Dispatch - Q3 2021

The Nobel Prize-winning economist Ronald Coase questioned, in an article called “The Nature of the Firm,” back in 1937, what it meant to be a company, or a “firm” in his day’s parlance.  David Gaspar, Partner and Head of Innovation at Gather, explains Coase’s theory for us. 

“Coase posited that employees are the core of a firm, but that not all workers in pursuit of the firm’s goals need be employees,” says Gaspar. “He imagined what would come to be known as a gig economy, in which friction costs to engage specialized workers would be low. These workers’ tasks would be core to the company’s mission, but the workers didn’t need to be core to the heart of the business — or what we may now call ‘corporate culture’ and externally experience as ‘brand’.”

Coase explains:

It is clear that these are alternative methods of coordinating production. Yet, having regard to the fact that if production is regulated by price movements, production could be carried on without any organization at all, might we ask, why is there any organization?

Coase proposed that even though open markets relentlessly drive down prices, long-term work partnerships (i.e. firms) are preferred because they can produce goods and services internally without having to pay the steep transaction costs associated with developing new business relationships. He summarizes these costs in “The Problem of Social Cost”:

In order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on.

Full time employment often isn’t ideal for businesses because at some point, the costs of performing a function inside the business begins to increase. As companies grow, the trust and social ties that lubricate the flows of information weaken. To solve this, companies introduce committees and standards of procedure to ensure that processes are executed across the organization consistently. These procedures become calcified over time as institutional knowledge. Such bureaucratic measures tend to slow large organizations down, and leave the business vulnerable to external disruptions. 

But, even back in 1937, Coase was able to recognize that technological innovation would steadily drive down these transaction costs, making it easier for firms to specialize, and outsource secondary functions to external workers. Modern companies take advantage of these innovations, and seek to achieve an equilibrium between internal and external workers, expanding workforces through partnerships with agencies and third-party vendors, temps, consultants, and freelancers. Today, the average corporation is a global hodge podge of all these modes of doing work. Its boundaries are porous and vague, with a value chain that runs in and out of the corporation’s four walls. 

“The question that today’s organizations face isn’t whether or not to engage external experts, but rather when to stop,” says Gaspar. “At what point is a firm no longer a firm and instead a network of affiliated parties aligned to a goal? Is a brand the label on the box, or the people behind the product? The truth is both. Brand equals trust. Brand is product and service encapsulated in a logo. That trust used to be extended to the employees who worked and want to work for that brand. I envision that tomorrow, the brand will be not just who a firm employs, but will extend outward in a network of trusted practitioners of various crafts. The brand’s strength will be judged in part by how well they can attract such practitioners, thus extending the breadth and depth of that network.”

We expect tomorrow’s organizations to be even more amorphous and flat, like a peer-to-peer network instead of a top-down hierarchy, with more specialized workers who sit outside of the company than inside. Work will necessarily become more relationship driven, as people will come to rely less on formal procedures and more on trust networks composed of people they know will deliver consistent work. The supply side of the labor arrangement (the workers) seem to have already figured this new paradigm out, and are driving the shift. How long will it take the demand side (the firms) to catch up.

Up to 40% of us are thinking about quitting our jobs. Economists are calling it The Great Resignation. Some are quitting because their companies are pushing them to return to the office. But we think this phenomenon indicates a more fundamental shift: in the push-pull power struggle between knowledge workers and management, workers have more power than ever before.

Some of that’s due to the surplus of jobs to be had (there are now a record 9.3 million open jobs in the U.S.). But it’s also a result of bigger technological shifts that make it easier than ever for workers to bounce around. It’s easier to establish trust, with tools like LinkedIn providing transparency to employment histories and professional certifications providing badges for practitioners. It’s also easier for employers to plug new recruits into existing workflows, with streamlined onboarding, since software tools have consolidated across organizations (salespeople know how to use Salesforce, product managers all know how to use Trello, QA engineers know how to use Jira, etc.).  

But to fully understand why this is happening, we need to look back long before the pandemic. In 1959, Austrian management consultant Peter Drucker coined the term “knowledge worker.” And at the turn of the century, he claimed that “we are in the year 2000 roughly where we were in the year 1900 in terms of [understanding how to improve] the productivity of the manual worker.”

