Boisterous -> ... rough and noisy; noisily jolly or rowdy; clamorous; unrestrained: the sound of boisterous laughter. 2. (of waves, weather, wind, etc.) rough and stormy....
It is both interesting and enlightening if we try to analyze corporate related matters using an economics context.
Most organizations adopt a team coordination method of organizing economic activities within the firm, though more recently the trend of moving towards BPO, KPO, LPO and other sorts of process outsourcing bring us some sights that structure, size and scope of a firm may hinders healthy growth.
A well known problem, the Principal Agent problem must be taken of if a firm is going to work towards maximum efficiency, that is to maximize profits.
The problem is ubiquitous.
Shareholders (Principal)- Board of Directors (Agent)
Board of Directors (Principal) - CEO (Agent)
CEO (Principal) - C level management (Agent)
C Level (Principal) - Senior Management (Agent)
Senior Management (Principal) - Middle Management (Agent)
Middle Management (Principal) - Senior Executive (Agent)
...
...
And the list goes on, depending on the organizational breakdown structure.
Basically, the idea is if you appointed someone to conduct certain duties for you, it is your own self interest that these duties are carry out successfully and your representatives might not have the same self interest as you. Thus, we absolutely positively shall have conflict of interests, though these conflicts might not be so obvious most of the time.
When we have OBS what we effectively try to achieve is to establish chain of commands. Command oriented activity organization requires close monitoring and it is this kind of monitoring that decreases the effectiveness of decision making.
I am not implying that command oriented management style is irrefutably bad. It is very suitable where 1.) Close monitoring is valid, possible and low cost or 2.) The cost of irreversible decisions and actions is unacceptably high.
Armies, production workers, bank tellers, students in exam room and so on can be efficiently controlled using command style.
However what about top management executives, R&D personnels, sales person? Frankly speaking, it's about incentives!
People often misinterpret the statement "maximizing profit". It doesn't mean that the firm shall be able to maximize profit at the expense of human, process and product. We all know (do you?) that it is possible that by spending more you could earn more. That's right!
Let's take an example of human productivity in a firm. Ceteris paribus, employee's non-monetary demand of incentives is elastic and using this knowledge every extra 1,000 dollar spent as non-monetary benefits to employees can turn out to churn more productivity and thus increases the total output, i.e. more man hours and completed projects, which eventually leads to improved profit. If you spend 1,000 bucks and get back 5,000 bucks worth of employee's time, it's a superb deal!
Ok, but remember the assumption here, this only works if the demand is elastic!
And more importantly, the demand curve is sloping downward. The effect of every additional unit of benefit spent on a particular employee shall have less goodness effect than the previous unit. For example, let's say you provide 100 dollar of telephone service allowance to an employee, the incentive effect of providing another 100 dollar of such allowance to the same fella will be so insignificant because 1.) Human loves varieties and choices 2.) The fella will perceive the value of spending the same 100 dollar on let say, meal allowance higher than 100 dollar extra on telephony.
Rule of thumb: The more you have something, the less you value it.
Another obvious example is the effect of 500 dollar increment on a person who earns 1,000 dollar currently and one who earns 5,000 dollar. You see it now?
To amplify the matter, imagine a mid sized firm with 500 employees, how the heck you are going to cater into everyone's need? Simply stated, it doesn't worth the time to microly manage and reward but then you need to ensure the efficiency of the firm. Phew!
The good news is this dilemma faced by firms is just a minuscule version of the one happening in most markets.
It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.
~ Adam Smith
If the same invisible hand can naturally regulate a market, why can't the same principle be used to optimize firm's efficiency?
If every stakeholder have a strong interest in the success of the firm, why not we formalize such an interest and make it a norm, a culture and a driver into the firm.
If the firm's success is measured by the economic profit it earns, then everyone must be measured by this metric explicitly.
Emmm... my initial thought is
(3P) People, Process, Product -> Things to manage
(4P) Professionalism, Performance, Predictability, Profit -> Aspects to manage
For example, Employee A (People) must be reviewed and appraised based on the 4P above.
Professionalism, Performance and Predictability can be aggregated to firm level qualitatively since I haven't know any working quantitative methods for them. But Profit definitely shall be aggregated quantitatively.
My model is Profit determines the total (extra) benefits a person entitled and other aspects decide how much actually they will get. To achieve this end, a proper project and task level accounting is needed and must be enforced firm wide for consistency, comparability and compatibility.
Let's work out an example.
Project: CMMI Internal Implementation
Customer: Internal
Budget: 1 million dollar, 1 year
Imagine the PM worked out a plan with 100 tasks and each task is costing 3 days and 5k. If everything works out according to this plan, the profit shall be 1 million - 500k = 500k (Wow, this seems like overbudgeted, LOLX). Say, 10% of the profit will be distributed as monetary/non-monetary incentives to the staffs, that's 50k (Total entitlement). Of course, some lazy staffs will get less due the results of appraisal based on Professionalism, Performance and Predictability. But the fact is that people know very clear of the benefits of working efficiently, i.e. saves cost thus increases their personal profit.
This game will have the elements of collaboration and competition. People will work together to achieve a coherent goal and compete against each other to maximize the value of the firm's scarce resources. Turnovers and dropouts are occuring because of inefficiency and this is encourageable because it helps to eliminate the inefficiency naturally from the firm. Equilibrum is not far from us...
I think I will stop here today. More to come when improvise again in the future!
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