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  • Uncertainty as a determinant of the transaction governance mechanism

    In the last blog, we discussed what could be the underlying logic for comapnies to choose between hierarchy and market to deal with transactions.In today’s blog we look at how bounded rationality influences this choice, and what are the problems that could come by. When organizations try to deal with transactions, it is the uncertainty and the transaction specific investments that have been seen to create a large variety of problems.
    It is pretty clear that bounded rationality has grown on the uncertainty organizations face – if not for the uncertainty, the bounded rationality would have no meaning. All parties involved in the transaction could ancticipate precisely how the transaction would evolve over time, and so managing it over time is very simple.A contract that specifies all the possible current and future states of the exchange and a clear statement of rights and responsibilities of the parties involved would have made the trick. 
    It could thus be said that greater the level of uncertainty in a transaction, the usage of contracts as a means of governance would be difficult if not impossible; hence a more likely form of governance in that case is the hierarchy one.
    In hierarchical governance, there is a dedicated third party, who decides how the unaniticipated issues that occur during the course of the transaction could be resolved. The parties donot need to anticipate the problems that might emerge eventually – they are taken up on and mediated as and when they arise.

  • When to choose Markets/Hierarchy as a governance mechanism

    In the last blog, we looked at the 2 underlying assumptions of the TCT. In today’s blog we shall discuss about how a choice of governance could be made between the market based approach and the hierarchy based approach.
    Organizations will invariably choose that form of governance that reduces any potential exchange problems created by bounded rationality compared to the threat of opportunism. There is not second thought that governance of economic transactions is a costly venture. Given this premise, we could state the following regarding the choice
    If organizations had to worry about minimizing the costs of governing their economic exchanges, then they would always choose market forms of governance. Alternatively, if the worry was about minimizing the effects of bounded rationality and opportunism on their exchanges, organizations would always choose hierarchical forms of governance.
    The organizations necessarily would have to take a call on which approach to take considering the priority and looking at the potential outcomes of the choice of governance they make.

  • Assumptions of the transaction cost theory


    In the last blog, we looked at Williamson’s TCT formulation. In the current blog we look at the 2 essential assumptions about economic actors engaged in a transaction.
    1. Bounded Rationality
    2. Opportunism

    Bounded Rationality is a term that we have used multiple terms thus far and essentially means – those who are engaged in a transaction are rational but have a limit to this rationality. What does this mean? I helps us realize that we would in the absence of such an assumption be writing contracts that would have unlimited complexity. Economic actors involved in the transaction simply cannot envision all the possible outcomes in an exchange relationship and there for formulate contracts for all eventualities.

    Opportunism refers to incomplete or distorted information disclosure towards misleading or confusing partners in the exchange. It would be highly complex to assume that all actors are always opportunistic, however it would be easier if we begin with the assumption that actors may behave opportunistically and it is extremely costly to make the distinction who is opportunistic and who is not – this is what TCT assumes. It is this threat that in the world we deal with much more than merely the promises.

    These two are important considerations – firms and people should always safeguard to avoid being victimized by the others.

  • Formulation of the Transaction Cost Theory – Williamson

    In the last blog, we looked at how hierarchies could enable effective and efficeint handling of the transactions within the organization. In today’s blog, we look at how Williamson formulates the Transaction Cost Theory – and discuss this further over the next few blogs.
    Williamson approahes TCT stating that markets and hierarchies are alternative instruments for completing a set of transactions. These are called “Governance Mechanisms”.
    While market form of governance relies on prices, competition and contracts to keep all parties to exchange informed rights and responsibiltiies; the hierarchical form of governance get these exchanges doen under an autoritative third part (the boss) who attempts to keep all parties in the exchange informed of their rights and responsibiltiites.
    The following picture summarizes these alternatives as suggested by Williamson’s TCT

