With the near collapse of the financial system and the current stagnant state of economic affairs created by the Great Recession, he asks pointed questions about the profit motive, such as when to strive for it and when not to.

“Is profit a ‘good’ thing—or isn’t it?” he asked during the height of the recession in a blog post on the “value that every business needs to create now.”

His point is that there are good and ethical ways to make a profit, which he calls “thick value,” and there are bad and harmful ways to grab for profit, which he terms “thin value.”

“Profit through economic harm to others” results in thin value, he says. “Thin value is an economic illusion: profit that is economically meaningless, because it leaves others worse off, or, at best, no one better off.” Thin value is what the “zombieconomy” creates, he continues. “The healthcare industry profits, but Americans get poor healthcare. Automakers fought tooth and nail against making sustainably powered cars. Manufacturers of all stripes stay mum about environmental costs. Clothing companies can’t break up with sweatshop labor. The clearest example of thin value, is, of course, banks: they invested our national wealth in assets that turned out to be literally worthless.”

Haque says the fundamental challenge then for 21st Century businesses and economies “is learning to create thick value. We’re seeing the endgame of a global economy built to create thin value: collapse. Why? Simple: thin value is a mirage — and like all mirages, it ultimately evaporates.

“In the 21st Century, we’ve got to reconceive value creation.” The company that beats up its suppliers on price every year may make some short term gains, but is it creating long-term value and valued partners?

He’s coined the term Constructive Capitalism. Constructive Capitalists are “disrupting their rivals by creating thicker value” and employing ethical values.

Haque defines thick value as “sustainable, meaningful value — and a new generation of radical innovators is wielding it like a strategic superweapon.

“Are your profits, like mobile operators, built on hidden costs, surcharges, and monopoly power — or on awesome stuff that makes people meaningfully better off?”

A deeper discussion on the economics of thin and thick value was presented by Haque at the BRITE ’09 conference.

Haque is the director of the Havas Media Lab and he founded Bubblegeneration, an advisory boutique that helps shape strategies across media and consumer industries.

Lesson for outsource practitioners: “Not all profit is created equal,” as Haque says, and neither is outsourcing. He  challenges the conventional one-sided profit-at-all-cost attitude of many businesses and their partnerships. In the same vein Vested Outsourcing and the Five Rules challenges traditional transaction-based, cheapest-cost relationships in favor of a collaborative, flexible, mutually beneficial approach in which all share the rewards of working together to create the bigger pie, the thick value.

Economic recovery hinges on values and the proper allocation of capital, he says. How thick is the value you are creating in your outsourcing arrangements? Are you Getting to We, and bringing new thinking and value to life?

Coase’s groundbreaking work around the institutional structures and practices of companies began in the 1930s.   In simple terms, Coase said that it was not enough to concentrate only on production and transportation as the main costs of doing business. Rather, the University of Chicago professor asserted that businesses needed to also consider the cost of entering into and executing contracts.  His viewpoints came to be commonly be referred to as transaction costs.

Today’s companies expend a considerable portion of their total resources on transaction costs. When all transaction costs are part of the mix of doing business, it turns out that the existence of firms, differing corporate forms, variations in contract arrangements, and even the structure of the financial and legal system can be given relatively simple explanations, according to Coase and a long line of Chicago School economists.  By incorporating the different types of transaction costs, Coase paved the way for a systematic analysis of economic institutions.

]]> http://www.vestedoutsourcing.com/the-big-thinkers-part-1-ronald-coase-transaction-costs-or-business-is-a-math-problem/feed/ 1 http://www.vestedoutsourcing.com/is-it-better-to-leave-money-on-the-table/ http://www.vestedoutsourcing.com/is-it-better-to-leave-money-on-the-table/#comments Tue, 19 Jan 2010 12:00:37 +0000 Kate Vitasek http://www.vestedoutsourcing.com/?p=686 If it seems like I’m a little stuck lately on Oliver Williamson’s Nobel Prize-winning research on Transaction Cost Economics (TCE), and specifically how he has tied outsourcing contracts and supply chain dynamics to his TCE research, it’s because I am.

Stuck may not be the right word actually, it’s more like really impressed and fascinated with how his scholarship dovetails so nicely with the Vested Outsourcing concept of working aggressively, flexibly and cooperatively to achieve mutually beneficial or ‘win-win’ outsourcing agreements.

In a previous post. I talked about the implications of Dr. Williamson’s TCE research for outsourcing at what he describes as the “interfirm make-sell-buy” contract and conflict resolution level. He outlined this in a 2008 article in the Journal of Supply Chain Management (“Outsourcing: Transaction Cost Economics and Supply Chain Management”).

I was reviewing some of his work again, particularly in connection with his description of the three types of hybrid contracts – muscular, benign and credible – and I was fascinated by his discussion surrounding the common economics aphorism, “Never leave money on the table.”

