Monday, 4 April 2011

Our business is putting our noses into your business

By Noshua Watson

A management consultant would ask us development scholars, ‘What business do we think we are in?’. Many of us would say that our job is to provide money, advice and technical support for programs that decrease economic inequality, provide global public goods and provide basic services around the world.

I’d say we’re really in the business of changing how people organise. We try to provide incentives for people to organise themselves and their activities in new or better ways that increase their well-being. Our problem is convincing people that they should do things differently than how they’ve always done them.

Why do people organise themselves the way that they do? We’re familiar with Ronald Coase’s seminal observation that people organise and firms emerge in order to reduce transaction costs. However, the transactions costs are a reflection of the social conditions among the participants and the decision-making information available to them. As a result, management professor William Ouchi saw three ways to control transactions: the market, the bureaucracy and the clan.

  • Making a market transaction requires the participants to trust that the exchange will be reciprocal and have good information about prices. Market exchanges will be more efficient when the participants can easily evaluate each other’s performance and it doesn’t matter if they have common goals. However, the participants are vulnerable to the opportunism of the other party.
  • An alternative is to make transactions within a bureaucracy, like a firm. In order for bureaucracy to work, there need to be norms of reciprocity, but also norms of legitimate authority (who’s in charge!). The participants in a bureaucracy don’t necessarily need price information to make an exchange, but there have to be explicit rules about how to make decisions. This way of organising tends to succeed under conditions of moderate performance ambiguity and moderate goal incongruity between participants. The continuing relationship between employee and employer decreases the level of opportunism.
  • Ouchi adds clans, which can be more efficient when it’s hard to evaluate participants’ performance, but they have goals in common. Clans can be found even in for-profit environments, like startup companies. Clans rely on norms of reciprocity, legitimate authority, and common values in order to make transactions. In order to transact, the participants need information about the implicit rules of the group, which can be hard to learn without being fully immersed in the culture.

In development, we frequently try to shift the way people do things from clan to market or market to bureaucracy and so on. But we don’t always bring that together with a knowledge of what social norms and information are needed to change the organisational structure of those transactions.

To move from a clan transaction to a market transaction, the participants have to be convinced to exchange and participate in collective action without direction from those with legitimate authority. They have to be persuaded to do business with people whom they don’t know and probably don’t trust. They also need to be assured that they will not be vulnerable to opportunism due to information asymmetries. Even in a bureaucracy, where people know each other and know who’s in charge, they need training and socialisation to make the rules of exchange explicit.

If we’re going to convince people to make, buy, or borrow for a better life, we have to make sure they know who is involved, who’s in charge, what’s in it for them and who they can go to with complaints. Even then, people’s needs may be too culturally-specific or irreconcilable for exchange to happen. But we can use what we know about organisations to avoid being caught unawares.

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