Ave Maria Lane, Business, Employment, Freelancer, Nature of the Firm, Ronald Coase, Social Sciences, Sue Lawley
I went to inaugural Freelance Lecture, held in the Stationers’ hall by the PCG last night. Sue Lawley was a charming and wonderfully effective chairman but I am afraid that although the speaker Dr Bellini is a “leading futurologist” he seemed to lack an understanding of the role of technology in our past or present.
The hall was a beautiful as ever but however often I go I can never find it. Next time I will remember that the entrance is opposite the big spiral sculpture on Ave Maria Lane. The staff were efficient and polite as ever.
After drinks and nibbles Sue Lawley was introduced as someone who had been freelancing for many years and she gave an excellent light-hearted introduction to the main lecture.
Dr Bellini gave a rather long and repetitive lecture which did not evidence any grasp of the role of information technology in the change that we are seeing in the workplace. He produced some interesting statistics that show the growing importance of freelancers to the economy. However I think that these statistics were rather misleading because they conflate white-collar and skilled labour jobs. Rather than criticise his work I will concentrate on the bits that I found valuable.
He explored one popular meme; economic development happened where there were the natural resources to support it. For example, the industrial factories of the Midlands exist because there was there was the raw materials such as coal and iron in the ground. Therefore, he observed, as information technology frees us from the shackles of location we will chose to live and work in other places. He then explored the nature of big firms and put forward the idea that these large organisational structures existed because each layer of management did not trust the one below it.
He nicely picked up on other trends such as “giganomics”; that the world of work will become dominated by short-term contracts “gigs” such as happens for session musicians now and that new online tools such as elancers.com facilitate this new economy.
The audience questions and panel discussion was very interesting. (Full disclosure: I asked a question but blithered like an idiot – however unlike Dr Bellini, I don’t hold myself up as a public speaker). Sue Lawley asked one question that I felt was very pertinent “Is this new economy just for the well-educated and intelligent”
Dr Bellini replied that there are thousands of plumbers and they are not necessarily well-educated or intelligent.
I think that this gets to the nub of the problem with the statistics and a serious flaw in Dr Bellini’s presentation. It is wrong to conflate white-collar roles with skilled manual labour. The fact that white-collar jobs exist primarily within large firms and that plumbers tend to work alone can both be explained by economic theory. I hope that this will become evident from the my alternative Freelance Lecture below.
The Alternative Freelance lecture
The world of work is changing. The days of a job for life have gone and our children will live with the forms of work that this audience experience daily. And what are these forms of work? They range from single days to multi-year contracts, the only common factor is the invoice rather than the monthly salary cheque. As Sue joked earlier, when I die they will find the word “invoice” graven on my heart.
But why is the world of work changing and why is it changing so fast. To understand the decline of the big firm, it is useful to understand its rise.
In 1991 Ronald Coase was awarded the Nobel prize for economics for his 1937 paper “The nature of the firm”. A wait of 54 years between doing the work and getting the recognition… even my clients are better payers than that.
In “The Nature of the Firm”, Coase considers when it makes sense for an entrepreneur to hire people rather than contract them (“Never” I hear you cry! free spirits all).
Coase noted that there were a number of transaction costs in using the market and therefore the cost of obtaining a good in the market was more than the value of the good itself. As every one of you here knows, there will be some circumstances when it makes sense to employ someone to work for you, rather than themselves.
The change we are seeing in the world of work is mainly driven by the effect of the internet on Coase’s transaction costs. He lists; Discovery Costs, Bargaining Costs, Keeping Trade Secrets, and Enforcement. To his list I will add explicitly Co-ordination Costs.
These factors are all obvious to us, let’s see how they are changing today;
When you have need for a good or service there is the cost of finding it. For example, on my last contract I had a team of Java Developers working for me. If I wanted a good Java developer, he was sitting next to me and the discovery cost was low. When I needed someone to tune a TomCat server I had to explore the market, interview consultants and this took a lot of time. The important thing here is that the discovery cost is getting lower every year. Tools like Google search and Linked-in enable me to discover TomCat tuning experts, learn about the services they offer and establish their credentials with much less effort than a few years ago. This reduction in discovery cost is making more managers take the decision to contract rather than hire.
