Ronald Coase

Recent days have sadly seen the deaths of a number of people including luminaries such as Seamus Heaney but also that of Donald Featherstone, a man none of you will ever have heard of, but who was hugely influential on a large number of those that I know. Among others that we have lost was Ronald Coase, the distinguished British-born economist. His wasn’t a name much mentioned in the press in recent years; partly¬† perhaps because he was 102 when he died, but also I suspect because he was a micro-economist rather than a macro-economist. The latter were once fashionable and are now frequently abused; the former were and remain invisible. Regular readers may recall that I feel the micro baby is often thrown out with the macro bath-water when economics is ridiculed and, in particular, I feel that Coase has something to tell us about the interim management sector.

That isn’t to say that I agree with everything he said, specifically on the need, or lack thereof, for government intervention to address negative externalities or regarding the, to me obvious, point that the bargaining positions of large corporations and individuals are unequal (a). Anyway, the area in which Coase first made his name was the consideration of why market places are made up of firms and not of self-employed workers. Given that interim management is a growing form of self-employment this has always seemed very relevant to me.

Put simply, he said that the classical supply and demand curve market model with which we are familiar was wrong because it assumed – alongside rationality, perfect information and other rather unlikely circumstances – that the cost of transacting business was zero. If we consider the situation where transaction costs are non-zero we immediately have to deal with situations where they have different levels under differing circumstances. His insight was to say that firms and other institutions will be established where the internal costs of carrying out operations are less than the comparable external transaction costs. Where the opposite is true firms will participate in the market as before.

By far the largest of the transaction costs of interim managers is the finding of opportunities (b), so it is instructive to look at the main routes that they have typically taken to reduce those costs:

  1. Use of intermediaries. This is the classic route to market. The cost of speaking to all possible clients is prohibitive (as well as being physically impossible for both interims and prospective client) and therefore agencies speak to clients and then call on their contacts within the interim community to fulfill assignments.
  2. Web and social network presence. This is increasingly important, not least as a form of ‘product surround’ for contacts made in other ways. One is, for example, expected to be on LinkedIn.
  3. Reliance on repeat business and word of mouth. There are a lucky few interims, and I have met some myself, who sustain themselves entirely by this route. You can recognise them by their smug smiles.

Point 3 is cheap, but for most of us is extremely risky. Point 2 is passive in nature and (like all marketing?) very difficult to measure the effectiveness of. And what of Point 1? What could we deduce from Coase’s theory?

Well, firstly the transaction costs won’t disappear just because those falling on the interim are lowered. The intermediaries will clearly seek to diminish their own costs and one key route they will adopt is the use of IT, primarily to manage the interface with the interims. This lowered cost of acquiring and managing new candidates, allied to the perceived low transaction cost for the interim managers themselves, means that more and more interims will enter the market reducing the value and pricing power of those already in it. Secondly, the agencies will seek, reasonably enough, to not only recover their costs but to maximise their return on them. As they own the end client relationship and have many possible candidates on their books for each role, this isn’t hard.

So, Coase’s concept of transaction costs would imply an interim market flooded with candidates unable to build proper relationships with end clients – logistically too difficult and too expensive – or with the intermediaries – resulting from increasing automation of the candidate management process – and gradually realising that they are not the self-employed professionals they had assumed, but are actually upmarket zero-hour casual workers.

Now, clearly Coase was a theoretician and I’m not suggesting that any of this has or will come to pass. And yet….

(a) Readers may, when considering who to believe on these issues, wish to bear in mind that Coase was awarded the Nobel Prize in Economics, whereas I was awarded an ‘A’ level. For an explanation of Coase’s opinions on externalities see here.

(b) The second largest is, I would suggest, managing credit risk

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