Economies of Scale, Schmeconomies of Scale

Kevin Carson gives us a preview of two chapters of his book on organization theory. He takes a critical look at the concept of “economies of scale”. The chapters are interesting, and I never thought I would say that about a book on organization.

I’m a tool in a monstrous global conglomerate, and in my experience economies of scale are rare. They exist, as when combined purchasing power means more bargaining power, but these gains are netted out by the additional costs associated with bigness. The added bureaucracy alone eats up profits like crazy. And upper management gets its information filtered through so many functionaries that they make decisions based on meaningless and inaccurate reports. We spend so much time reporting to our superiors that we barely have time left to do any actual work.

We do best when we allow the operating entities to function more or less independently, when they are encouraged to be entrepreneurial. This means structuring incentives to reward productivity while restraining the urge to control from HQ. This is hard to sustain, however, because upper management in conglomerates are often control freaks who reckon that they know best how to run things centrally.

Another secret I have learned as a tool is that bringing functions in house is rarely cheaper than hiring outside firms. The outsiders can be retained on an ad hoc basis when needed, and they cost nothing when not needed. Insiders find a way to keep busy all the time and expand their work and increase the size of their departments until any savings realized are netted out by increased costs. And you still end up hiring outsiders.