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Technology, again, reshapes business

Technology has always had a major impact on the boundaries of the firm and in recent years it seems to be doing so again, with major implications. In short, technology defines and enables what companies do, what they don't do and how they do it. The industrial revolution created economies of scale and put an end to outsourcing work to small self-employed workshops. The ICT revolution made it possible ‘to subcontract ever more tasks to ever more places’ regardless of distance and, in more recent years, enabled remote work. Firm boundaries have now blurred so much that collaborating with colleagues, freelancers and other companies is just as easy and wherever they are in the world.

The Economist draws on Ronald Coase’s seminal 1937 article ‘The nature of the firm’ to explain the impact of technology on the organisation of business (compulsory reading for every economist and organisation expert). In essence, the more complex organisations become and the lower the transaction and information costs between and across firms, the easier and more competitive it is to outsource activities. With the rapid rise of and habituation to advanced online communication and collaboration tools and practices in particular outsourcing to white-collar professionals has been growing exponentially. The scarcity of talent obviously reinforces this in the Western world.

The consequences of this ongoing 'revolution' are already visible and far-reaching. Corporates specialise and outsource more, lots more, while distributing their work across a larger number of locations, regions and countries. The Economist's own research among “a sample of large listed firms from America and Europe” indicates that ‘outsourcing intensity’ has doubled from 11% in 2005 to 22% in recent years. This growth was “especially pronounced among [fast-growing, innovative] tech titans” than among business that grew only slowly.

In line with this, the number, variety and turnover of platforms that link companies and freelance workers are growing lightning-fast. “The result is that companies have greater flexibility to seek out new workers for new tasks in new places” and, hence, can draw on a much larger pool of talent. Also, smaller cities, rural areas and emerging countries are increasingly winning out over large metropolises in popularity (lower cost of livings undoubtedly also contributes to this). Countries like Canada, Poland, India and Brazil are already clearly benefitting. The architecture of new, digital firms and ecosystems is fully in the making. More than interesting to see which (types of) companies and regions understand this best to benefit most.

Photo by Peggy Anke on Unsplash

#transactioncosttheory #coase #technology #ecosystems #remotework #outsourcing

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