It’s estimated that over the last century, advances in factory organization and automation increased the productivity of manual laborers by a factor of 50. What Drucker meant is that knowledge work had not yet been systematized or templatized to the extent that it could be analyzed and improved. In other words, as of 2000, knowledge work had yet to see its Henry Ford.

Some believe this may now be changing. Much of knowledge work is now done on tech platforms, where user behavior can be tracked and analyzed by machine learning and other tools. We can expect large, complex projects will be broken down into discrete parts that can be performed by different geographically dispersed teams, and orchestrated through collaborative platforms infused with AI. But ultimately, as automation eats away at things formerly called “knowledge work” we can expect knowledge workers to shift into even more abstract, higher-level tasks that are even harder for machines to do.

“We’re going through the throes of a total revolution in management,” says Gather’s Ben Edwards, suggesting that many managers today are stuck in the 20th century, still drawing from management theories established in 1909 by Frederick Taylor’s “The Principles of Scientific Management.”

“Before Taylor, we had a world of skilled artisans, and the artisan owned their own process and their own means of production,” explains Edwards. “When they showed up in factories in the beginning of the 20th century, you’d have a foreman, and the foreman wouldn’t have any opinion about how the work would get done.” This was because the artisans, having perfected their craft across centuries of master and apprentice relationships, knew best.

But when Taylor, Ford, and others began to develop the sciences of management theory and organizational design, this led firms to break down tasks into discrete pieces, and apply technologies to improve productivity at each step. This was, more or less, the end of the artisanal era, where artisans applied their expertise to production.

“The idea was to disenfranchise the worker from their skill set,” says Edwards. “And the way we did that was by studying what workers did, and by then owning the processes.”

But knowledge work, being made up of abstract problem-solving, is much harder to observe, measure, break down, and templatize (the introduction of AI notwithstanding). Edwards sees our current moment as a resurrection of the artisan, with knowledge workers acting as free agents, maintaining a commitment not to their employers, but to their craft. In the case of software development, we can even see the resurgence of guilds, with open-source software communities managed by voluntary steering committees hosting conferences, where the most knowledgeable practitioners of a programming language are able to share their expertise with their colleagues. Large tech companies go out of their way to sponsor such events, and pay their workers to speak at them, even though this does not contribute directly to their bottom line. They must do so because engineers are now often more dedicated to developing fungible skills than they are to cultivating political clout and rising through the ranks of a particular company.

Edwards believes that upskilling is becoming increasingly crucial for knowledge workers, and not only in tech, because modes of work are changing so quickly, and because it gives them more independence and security.

So how can managers move into the 20th century? 

Edwards argues that given how difficult it is to measure the true output of knowledge work, managers first need to give up control. 

“Often, the most elegant, beautiful code is the simplest and shortest,” says Edwards. In other words, it’s not about the quantity of the work, but the quality. So it’s often misguided to try to measure output of knowledge work in terms of lines of code. “There’s no linear way to put X amount of hours in and solve Y number of problems out,” he says.

“Don’t give them a task to complete. Give them a problem to solve,” Edwards continues, advocating small, cross-functional teams, supported by an environment of learning and a motivational model that rewards learning. “Invest heavily in allowing them to build their skills because that is their lifeblood,” he says.

“The apprentice was only as good as the time they spent being taught by the artisan,” says Gaspar. “Modern corporate dynamics found time for face-to-face skill building moments, between meetings and in other moments of downtime. We need to be intentional and pay attention to the next generation of knowledge workers, and how we modern day artisans are passing our skills and traditions down to the next generation.” 

As independent knowledge work continues to evolve, managers will need to develop new ways of organizing, assessing, training, and compensating knowledge workers, in order to streamline workflows and align incentives. For example, contract workers require a different kind of management, with service level agreements that set proper expectations for all parties. We can expect technology to perform much of the admin work that so-called “middle managers” used to perform. 

If our assumption is correct that the nature of the relationship between management and knowledge workers is going to be fluid and flexible, this means that managers will need to figure out how to align the incentives motivating the people contributing to their output, be they freelancers, partner firms, or in-house employees. 