  • Hierarchy as a reason for existence of firms – Efficiency derived there in

    In the last blog, we
    discussed why an organization would be necessary when we already have the
    markets that are efficient. In today’s blog we look at interesting reason why
    organizations have a hierarchy – stated differently this approach by
    Alchian-Demsetz approaches the reason for firm’s existence to be measurement
    and metering the problems.
    The measuring problem
    emerges when we talk about ‘team production’; where the underlying motivation
    is the production gains that occurs through cooperation amongst the people when
    executing a complex task. There exists an incentive to cooperate. It is always
    a possibility that there could some Shirking amongst team members and when this
    happens the incentive to cooperate reduces. Shirking could range from cheating
    to merely giving less than one’s efforts.
    The team production
    in such a scenario makes it difficult to assess the contribution of individual
    member – the means to monitor or measure do not enable rewarding based on
    individual productivity. This imperfect connectivity to the reward system could
    potentially get the members to work less diligently. Measures like, splitting
    the income generated equally amongst the members doesn’t eliminate the
    incentive to shirk. (This view might not strictly hold in the J-Form
    organization we discussed earlier; this again would have to be understood in
    the context of the society)
    Such a shirking
    behavior would potentially prevent a high-output individual to join the team;
    or if s/he joins the team, they may become shirkers too!
    In such a scenario it
    would become essential to monitor the team. Monitoring each individual would
    reduce the likelihood of shirking. This introduces a hierarchy of sorts for the
    first time. This doesn’t completely eliminate the hierarchy and there might be
    a need to monitor this monitor and so on. A strong case for this monitoring
    hierarchy with reduced chances of shirking emerges when the monitor is given
    the right to negotiate contracts with all the team members,  monitor their productive efforts and
    (crucially) claim any residual value created by the team has received their
    expected compensation. The final level of this monitoring would rest at the
    stockholders of the company – who could gain from the firm’s residual profit.

  • Interview – SecurityXploded.com

    Sachi: Good evening. Today we have with us NagareshwarTalekar who runs the community website called SecurityXploded.
     
