japan is just a mouse-click
away"), the existence of a unique network within which all
tasks of employees can be performed, the creative power of self-organization,
and the possibility for synchronous as well as asynchronous modes
of collaboration.
Now let us apply the method of elimination
to find the optimal solution. If we look at the echelon of hierarchy,
the topmost (Authority Relation - 3.b) will assume a lower ranking.
It cannot offer the degree of flexibility information oriented
enterprises need with respect to fast adaptation to the changing
markets. It shows a major disadvantage: Authority Relation is
not a voluntary relation for the worker, it is an incomplete form
of contracting. The employee is subject to detailed supervision.
He/she has to accept orders and instructions as premises of his/her
behavior. Authority rule is less and less accepted by the majority
of people. The degree of education, training and qualification,
both formally gained, or by training on the job, has increased
to such an extent that people do not like to be in a completely
subordinated position any longer.
The bottom of the echelon is formed by Federated
(1.b) and Communal Mode (2.a) on both sides of the hierarchy,
the contractual and the decision-making one. These two fall short
as appropriate organization modes for a different reason than
Authority Relation. Because markets are more volatile than in
the 19th century, the product of the enterprise has to be redefined
at irregular intervals. While agricultural or milling activities
remained constant for generations, information as a product or
service is changing its content fairly rapidly. As there is no
way to redesign the tasks of the enterprise in an organized manner,
the two modes will have difficulties to survive in this environment
of fast changing demands.
The concept of the Peer Group (2.b) does not
encourage work intensity enough through compensating workers by
the average product. The problem of free riding comes up sooner
or later. As Peer Groups are weak in assignment to stations and
in leadership, the ability for flexible and fast adjustment is
missing (similar to the case of the two other modes mentioned
above).
Only two more candidates remain, remnants of
completely different historical periods: Putting-Out (1.a), a
mode rooted at the outset of early capitalism, and Inside Contracting
(3.a), a type of organization used by large capitalist firms during
the late era of Fordism to overcome the problems of rigidity and
petrifaction. Both seem to be interesting candidates to become
the winner of our competition of modes. Let us look closer and
use the method of analogy. Putting-Out forms a rather centralized,
but only slightly hierarchical system. Networking technology can
be shaped in a very similar structure. The "star" (in
addition to the "ring") is one of the frequently used
types of electronic networks as well as the structure of the widely
used electronic client-server-architecture. The analogy may be
continued with respect to material flow, now called data. Data
may be owned by a merchant-coordinator (located at the center
of the star) who submits them to the workers' stations on a contractual
basis, and, after the workers have finished working on them, they
are sent back to the center. The weakness of this mode is the
isolation of the workers. If they are not integrated in additional
social relationships they become more and more dependent on the
center. They have no other choice and alternative than to sell
their work - although formally independent - to the merchant-coordinator.
They can thus easily become subject to exploitation, face low
wages, weak social benefits, experience feelings of loneliness,
etc.
The last mode remaining to be characterized
is Inside Contracting (3.a). As is the case with Putting-Out,
a high degree of centralization may be combined with a slight
degree of hierarchy, but in decision-making terms only, not in
contracting terms. In Williamson's definition, Inside Contracting
does not control material assets of any kind, but it depends vitally
on workers hired. Through electronic networking technologies,
an Inside Contracting firm faces a greater range of alternative
possibilities. The "Inside" is no longer limited to
geographic space. Information workers may be tied up at locations
everywhere in the world. At the same time, there is no need to
be related to only one "parent" firm. It is possible
to build up a portfolio of parent firms. The monopoly power of
a single firm can be mitigated. The spreading of risks could be
helpful in economic depression.
The discussion of attributes different from
the original definition of ideal types shows that there could
be viable alternatives, more appropriate to modern technology
than the six versions discussed by Williamson. Let us recapitulate
which mode we are looking for:
a. Because of the low price of computers and
the abundant network links all over the country the means of production
could be owned by the workers on an individual basis;
b. The cultural tendency toward a high rated
value of the individual restricts us to vote for any authoritarian
organization with a leadership which is not legitimized by the
workers;
c. Negative effects can result through the
isolation of the workers. Group approaches may satisfy the need
for collective action, assistance, guidance, resistance etc. better
than a model based on single individuals. This is not only a vote
in favor to the workers. It is rational for the parent firm or
the entrepreneur as well. In case of illness, the tasks can be
more easyly shifted by the members of the group to one or more
other members. There is no need for the management of the parent
firm to deal with such contingencies;
d. Group organizations create possibilities
for self-organized collective action. They may educate people
in rational decision-making, in learning to assume responsibility
for their actions, in enabling them to become socially competent,
etc. In case of stress, occupational risks or illnesses, the group
can become a center of preventive activities far more easily than
a single individual; and
e. A group of workers organized as a legally
competent institution has the right and the abilities to hire
additional people. This could not only serve to increase the firms
capacity but it could be used as well for social integration of
invalids, the impaired, the hitherto unemployed, displaced persons,
etc. Of course one can not expect this will happen by itself.
Incentives have to be offered by legislation to encourage the
group to show this socially oriented behavior.
If we take into account the above mentioned
five demands, it should be possible to construct a new mode of
organization which fits into the contemporary needs much better
than any other mode previously discussed. Let us call this new
creation an "Intrapreneurial Group". It is a small-group-based,
legally empowered institution. It is allowed by law to own assets,
to sell and buy commodities and services, to hire workers, and,
of course, it is subject to taxation. Usually it enjoys elected
leadership, with rather short election periods. The remuneration
is based on average earnings, but wages are bargained for individually
inside the group. Intrapreneurial Groups form only one element
of a new scheme (the others are Peer Group Care, Green Taxes,
Negative Income Tax, and Workers' Health Assurance Group). Their
balanced interplay is vital for a more sustainable society.
(See our report on the visit to Opteam, a very
successful Intrapreneurial Group in car design, in this volume!)
Reference
Williamson, O. E., The Economic Institutions
of Capitalism - Firms, Markets, Rational Contracting, Macmillan,
New York and London 1987.