Could it be, as Dr. Williamson suggests, that it’s “better to leave money on the table,” to not win every negotiating point?

Well yes; in the case of a credible, mutually beneficial contract that idea might be just the ticket for a winning and adaptable contract.

Never leaving money on the table has cache, especially in a muscular contracting arrangement, Williamson says, because “money left on the table signifies waste that can be converted to mutual gains by perfecting the bargain.” It’s an important lesson, he continues, but “as with many aphorisms there can be too much of a good thing.”

The economists’ dictum to never leave money on the table has been disputed by some investment bankers and businessmen who advise ‘always leave money on the table,’ Dr. Williamson says.

“But that sounds foolish. How could this be?” he continues.

As sometimes happens good theory (for one purpose) and good practice (for another) can part ways.

For one thing constructive and strategic contractual points are sometimes hard to differentiate. What exactly are the parties’ intentions going into a negotiation?

If there is a strategic, rather than constructive, purpose that skews the contract in one party’s favor “and if real or suspected strategic ploys invite replies in kind, then what could have been a successful give-and-take exchange could be compromised,” Williamson explains.

Asymmetry will rule the day as each party tries to gain and regain the upper hand.

This activity ”could plainly jeopardize the joint gains from a simpler and more assuredly constructive contractual relationship.

“Always leaving money on the table can thus be interpreted as a signal of constructive intent to work cooperatively, thereby to assuage concerns over relentlessly calculative strategic behavior.”

That’s a contract with credibility from start to finish. And that’s where the rubber meets the road for Vested Outsourcing.

In contrast to a one-sided muscular contract or an idealistic benign contract, “credible contracting is hardheaded and wise,” Dr. Williamson says.

The parties are hardheaded because they expressly work out contract commitments “to which mutual benefits can be confidently ascribed.” They are wise if they avoid contract provisions that “invite the escalation of strategic behavior with net negative effects.”

And they are brave and foresighted if they see the value of leaving money on the table.

After all, outsourcing may be high stakes but it’s not poker.

It’s fair to say that collaboration is an essential key to survival and bottom-line prosperity.

Global companies know this but they still struggle mightily with the challenges of integration and collaboration across their increasingly complex and widespread networks.

A new study, sent to us courtesy of Peter Moore, vice president, Government Services of Celerant Government Services Inc. underscores this point. “Most companies know that a global supply chain needs to be in touch with all partners involved,” he says, “but very few companies out there are actually doing it.”

But it’s even more than that: It used to be that collaboration was the innovation – maybe it still is for many companies – but nowadays companies need to collaborate to innovate.

The Business Performance Management (BPM) Forum and the Chief Marketing Officer (CMO) Council released “Greater Innovation Through Closer Collaboration” in early December. Sponsored by Sterling Commerce and AT&T, the 48-page report is based on a survey of more than 400 executives and managers whose companies do business around the world, and about 36 percent of the respondents represent companies with revenues of more than $1 billion.

“Twenty-first century business models are more dependent than ever on complex, cross-company collaboration for business innovation, product and service delivery and customer satisfaction,” said Liz Miller, vice president of the BPM Forum and CMO Council.

The survey illustrates this point: Nearly 70 percent of the respondents say that business partners are essential to their companies’ go-to-market processes, customer experience and competitive position. And more than half say their partner networks are becoming more global and complex.

Yet, only 6 percent of survey respondents believe their companies are highly effective in integrating, coordinating and optimizing their business partner networks.

“Most companies are struggling to collaborate with partners and almost universally believe there is a significant deficiency in the way they integrate information exchange and processes across their partners networks,” says the report.

More findings:

• Only 5 percent of respondents said they have end-to-end data and process integration across their networks, although 51 percent report some level of integration with select partners.
• About 64 percent say they have either no ability or an unsatisfactory ability to extend and leverage their internal systems to selling and service partners.
• Some 75 percent have either no or unsatisfactory ability to extend and leverage their internal systems to suppliers and outsourced service providers.
• Only 30 percent say they effective in sharing customer data and insights with partners to enable innovation.

Those are some pretty lackluster results about the state of collaboration in 2010, especially the last point. It seems that trust is still a thorny hurdle – as in establishing it from the get-go.

Quoted in the report, Lisa Ellram, Professor of Distribution Management at Miami University of Ohio, said: “A lack of trust (in one’s partners) causes companies to insert extra assets all over. For example, they will have extra inventory everywhere and more suppliers than they need.”

Ellram’s thought jibes well with what we talked about last week, based on the research and work of Nobel laureate Oliver Williamson and his Transaction Cost Economics, particularly in coming to terms with supply chain  “maladaptations” and the bounds and rationality of contracting.

That is where Vested Outsourcing can change that game by getting into the ‘What’s in it for We’ mindset from the very start of the relationship.