    Nagareshwar, could you please begin the interview with a brief introduction about yourself and then explain what SecurityXploded is about?
    Nagareshwar: Thanks, I am a Computer Science Graduate from KREC – Surathkal of the 2004 batch. I joined Novell before moving on to Citrix where I worked on virtualization technology.
    Since my college days, I used to do a lot research and publish articles in sites like Codeguru, Codeproject etc. Most of the tools I built during that time were all free. I grew more passionate about this, I felt I would need to have a portal of my own where  I could share the work I did – so I finally launched my own website – the primary objective being to share the research work which revolved around reverse engineering and security tools. The site was named – SecurityXploded.
    The first tool I wrote was – “FirePassword” which was incidentally the first password recovery tool for Firefox, I then wrote another tool, FireMaster to recover the master password of Firefox. I would constantly add tools to this website based on the reverse engineering – so the website continued to grow.
    I was more involved in Reverse Engineering stuff figuring out hidden things under Windows, undocumented stuff and write tools around these discoveries to make the system better.For example: One of the tools I developed was the ProcHeapViewer – whichcan enumerate process heap memory on Windows  much faster than the documented API functions – reducing the time from 20-30 minutes to just 10 seconds!
    This quality work began getting attention from a lot of people. The users were steadily rising.
    Around the same time, the work at Citrix was draining a lot of my energy and I couldn’t focus my energies on my passion of reverse engineering and tool development – This was around 2010. Around the same time – the movie “3 Idiots” inspired me to make the choice of taking this passion fulltime.
    I guess the timing was also right – I had completed 7 years of corporate career; I decided to go full time to work on SecurityXploded and also had intention to run a Startup later on if things go well. That is when I decided to quit my work at Citrix.
    I made this my first priority to complete the tools in my long to-do list and began working full time on it. These helped the website rating increase too –We grew from “Alexa Rating” of top 500,000 websites to coming in the top 100,000 websites.
    Today we also promote a lot of local and international security conferences bringing more focus and success to these events.We also have local monthly meets along with other security communities such as null, g4h, owasp etc. Since this January we have also started a free training on ‘Reverse Engineering & Malware Analysis’ delivered by experts from corporate firms and some of our core team members. This is extremely beneficial for anyone either students or professionals working in this field.
    Sachi: Tell us more about building community and how challenging it wasto start with?
    Nagareshwar:  Looking at the work I was doing, my friends approached – then some more people to put their stuff on the website. But that time it was more of personal knowledge sharing site. Then it stuck me that I can make it like Community Website where other passionate folk’s mainly young security geeks can showcase their work. It can not only help them to utilize the popularity of the website but also take their work to wider audience in shortest span of time.
    So I transformed it to a Platform for contributors to freely publish their work.To make it easy for the contributors, I adopted detached model (rather than volunteer-ship) where they neither have to work for SecurityXploded nor have any commitment from their side.
    The intension was never to increase the contributors, but to help youngsters get early recognition and grow at the international level. Today we have instances where people have got very good jobs having put up their work on the website. We cannot take the complete credit for this but it has definitely helped them to grow from no-one to some-one. That makes the difference!
    So we are not like any community that runs on numbers and volunteers – this model mostly works as a medium to inspire youngsters to aspire for more – become role models for others. This is where I derive my satisfaction and motivation to live for another extra day J
    This website has taken a lot of my effort into it – it is not easy. For Example: When someone submits and article, I proofread it, fine tuneit, add graphics etc–giving it that professional touch. This makes the article look far more professional than the original one. This takes a dedicated 4-5 hours of effort from the draft to final article. At the end of the day it is worth it.
    Some of the contributors are now part of our core management team and they work on Training, leading local meets etc. All these efforts have immensely helped us to cut across the Indian boundaries and to grow at international level with strong community support.
    Sachi: Your site operates on a completely free basis – so the consumes of your website have given extremely good testimonies to signify the work you are doing. Could you explain a bit about that?
    Nagareshwar: Currently, the portal contains tool written by me as well as other contributors. I specialize in writingtools; I can write tools faster than writing an article. Of course excluding the research work which takes significant amount of time.As of today we have over 80 security tools, nearly 70 of them developed by me alone. Some of these are also comparable to professional software from Elcom Soft. A major portion of these are password recovery tools, and most of the users are from the US, Europe and India. Over the last year, the downloads have also increase in line with the growth of the site ranking.
    Our tools are recognized & published by leading downloading sites like Softpedia, Brothersoftetc and given 5 star rating, editor pick awards etc. Around 5 of the tools have crossed over 100,000 download mark. Our best tool, Facebook password tool has crossed over 800,000 downloads in just 14 months! Imagine if we had charged $1 for each download and assume 10% conversion – we would have been far wealthierJ.
    Our users are either home users or professionals spanned across the world, but last year we had one special person – who works in Forensic investigation at Police Dept of Delaware County, USA. He wrote to us thanking for our Password Recovery tools and how they have helped in his forensic investigation. That was one of the special moments and he later sent us testimonial also which is featured on our site. Another memorable testimony was from the president of CompUSA – for our SpyDLLRemover tool. We have also received nice words from couple of security community founders citing our good work.
    These testimonies inspire and keep us on our tows all the time.
    Sachi: Your website operates on a completely free model, and you haven’t worked for the last one and half year. How do you manage your finance?
    Nagareshwar: Yeah, frankly it has been difficult period. It is not easy to convince people at home – saying you are on our own, running a community etc. especially in the Indian context. More than the money part, convincing at home was most difficult task and people are still not convinced.
    I had planned that; this activity would take substantial amount of time and so had been saving for a while. I am not married Jand have noother financial liabilities too. The internal urge was getting stronger, and I knew I had to jump in full time at some point. I expected it to be difficult and had planned my finances for a year or so.
    At the SecurityXploded end – the major cost for us was the hosting – it doesn’t come free. Initially I paid it from my pocket, but later on it become difficult when last year we moved from shared hosting to dedicated-hosting. Now the advertisements and promotions help us to cover the hosting cost.
    It is the satisfaction at the moment that I derive. And finally what goes around comes back around.
    Sachi:  You have been doing this for the past 4-5 years, it takes a passion to do something like this.What drives the energy for you?
    Nagareshwar: Yes it has been nearly 5 years. Initially, it was a difficult especially when you try to manage your full time job along with it.
    The sort of reverse engineering I do, generally goes for days often weeks together –you constantly concentrate on the binary numbers on your screen.Once the research work is completed, it will lead to new tool or article. This takes a lot of work and energy. It is primarily the passion that has kept me kicking all these years. Inherently I am blessed with lot of energy and passion that drives me to do things – I guess it’s a God’s gift to me which helps me keep running.
    Sachi: What is your message for aspiring entrepreneurs?
    Nagareshwar:  The most important is – pursue your passion.
    An entrepreneur needs to look beyond the monetary gains. An enterprise cannot be built with only money as the motive. You would have to be passionate and believe in your ability to pull off things that you dream of. Only this can help you sail in the tough times and surge ahead!
    Sachi: Thanks Nagareshwar, thank you once again.

  • Why do we require organization?

    In the last blog we
    began our journey towards understanding the various organizational economic
    theories. In today’s blog we initiate a discussion on “why organizations
    exist?”
    For many this
    question would raise some odd feeling – Why even as such a question? We know
    organizations exist, so why did into this at all? It is important to understand
    this question – since in many ways this forms the starting point of
    organizational analysis and there by organizational economics.
    We shall begin
    attempting to answer this question with Adam Smith’s insight that – economy
    could be coordinated by a decentralized system of prices – “the invisible
    hand”. Economics post this aimed at identifying the necessary conditions
    for the effective use of the invisible hand, and designing changes in these
    settings where the conditions are lacking. Continuing on the same lines, it
    would be interesting to ask – since the market is so effective in coordinating
    economic exchanges why would we ever need firms to manage this?
    The answer to this
    question of the existence of firm was provided for the first time by Coase (1937)
    who suggested that sometimes the cost of managing economic exchanges across
    markets is greater than the cost of managing economic exchanges within the organizational
    boundaries. – This argument essentially placed “transaction costs” at
    the center of the analysis of the reason for firm’s existence. In a way the
    theory put markets and organizations as alternatives to managing the same
    transaction.
    Over the next few
    blogs we look at understanding the various theories that fall into this stream
    of organizational economics

