Irving Wladawsky-Berger

Why Do Firms Exist?

Ronald Coase, the eminent British economist and University of Chicago professor emeritus, turned 100 on December 29.  In 1937, Professor Coase published a seminal paper: The Nature of the Firm, which along with many other achievements earned him the 1991 Nobel Prize in economics.

The Economist marked Professor Coase’s 100th birthday with an article, Why Do Firms Exist?,  that reviews his major accomplishments.  I like its edgy first paragraph:

“For philosophers the great existential question is: ‘Why is there something rather than nothing?’  For management theorists the more mundane equivalent is:  ‘Why do firms exist?  Why isn’t everything done by the market?’”

Professor Coase’s work provides simple answers to to these questions.  He explained that, in principle, a firm should be able to find the cheapest, most productive goods and services by contracting them out in an efficient, open marketplace.  However, markets are not perfectly fluid.  Transaction costs are incurred in obtaining goods and services outside the firm, such as searching for the right people, negotiating a contract, coordinating the work, managing intellectual property and so on.  Thus, firms came into being to make it easier and less costly to get work done.

Why Is Civil Discourse So Important - Yet So Difficult

In his remarks at the memorial service for the victims of the Tucson shooting, President Obama urged us to be more civil in our dealings with each other:

“The loss of these wonderful people should make every one of us strive to be better.  To be better in our private lives, to be better friends and neighbors and coworkers and parents.  And if, as has been discussed in recent days, their death helps usher in more civility in our public discourse, let us remember it is not because a simple lack of civility caused this tragedy - it did not - but rather because only a more civil and honest public discourse can help us face up to the challenges of our nation in a way that would make them proud.”

Why is civil discourse so difficult?  This is a very important question, dealing with the very essence of being human.  I think of it as a Darwinian-kind of question.  As this provocative Economist article – “Why we are, as we are” - from December of 2008 observed:  “For a Darwinian, life is about two things: survival and reproduction.”

Humans are social animals, and like all such animals, we are ill-equipped to survive on our own.  Our social impulses cause us to naturally gravitate toward forming communities to help us get the necessary survival strengths from each other.  But our evolution - or at least our history - has also channeled these social impulses into forms that are tribal.  That is, we affiliate with our own kind and against the others.

The Evolution of the World's Digital Payments Infrastructure II

In part I of this entry, I discussed  the need to significantly transform the world's digital payments infrastructure to support the emerging evolution toward univeral mobile digital money.  This transformation is a very complex an undertaking that will require significant research and innovation, and will likely play out over many years.  Let me summarize some of the key challenges and opportunities.  

Payment Hubs and Clouds

There is near universal agreement on the need for new payment hubs.  As McKinsey's Payment Hubs: Redefining the Industry’s Infrastructure observes:  “Banks are struggling to cope with transaction platforms that no longer serve their needs.  A legacy of silo IT architecture combined with the need for data integration is leading these institutions to investigate payments hubs as a solution.  There seems to be little consensus, however, as to what a payments hub is (even among those who are building them) and where it sits in the overall payments system.”

The study identifies three major kinds of consolidation or aggregation payment hubs.

The Evolution of the World's Digital Payments Infrastructure I

The huge success of the Internet and World Wide Web was made possible by the continuous advances in digital technologies over the past few decades.  The technology advances were absolutely necessary, - but not sufficient.  The underlying IT architecture supporting the new Web-based applications had to radically evolve as well in order to take advantage of the advances in technology.  And the organizational architecture of the private and public sector institutions that were embracing these new Web-based applications had to similarly change, in order to translate these technology advances into productivity and quality improvements.

Web applications typically run on a three tier IT architecture.  In tier one, users link to the Internet with their PCs, smartphones and other devices, and access the Web with their browsers and related software.  These tier one clients connect to the tier two http-based web servers, which process the browser requests, access tier three back-end systems as required, collect all the needed information and send it back to the clients.  Tier three comprises the different applications and information in back end systems, including mission critical transaction processing and data bases.

This three tier architecture has contributed greatly to the success of e-business solutions, by making it possible to quickly combine the standards, universal reach and connectivity of the Web-based systems in tiers one and two, with legacy and new applications, data bases and other back end resources in tier three.

As we now contemplate the evolution toward universal mobile digital money and smart digital wallets, I believe that we are facing major changes not unlike those that accompanied the advent of the Web and e-business, which will require similar technology, architecture and organizational innovations.  The need for privacy and security concerning money, credit cards and personal IDs requires a highly sophisticated IT infrastructure to support this transition.  Today’s payment systems and the organizations that operate them will need to significantly evolve in order to handle the combination of huge transactional volumes, very low costs and high degree of security, as well as compliance with the variety of financial regulations in countries around the world.

The Evolution of Money

In 2010, the BBC and the British Museum collaborated in a project called A History of the World.  The heart of the project was a BBC Radio program which focused on one hundred objects from the collection of the British Museum, around which you can tell the history of humanity over the past two million years.  That history is presented in a series of fifteen minute podcast about each of the objects, written and narrated by British Museum Director Neil MacGregor and broadcast over the BBC throughout the year.

The objects and podcasts are organized into a number of themes.  Money is one of the themes.  It is represented by four objects:

• one of the world’s first gold coins produced over 2500 years ago in Lydia, western Turkey, whose last king was Croesus, of rich as Croesus fame;
• a 1375 banknote from the Ming Dynasty, one of the world’s first paper banknotes;
• a silver coin minted in Bolivia in the late 16th Century; these were known as pieces of eight and used as the world's first global currency throughout the Spanish Empire;
• and a plastic credit card exemplifying the changing role of money in the modern world.

Money, as one of the podcasts observes, has been one of the great constants in human affairs, right up there with sex and war.  Money was not necessary when people lived in small communities where they knew and trusted their neighbors and could therefore exchange labor, food or goods in kind.  But the need for inventing money arose once civilization started to expand and people were dealing with strangers they may never see again and could not trust, as was the case in Lydia and neighboring communities a few thousand years ago.  Money has played a major role in the world ever since, giving rise to commerce and economies, enabling the organization of companies and public institutions, and helping communities become more productive and raise their standard of living.

Principles and Compromises

Last week I posted a blog focused on the tax deal between President Obama and Senate Republicans as a good example of political compromise, - bringing people together with widely different opinions in order to get something concrete done.  Such compromises are the essence of effective governance, especially in highly complex organization, whether in business or government.

Are there limits to compromise?  Are there times when our sense of right and wrong should guide our actions?  Are there occasions when principles should trump compromise?

Absolutely.

For example, in 1953 IBM President Thomas J. Watson, Jr. published the company's first equal opportunity policy letter - one year before the U.S. Supreme Court decision in Brown vs. Board of Education and 11 years before the landmark Civil Rights Act - which said:  “It is the policy of this organization to hire people who have the personality, talent and background necessary to fill a given job regardless of race, color or creed.”  And he put IBM’s money where his mouth was – writing to two Southern governors that IBM refused to adopt “separate but equal” policies, and that if those states didn’t like that, IBM would locate its plants elsewhere.

Another notable example is President Lyndon Johnson’s personal leadership in overcoming fierce southern resistance and convincing Congress to pass the aforementioned Civil Rights Act of 1964 as well as the Voting Rights Act of 1965.  President Johnson realized that his party was going to pay a huge price for his actions.  “We have lost the South for a generation,” he is alleged to have told an aide right after signing the 1964 Civil Rights Act.  He was only wrong in that support of civil rights has lost the South to the Democratic Party for far longer than one generation.