Businesses of One

Business organizations are, in essence, mechanisms for coordination. They exist to guide the flow of work, materials, ideas, and money, and the form they take is strongly affected by the coordination technologies available. Until a hundred or so years ago, coordination technologies were primitive. Goods and messages were transported primarily by foot, horse, or boat, and the process was slow, unreliable, and often dangerous. Because there was no efficient way to coordinate disparate activities, most people worked near their homes, often by themselves, producing products or services for their neighbors. The business organizations that did exist— farms, shops, foundries—were usually small, comprising a few owners and employees. When their products had to reach distant consumers, they did so through a long series of transactions with various independent wholesalers, jobbers, shippers, storekeepers, and itinerant peddlers.

It was not until the second half of the nineteenth century, after railroad tracks had been laid and telegraph lines strung, that large, complex organizations became possible. With faster, more dependable communication and transportation, businesses could reach national and even international markets, and their owners had the means to coordinate the activities of large and dispersed groups of people. The hierarchical, industrial corporation was born, subsuming a broad array of functions and, often, a broad array of businesses, and it quickly matured to become the dominant organizational model of the twentieth century.

Despite all the recent talk of decentralized management, empowered employees, and horizontal processes, the large, industrial organization continues to dominate the economy today. We remain in the age of multinational megacompanies, and those companies appear to be rushing to meld into ever larger forms. The headlines of the business press tell the story: Compaq buys Digital. WorldCom buys MCI. Citibank merges with Travelers. Daimler-Benz acquires Chrysler. British Airways allies with American Airlines (which in turn allies with US Airways). Some observers, projecting this wave of consolidation into the future, foresee a world in which giant global corporations replace nations as the organizing units of humanity. We will be citizens of Sony or Shell or Wal-Mart, marching out every day to do battle with the citizens of Philips or Exxon or Sears.

Such a scenario certainly seems plausible. Yet when we look beneath the surface of all the M&A activity, we see signs of a counterphenomenon: the disintegration of the large corporation. People are leaving big companies and either joining much smaller companies or going into business for themselves as contract workers, freelancers, or temps. Twenty-five years ago, one in five U.S. workers was employed by a Fortune 500 company. Today the ratio has dropped to less than one in ten. The largest private employer in the United States is not General Motors or IBM or UPS. It's the temporary-employment agency Manpower Incorporated, which in 1997 employed 2 million people. While big companies control ever larger flows of cash, they are exerting less and less direct control over actual business activity. They are, you might say, growing hollow.

Even within large corporations, traditional command-and-control management is becoming less common. Decisions are increasingly being pushed lower down in organizations. Workers are being rewarded not for efficiently carrying out orders, but for figuring out what needs to be done and then doing it. Some large industrial companies like Asea Brown Boveri and British Petroleum have broken themselves up into scores of independent units that transact business with one another almost as if they were separate companies. And in some industries, like investment banking and consulting, it is often easier to understand the existing organizations not as traditional hierarchies but as confederations of entrepreneurs, united only by a common brand name.

What underlies this trend? Why is the traditional industrial organization showing evidence of disintegration? Why are e-lancers proliferating? The answers lie in the basic economics of organizations. Economists, organizational theorists, and business historians have long wrestled with the question of why businesses grow large or stay small. Their research suggests that when it is cheaper to conduct transactions internally, within the bounds of a corporation, organizations grow larger, but when it is cheaper to conduct them externally, with independent entities in the open market, organizations stay small or shrink. If, for example, the owners of an iron smelter find it less expensive to establish a sales force than to contract with outside agencies to sell their products, they will hire salespeople, and their organization will grow. If they find that outside agencies cost less, they will not hire the salespeople, and their organization will not grow.

The coordination technologies of the industrial era—the train and the telegraph, the automobile and the telephone, the mainframe computer—made internal transactions not only possible but also advantageous. Companies were able to manage large organizations centrally, which provided them with economies of scale in manufacturing, marketing, distribution, and other activities. It made economic sense to directly control many different functions and businesses and to hire the legions of administrators and supervisors needed to manage them. Big was good.

But with the introduction of powerful personal computers and broad electronic networks—the coordination technologies of the twenty-first century—the economic equation changes. Because information can be shared instantly and inexpensively among many people in many locations, the value of centralized decision making and expensive bureaucracies decreases. Individuals can manage themselves, coordinating their efforts through electronic links with other independent parties. Small becomes good.

In one sense, the new coordination technologies enable us to return to the preindustrial organizational model of tiny, autonomous businesses—businesses of one or of a few—conducting transactions with one another in a market. But there's one crucial difference: electronic networks enable these microbusinesses to tap into the global reservoirs of information, expertise, and financing that used to be available only to large companies. The small companies enjoy many of the benefits of the big without sacrificing the leanness, flexibility, and creativity of the small.

In the future, as communications technologies advance and networks become more efficient, the shift to e-lancers promises to accelerate. Should that indeed take place, the dominant business organization of the future may not be a stable, permanent corporation but rather an elastic network that may sometimes exist for no more than a day or two. When a project needs to be undertaken, requests for proposals will be transmitted or electronic want ads posted, individuals or small teams will respond, a network will be formed, and new workers will be brought on as their particular skills are needed. Once the project is done, the network will disband. Following in the footsteps of young Linus Torvalds, we will enter the age of the temporary company.