This past summer, General Motors announced an initiative to bring 90 percent of its information-technology positions back inside the company. The decision was newsworthy for its creation of US jobs at a time when the country's economic recovery remained anemic and unemployment sky-high. Even more notable was GM's plan to grow its own payroll instead of handing the work to subcontractors. In truth, though, the auto giant's latest move was following, not bucking, a trend: For all the focus on outsourcing, economic forces are actually pushing corporate giants to grow larger.
Since the birth of the Internet, we've been told that our unbounded connectivity will favor the rise of small, nimble organizations—microfirms linked through contracts and T1 lines. And indeed, the web does make it cheaper and easier for firms to do business with one another. In the same way that would-be entrepreneurs can raise funds through Kickstarter, they can find contract work and contract workers through online marketplaces like Elance and oDesk.
But the rise of a different set of technologies—enterprise software to tie organizations together, along with sophisticated tools for measurement, analysis, and prediction—has conferred immense advantages on the Goliaths of American industry. In part that's because they do more business, and more business means more numbers: transaction data that can be used to develop more refined credit models and consumer insights and to otherwise outsmart smaller competitors. In an earlier era, a regional bank might have had an advantage in making loans to local businesses on the basis of its intimate, on-the-ground knowledge of borrowers and the community. But nowadays, computer credit- scoring models calibrated on the outcomes of millions of prior loans can predict better than any human being whether a loan will be repaid.
Perhaps more important, though, is the way that data helps to manage workers, allowing these giant corporations to become significantly more efficient. Technology makes it easier to coordinate the activities of employees and to monitor in real time whether they're doing what they're told.
In a 2004 study, for instance, economists George Baker and Thomas Hubbard examined how trucking companies decided whether to employ their own truckers or hire independent drivers who owned their own rigs. What they found was a trend toward payrolled employees—and the reason, they discovered, was the advent of GPS and monitoring technology. Before electronic supervision, it made more sense for firms to contract with driver-owners who were naturally incentivized to complete routes quickly while protecting their trucks. But with monitoring, employees can be supervised far more closely than outside contractors. And the same technology can make all the employees more efficient, shifting labor through the delivery network in real time.
Even as we acknowledge the creepy Big Brother-like implications of this trend, it's also worth noting that it frees up workers in other ways. For example, when a group of Stanford economists studied telecommuting at China's largest online travel agency, they found the practice to be successful precisely because it's so easy to track employees' minute-to-minute activities from afar, using the same sort of enterprise software systems that manage call-center workers in the office. Tellingly, the researchers found that the telecommuters weren't just happier and less likely to quit than their colleagues who continued to work from company cubicles; they were more productive too.
This ability to more easily and cheaply coordinate and monitor the goings-on inside a company has had reverberations that extend all the way up to the C-suite, where we've witnessed not the decentralization that many predicted would come with better information flows but rather a consolidation of power among executives. Harvard Business School professor Julie Wulf has documented a "flattening" of US business over the past 25 years, with fewer layers between the CEO and managers in the lower rungs of the org chart. But it's not because decisions are being pushed down to lower-level executives. Instead, CEOs can get "closer to the business" with the aid of communications technology.
One of the great insights of Nobel laureate Ronald Coase, founder of the modern field of organizational economics, was that as companies got bigger, the cost of in-house work could spiral out of control. But the advent of new technologies has changed that equation. Despite all predictions to the contrary, it's the large organization—not the nimble microfirm—that is reaping the rewards of our 21st-century technology.
Ray Fisman and Tim Sullivan (theorgbook@gmail.com) are coauthors of The Org: The Underlying Logic of the Office*, published this January by Twelve Books.*
