Starting 10,000 New Companies

How was that for a subject line, ehh?!

It was just enough to lure you in to my intoxicating analysis of the modern implications of my favorite 20th century British economist, Ronald Coase.

GOTCHA!

I can hear your voice now, as you read that introduction:

“Be still my beating heart!!”

Well buckle up buddy, I’m going to take you on a wild ride.

I promise this dude has real world implications for your business - just stay with me.

One small note - every time you see the word “transaction costs” just use the word “business owner brain damage” if you don’t like using the econ word.

Here's a 2 paragraph summary of Coase's theory of the firm for business owners:

Ronald Coase explained why companies exist.

Using “the market” has costs - finding suppliers, negotiating deals, ensuring quality.

Businesses reduce these "transaction costs" (brain damage).

Businesses emerge when organizing production internally is cheaper than transacting on the open market - so companies expand until the cost of adding extra functions outweighs the savings.

The key takeaway?

Your company's size reflects transaction costs (brain damage).

New technologies like digital platforms enable lower transaction costs (brain damage), shrinking businesses average size.

But administrative expenses also matter - internal coordination has costs (brain damage) too.

Coase says firms exist to minimize total costs, not just market costs.

So weigh the true costs (brain damage) of outsourcing versus vertical integration.

The optimal firm structure balances these tradeoffs.

This explains shifting boundaries between businesses and markets over time.

Now, imagine for a moment it is 1988.

You want to have your phones answered overseas.

Here is a short list of all the transaction costs (brain damage!) associated with that:

• Search costs to find and evaluate foreign call center providers

• Negotiation and contracting costs to establish terms & quality control

• Monitoring and enforcement costs to ensure service levels

• Coordination costs across time zones and distance

• Payment infrastructure

• Telecommunications costs for international call routing

In 1988, these kinds of transaction costs were very high. So most companies handled call center functions internally rather than overseas.

Compare that to today. Here is how you can have your phones answered overseas:

• Go to Upwork.com - find someone decent

• Signup for Aircall or DialPad

• There is no step 3!

Bit of a difference, right?

Especially recently (in a post-COVID) world, the transaction costs (ie brain damage) associated with having white collar work done internationally have fallen tremendously.

Pay with Payoneer from your phone.

Talk on Zoom.

Chat on Slack.

Pretty low brain damage.

So - what else do these falling transaction costs enable?

A ton of new companies to help western businesses adapt to using and enabling a global white collar workforce.

Now that transaction costs for using white collar global talent have plunged - I expect THOUSANDS of new entrants into the global talent game.

Gone are the days of Mckinsey charging a Fortune 1000 company $3,400,000 to outsource a business unit to India.

Now are the days of specialization of global talent companies (the margins are so juicy, the smart players will come flying in)!

• Company that just does global talent bookkeepers? Yep

• Company that just does global talent for the roofing industry? Yep

• Company that just services the global talent needs of San Diego? Yep

• Companies that just use global talent to build increased capacity for franchisors in shared services? Yep

• Company that just places Jamaican talent? Yep

There is going to be a tidal wave of new entrants based on these stunningly low transaction costs.

The only question I have for you is - do you want to grab a surfboard and ride the wave?

I’m launching something in 8 days, more details here:

To continue the above analogy, I’m getting in the surf board business.

Reach out if you are interested in being one of the early folks (to ride the tidal wave in your industry, geography, or specialty).

Yallah Habibi,

Jon

Passage of the Week:

“To those human beings who are of any concern to me I wish suffering, desolation, sickness, ill-treatment, indignities—I wish that they should not remain unfamiliar with profound self-contempt, the torture of self-mistrust, the wretchedness of the vanquished: I have no pity for them, because I wish them the only thing that can prove today whether one is worth anything or not—that one endures.

…if you refuse to let your own suffering lie upon you for an hour and if you constantly try to prevent and forestall all possible stress way ahead of time; if you experience suffering and displeasure as evil, hateful, worthy of annihilation, and as a defect of existence, then it is clear that besides your religion of pity you also harbor another religion in your heart that is perhaps the mother of the religion of pity: the religion of comfortableness. How little you know of human happiness, you comfortable and benevolent people, for happiness and unhappiness are sisters and even twins that either grow up together or, as in your case, remain small together.”

Nietzsche