The traditional model can be roughly described as follows: companies hire employees on a full-time basis, agreeing on compensation at the outset. Due to this payment model, bosses often try to squeeze every last ounce of productivity from their workers, and often grow concerned that they are loafing when not in sight. A polarity emerges: employees are incentivized to work hard to the point of burnout to build their reputation within the organization, or they perform the bare minimum of work to squeeze by their performance reviews with an eye toward the door. It’s a fraught dynamic that can become somewhat adversarial. 

We advocate a different approach that we think can solve this problem for many (but not all) workers. Companies can ditch the 40-hour work week and move toward a compensation model where managers pay workers for completing projects rather than butts-in-seats time. While it doesn’t work for every situation, it’s an arrangement that allows each party to feel respected and fairly compensated. Technology helps — this approach is partially made possible by the flourishing of digital applications that allow firms and workers to more efficiently and accurately plan, execute, and track the work being done.

We don’t expect traditional full-time work to disappear any time soon, no matter how frictionless independent work becomes. Full time employment lends itself to work that’s unstructured and unquantifiable. While outside expertise can yield refreshing new ideas, brands need workers that can define its values by living and breathing them every day. The future of work isn’t fully remote and independent — it’s hybrid. The challenge will be for companies to determine what kinds of work and workers belong in house, and what is best delegated externally, and figuring out how to elegantly integrate both. We’ll be looking deeper into this subject in the next Dispatch.

Some CEOs have resisted hybrid work because they want to ensure their people are productive, and they don’t know how to do that without maintaining constant surveillance. But managers who feel they need to look over their workers’ shoulders may well have already lost the productivity they think they’ve secured. Edwards similarly advises against measuring productivity in man-hours, suggesting that this is a recipe for busy work.

We think that in the long term, pandemic or no, the office spaces that persist into the future will not exist because they allow for hot-swappable cubicles, or for face time with the boss. They’ll be for serious collaboration and water cooler socializing, two things that are difficult to encourage when everyone’s dialing in. 

There is a certain flow of collaborative work that can only be achieved with physical co-location. Anyone who’s been part of a hackathon or other fast-paced project knows what this feels like, when everyone is in sync, seamlessly connected in physical space, like worker bees in a hive. While productive remote collaborations are certainly possible, we think offices will be reserved for this level of collaboration, when workers need to be able to bounce complex ideas off one another without having to schedule a Zoom meeting. 

Secondly, we think offices will transform to allow for more fun and the cultivation of camaraderie.  It’s important to enjoy the company of one’s coworkers, and there’s a certain level of intimacy that yields effective collaboration. Offices must provide spaces for team-building experiences to occur. 

A piece in the Harvard Business Review argues that the biggest factor limiting the rise of gig work in the knowledge economy is not technological but organizational and cultural:

Gig workers in the knowledge economy will have to work with and for firms that have pronounced values, incentives, practices, and preferences. But they do not assimilate easily into these organizations (unless they join them) as they often work at arms-length with them and are seen by people in the organizations as outsiders — or even threats — impeding effective cooperation and creating the potential for conflict. In this context, gig workers often struggle to understand, let alone accept, the larger organizational processes, people, and politics of many of the people they have to work with.

How could you possibly prove that distributed workforces can effectively assimilate to a company’s culture as full time in-office employees? This hypothesis was, of course, unfalsifiable, until now. The pandemic forced a global test environment for large organizations to determine whether remote work resulted in a loss of productivity.

One of the most striking things about the pandemic wasn’t how much the economy suffered, but how much it didn’t! Despite all the havoc wreaked upon the market and geopolitical uncertainty, despite all the supply chain disruptions and workplace closures, despite record unemployment — as terribly unfortunate as all of those things were, the U.S. economy managed to keep chugging along. Analysts attribute this resilience to the knowledge economy’s ability to quickly adapt to remote work conditions. A lot of knowledge workers simply kept working, with a few formatting shifts. 

Although the pandemic was a world-historic tragedy — and we’re not out of the woods yet — the resilience of knowledge work is a reason for everyone to be hopeful, and indeed grateful. Businesses should take the opportunity to test and learn, and continue the experiment.

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