Wacky Business Idea #10: A Free Market Corporate Structure

by Mr. Cheap

Apparently the modern corporate structure was developed shortly after World War 2.  The idea of a hierarchy, where everyone reports to someone above them all the way up to the CEO was modeled on the military structure men returning from battle were familiar with.  I don’t know much about corporate organization, but it seems to me that there would be better ways to organize a company.

Conglomerates were big in the 60’s, where the rationale was that there were economies of scale in merging companies.  It turned out that most of the “gains” were accounting tricks, and in fact the monstrous companies were LESS efficient as they got bigger.  Large organizations with central planning just don’t work.  Look at any government, any military or any large company.  Its a debatable point, but I feel that the benefit of large companies is having the resources to subvert government (through lobbyists) rather than greater efficiency due to their size.

A friend was recently part of a project at the company he works at where they were going to buy technical services from a partner for $200k.  Everyone was ready to go for the deal, but he put the brakes on it.  He said he had to investigate further before he could sign off.  The next day one of the other people in the meeting came up to him and said “I was really angry when you wouldn’t sign off yesterday, but afterwards I talked to some people in my group and we can do the same thing for $50k”.  I suspect this is going on all the time, people within companies can’t be bothered to look for better arrangements, and happily sign off on bad deals because its not their money being spent.  They can hide behind the idea that this is a trusted vendor if it ever comes back on them that they overpaid.  A structure where they have greater investment in getting the best bang for the companies buck is clearly a good thing.

I’ve thought that an interesting approach to running a medium or large size company would be to model its structure on the free market.  Each group would provide services to the rest of the company and charge them what the (internal) market would bear.  If one group start gouging the rest of the company, competition could start offering the same service and bring them back into line.  So groups could choose who they wanted to manage payroll for them, work out a service contract with them, and if they were unhappy with the price or service, switch to a competitor (or handle payroll themselves).

Company profits could be used as the currency within the company.  If someone leading a group was able to deliver superior results with less resources, the excess would be hers to take home as a bonus.  If someone runs an inefficient team, they will make less than their leaner competitors.  At each level individuals will have a personal incentive to deliver the best results for the lowest cost.  It could be something like at the end of the year, they get a bonus of 10% of the company profits they’ve “accumulated”.

Each group could be given resources and complete discretion over who they hire and where they spend their money (they can buy new computers, but that leaves less resources to increase salaries or take home as a bonus).  This allows entrepreneurs to flourish within the company.

The biggest problem is that people will obviously game the system (whatever the rules are, they’ll operate to try to maximize their personal benefit within them).  The beauty of the free market is it leads to people being of service to society in order to personally benefit.  The flow of currency through the company therefore should be as closely tied to the business practices as possible (such that “gaming the system” will lead to higher profits for the company).

Perhaps salesman will be given credit based on the gross sales they make.  They need to actually purchase what they sell from the manufacturing department (who, in turn, buys from R&D).  Groups are free to make whatever deals will make the system as a whole work (perhaps giving a certain salesman exclusive access to a product in exchange for a guaranteed order size or whatever).

People within the company will be held accountable as well, where if there’s a product defect or a legal problem, the cost of that lands on the department that’s responsible (perhaps destroying their bonuses for the year or leading to their group being dissolved).

It would be trivial to “spin off” a part of the company that might offer valuable service to other companies and individuals (just make them autonomous and keep doing business with them).  Equally, acquired companies could keep doing business the way they always had, and continue interacting with the rest of the company.

The people at the top would be mainly focused on enforcing contracts between the groups, and providing the general rules for interactions between them (which should be kept as simple as possible, any ideas to create new and convoluted interactions, rules or requirements should be avoided).  At the end of the year, the 90% of profits goes to the owner(s) or shareholders.  They would count on the increased efficiency of everyone in the company continually looking for better ways to do business would make the 90% worth more than 100% of a totalitarian company.

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{ 2 comments… read them below or add one }

1 Four Pillars

Wow, I really hope my company doesn’t adopt this doctrine or I’ll have to start working for a living!

Great stuff!

2 mjw2005

a fascinating post…..never really thought about where our current corporate system came from, I guess I assumed it had always been this way….

It also helps me understand why I never really fit in to corporate military system….

I think your ideas are good ones.

Great post!

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