  • Organizational Economics – and streams

    In the last blog, we discussed about the reduction of “transaction cost” if there is a trust that is built between the firms. The term “transaction cost” has been discussed multiple times thus far, and it would be apt if we describe the term – starting from this blog we begin a discussion on “organizational economics” that would continue over the next few blogs. The primary resource for our discussion over the next few blogs would be a chapter from the book “Handbook or organizational studies – S R Clegg, C hardy and W R Nords from Sage publications”. In this blog, we look at the understanding the nature of organizational economics since the term is pretty new to most readers. 
    Organizational Economics is a type of organizational analysis that generally relies on equilibrium analysis, assumes profit maximizing managers and uses abstract assumptions and models, but having said these we always would find exceptions to this. The real underlying commonalities in all the theories of organizational economics are 
    1. The interest in structure, functioning and implication of firms
    2. Relation between competition and organizations
    3. The probability of organizational survival
    Having said that competition is a subject matter of interest, it doesn’t preclude discussion on cooperation within and between firms. For the sake of study, literature on organizational economics has been classified into following streams
    1. Transaction cost economics
    2. Agency theory
    3. Strategic management theory
    4. Cooperative organizational economics
    We shall discuss these 4 streams and the theories in them over the next few blogs.

  • Role of Trust in an outsourcing scenario

    In the last blog, we looked at the possible reasons that could prevent a company from choosing to go ahead with outsourcing. In the current blog, we look at how the alignment of the economics related to outsourcing would change when one begins to consider the factor of trust.
    It is common knowledge that Airtel has outsourced most of the network tower maintenance and equipment setting up to companies like Ericsson and IBM. Does it change anything in the equation when we have a pretty well known company to partner with? A careful look at the detail and we would begin realizing the benefits possible.
    I read the following on a recent update on facebook status – “Trust is like an eraser, it becomes smaller after each mistake” I guess it’s also true that every time we adhere to what was promised the trust would grow! The brands we know today are not just a marketing head start – it is a good match of what was marketed with good operational execution. – IBM and Ericsson have built the brand this way.
    When Airtel gets into an outsourcing agreement with these majors towards implementing the network – Airtel doesn’t have to really worry about hedging the opportunistic behavior to a great extent. A history of acceptable behavior by an organization generates a reputation of trustworthiness; this intern creates confidence in the companies that align with the organization. The trust that the 2 parties have on each other reduced the otherwise high “transaction cost” associated with such an outsourcing. 
    In summary, it makes a lot more sense for a company to build a reputation – as a hedge against the possible opportunistic behavior. This reduces the transaction costs the 2 parties in the outsourcing would have to incur.

  • When not to consider outsourcing


    In the last blog, we looked at the risk of possible opportunistic behavior in an outsourcing scenario. In the current blog, we look at some of the reasons why the organizations would have attempted to avoid outsourcing of tasks in spite of the economic benefits that the company would gain.

    We can identify 3 possible reasons for companies to stick to carrying out these tasks in-house instead of outsourcing:

    1. Knowledge Spillover
    2. Poor performance by the supplier 
    3. Retain and Build competency for long term competitiveness

    Companies generally use contracts to ensure that the outsourced tasks could be forced, however there are many scenarios where some tacit and complex knowledge would have to be revealed to the supplier – the company that has outsourced the activity incurs the risk of such information being leaked to the competitor – this is one reason where outsourcing is not preferred. However making a sweeping statement wouldn’t be appropriate – it is again dependent on the industrial context. While in the Indian advertisement industry companies do not engage the same agency, it is pretty common for the large competing companies to engage the same consulting firm (obviously for reasons the teams working would be different on these projects)

    Companies would also consider doing the task in house when poor performance by the supplier has the potential to damage other organizational resources. If companies find that food served in the cafeteria has been the reason of displeasure of its employees, there have been instances where the change of these companies has been extremely frequent and in some cases the company has initiated the step of getting the cafeteria managed in-house!

    The third point of retaining and building the resources that the company feels are important for the long term survival is pretty obvious. It doesn’t need any great depth of explanation. The critical interdependence of the tasks of a company is important considerations that a company would consider while making an outsourcing decision.