Bargaining Costs. Unlike discovery costs which have fallen dramatically I think we are only at the beginning of long journey on Bargaining Costs. Site like elancer.com and guru.com offer standard forms of contract for discrete pieces of work and greatly smooth the process of negotiation and settlement. The volumes of work passing through these sites today is trivial but it may grow if there is sufficient incentive for the Freelancers who work on them. I have some concerns about the applicability of this model to the work that many of us here do today. There is a huge problem with the idea that work can be accurately priced before it is done. As a requirements analyst and project manager I am well aware that a client only learns what they want as the project develops. There will always be a role for the consultant paid by the day for his or her expertise and the financial aspects of the relationship with the client will need to be managed. Here I should point out the excellent work done by the PCG in the preparation of model contracts for use by their members.
Keeping trade secrets. I will consider this in the rather broader context of enforcing ethical behaviour by staff.
Respecting the confidentiality of a client’s business is the ethical duty of any Freelancer and I know that many believe that there is a need for an acknowledged code of ethics for Freelancers. Here I would like to make a little joke about small business ethics (and you don’t get much smaller than Freelance businesses)
James and Brad run a small shop. A little old lady comes in, carefully removes her pension from her bag and purchases one small tin of cat food with a £20 note. James carefully counts out her change and watches her walk slowly towards the door. But what’s this, just as she reaches the door James notices that there are two £20 stuck together but she was only given the change for £ 20.
What should he do about the extra £ 20? Now he faces the ethical dilemma that faces every small-businessman at some point – should he tell his partner Brad?
The are many ways that ethics can be considered including, spiritual, evolutionary biology and economic aspects. Each of these can give us important insights but as a physicist I will consider the economic model. Here we consider the incentives of the parties to behave ethically and the application of game theory tells us that parties have a strong incentive to behave ethically when they are in a long-term relationship with an individual or community. This perhaps explains the great attraction of marriage (to women at least).
We are seeing the emergence of communities which encourage ethical behaviour. Good vendors on eBay are scrupulous about maintaining their reputation. Not necessarily because they are ethical people, although I am sure many of them are, but because if they don’t they won’t get any business.
When you have an agreement it is sometimes necessary to enforce it. Employees who are financially dependant on their employer can be forced to deliver. When work is contracted out the client must rely on the rule-of-law to enforce the contract. If this is expensive or non-existent then it is a safer option to employ someone.
This was true in 1937 when Coase wrote his paper but few managers today would consider employing someone a “safe” option. Governments will continue to use employment regulations to redistribute income from productive employees to unproductive employees (or “voters” as they are known). This will remain a key driver for the growth of freelancing as productive employees become tired of the hidden tax burden and employers are desperate to improve their productivity.
Finally, I will explicitly consider co-ordination costs. I have been always struck by the fact that the Victorian British managed an Empire that controlled one-quarter of the globe without the use of a photocopier.
How did they achieve this? I think that to a large degree it was due to cultural uniformity; Simpkins might be 1 day by Elephant from the next Smythe but when there was trouble he knew how Symthe would behave because they had been to school together. Corporate culture is the modern-day equivalent. It is possible to control large organisations because of shared values. Where does the Freelancer, the perpetual outsider fit into this model?
There are several factors increasing the use of the outsider. One is the prevalence of project work; we live in an environment of constant change. Corporate cultures are essential for maintaining operations but can be a barrier to successful projects. Another is the creation of superb project management methodologies such as PRINCE2 and my own soon to be published ElephantPM . These faciliate the effective use of Freelancers by defining new ways of working within a team.
Lastly but not least we must consider the dramatic drop in the cost of communication. In my first job I was not allowed to use the telephone in the morning because it cost more. Now unlimited voice and video calling costs me less per month than buying a round in the pub. As these technologies become more widely adopted and the new generation of managers who are “digital natives” gain more power we will see a continued drop in the cost of co-ordination.
In summary, I hope that this lecture has given you a new way to look at the changes we are seeing in the world of work and has informed and entertained you.
The future is what is happening today. I am confident that you will not only embrace the new world of work, but create it.