The mystery of transaction costs, Information Management and Organizational Design

....or why your company may not survive an era of Google outside and not inside.

The traditional Theory of the Firm used to explain that jobs performed inside the firm implied lower transaction costs than those performed outside. In essence, the firm avoids the necessity of using the price mechanism for performing its actions, and instead it is replaced by the direction of managers. The moment the cost of performing those actions inside the firm is bigger than performing them outside, then that transaction will be performed in the market. Two of the most relevant transaction costs are the cost of finding the relevant information and the cost of coordinating activities.

Today there are two dimensions that have significantly altered the relationships inside the firm and the associated transaction costs: (1) technology and (2) knowledge-intensive works.

1- We've seen the development of IT that has brought interaction costs down to nearly zero in the modern world. Talking to someone in a remote location, or accessing corporate information is today a very easy task. However, the difficulty of accessing the appropriate information inside an organization these days is growing all the time. We've all experienced situations in which finding information outside our company is much easier than finding it inside.

IT and Information Management are today disciplines that play a key role in maintaining the entity of the firm. If Search technologies, Enterprise Content Management, Business Intelligence systems are not effective inside the company, the cost of acquiring the relevant information simply goes to high and the reason to work for a firm looses a lot of sense.

2- Frequently in modern companies, knowledge-intensive complex and value added tasks need to be performed by groups of individuals that have to collaborate. However, the design of the organization does not make it easy to collaborate: silos, departmental walls, make it difficult to collaborate.

If organizational designs do not facilitate collaboration, sharing and interaction, another important cost of transaction goes high and another reason to keep the firm united disappears.

The two aspects mentioned above are probably the biggest threats to most of the modern corporations. I'm reading with interest the book "Mobilizing Minds" that explores some of the above mentioned issues and I hope it Will provide me with some answers.