The Nobel Prize-winning economist Ronald Coase, writing in 1937, argued the main reason a company exists (as opposed to individual buyers and sellers making ad hoc deals at every stage of production) is because it minimises the transaction costs of co-ordinating a particular economic activity. In his famous treatise, The Nature of the Firm, Coase wrote "the operation of a market costs something and by forming an organisation and allowing some authority (an 'entrepreneur') to direct the resources, certain marketing costs are saved".
But the gains have to be balanced against "hierachy costs" - the costs of central managers ignoring dispersed information. And in the 21st century, technology might be shifting the balance away from companies back towards markets and individuals.
The modern company structure can be traced back to the UK Companies Act of 1862. In The Company: A Short History of a Revolutionary Idea, John Micklethwait (now editor of The Economist) and his co-author, Adrian Wooldridge, agreed that the limited liability joint-stock company is the greatest single discovery of modern times - a historical force to rival religions, monarchies and even nations. It is a construction that gave us the sharemarket and the British Empire, and is the basis of prosperity in the West with the only competitor for our time and energy being the one we take for granted - the family.
But the proto-economist Adam Smith believed companies were inherently less efficient than sole traders or small-scale individual businesses. Writing in Wealth of Nations (1776), he said: "The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own ... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company." Smith was writing two-and-a-half centuries ago. But his idea has gained a new reality in the 21st Century as the internet empowers the sole trader and groups of individuals.
A RETURN TO PEER-TO-PEER INTERACTIONS?
Could Smith have been right and, aided by modern technology, might there be a return to peer-to-peer interactions, a revival of the outlawed Napster model, so successful for music sharing? Already peer-to-peer money (Bitcoin) has been developed and a black internet economy is emerging. The implications are unknown: peer-to-peer payments with virtual currencies have troubling implications for illegal activities, such as covert drug and arms transactions.
In the near future ubiquitous broadband, inexpensive computing power, smart algorithms, cheap data storage and 24/7 services provided by the crowd might bypass established financial institutions and enable a world of one-to-one transactions. Imagine a sort of Wikipedia model for corporate processes where the company role is?merely a curatorial one.
Got a technical issue? Invite the crowd to solve it or share their experiences. Need a breakthrough in R&D? Define the problem on the net and invite solutions in return for peer recognition or a small prize. Need start-up funding for an original idea? Ask online for individual contributions in return for preferred access to the innovative product once produced.
This web-enabled, crowd-sourcing model leverages low-cost access to discretionary effort from the global online community. It hints at virtual companies rather than those hamstrung by depreciating assets, sales and service teams, and real estate. Boards of management might?perform curatorial roles of communities within the crowd that contribute to elements of the supply chain in a commercial ecosystem.
As with social media, today's companies continue to grapple with the possibilities and the risks of peer-to-peer commerce coupled with crowd-sourcing. And in the future the solutions may involve new company forms.
ADAPTIVE PROCESSES UNFOLDING
Let's see how adaptive processes might be unfolding by following the?examples of industries being reshaped by the revolutionary forces of new digital technology. The destruction of traditional photography by digital imaging is a simple case, in the first instance, of technical innovation (charge-coupled devices to record images digitally) overwhelming a long-established technology (silver halide chemistry). This is Schumpeter's "creative destruction" at work but without profound implications for organisational design.
But is the demise of printed news?of similar character - as is often alleged?
If the technology only involved replacing newsprint production with online distribution of news, this might be the case. Then installing pay walls and charging for content might be effective if the traditional processes of news gathering, aggregation in the newsroom, editing, packaging and once-daily distribution to the masses, remained relevant. Here the company model prevails - efficient, quality-controlled, co-ordinated economic activity with the ability to pool capital for big investment projects.
But sources of news are now dispersed and posted unedited in the blogosphere from which consumers draw information in a?continuing stream. When information was scarce and trust at?a premium, a company was more efficient than individual agents trading in the market. But information is no longer scarce and?trust has become a graduated concept. The internet facilitates a kind of anarchy. People can deal with each other and bypass the conventional channels of supplier to?consumer, and usually at less expense.
In this example, new technology (the internet) has had an impact at three levels. First, replacement of traditional news gathering and reporting by a dispersed, virtual, near-continuum of sources feeding the web. Second, introduction of lower-cost, real-time online distribution and, third, a more efficient alternative to printed classified advertising which guts the?cash flowing from the "rivers of gold''. This is a fatal combination for traditional print-based businesses.
MOOCS CHALLENGE TRADITIONAL EDUCATION MODEL
An equally interesting situation is emerging within universities with the arrival of Massive Open Online Courses (MOOCs), a model for higher education in which course content may come from the world's leading universities, delivered online by established international lecturers to an individual or shared environment, at little or no cost.
Will the traditional model of higher education be overturned? What is the role of university lecturers in an online world? Will a?form of peer-to-peer pedagogy evolve with learning lightly overseen by tutors? What institutional structure is now relevant?
At first glance this feels analogous to the print media example except for the vital role played by formal quality control, regulatory and compliance rules. Higher education is not (yet) anarchic. Degrees must be certified by organisations whose status is regularly reviewed, their authority confirmed by continuing assessment, and educational value and brand equity affirmed through students' career successes.
Initially, short courses and some individual subjects appear good targets for online learning. How big an influence this will have on conventional degree, diploma and certificate programs at universities and TAFEs remains to be seen.
Of course, in any highly regulated system, creative destruction is somewhat thwarted: try introducing a new banking model. But since people in the West learn at schools, study at universities and mostly work for companies, which also produce the bulk of the world's products, the outlook for our familiar institutional models and their processes matters.
Is the company to be deconstructed, soon to own fewer assets, morphing into a small set of organisational capabilities, a network of outsourcing contracts with service-level agreements behind a branded user-friendly interface? What becomes the new governance structure, including the role of a board, in such circumstances?
Can companies sensibly plan for such transitions over a 10- to 20-year horizon? Not in my experience. The average tenure of today's chief executive is about five years and strategic planning becomes awfully vague beyond that horizon, except for very large capital-intensive infrastructure and resources projects - industries that may well?retain traditional governance structures longest.
It is rightly fashionable to draw on Darwinian metaphors of adaptation, survival and evolution to describe the nature of the metamorphosis required of today's enterprises.
As Jack Welsh, the legendary chief executive of General Electric, said: "If the environment is changing faster than your business is, you're dead".
Dr Ziggy Switkowski is Chairman of Suncorp Group, Chancellor of RMIT University and a former chief executive of Telstra. This article is adapted from the author's forthcoming CEDA publication, The Future of Work.
This article was published on the Australian Financial Review website on 11 January 2013.