Organizations and Transaction Costs
I have a breadth of work experience, in which I have seen many different types of organizational and structural changes. Take one example- I worked at a financial consulting firm in New York City, where the organizational structure was quite simple- there was a husband and wife pair who worked as principals, and they had one main analyst who would run mathematical formulas for them to determine the accuracy of their work. They performed credit swap ratings independently of the large agencies in order to provide unbiased ratings which was in great demand after 2008. The firm ran on transaction costs. The large companies would pay for independent analyses in order to justify and/or rule out the specific securities they were buying. The company I worked for acted both as a broker and as an underwriter of the securities, and added their costs on to the deal. Thus the company buying the securities would have to pay not only the underlying price but also the extra transaction costs of hiring the independent analysts.
I also worked at a private equity firm in Menlo Park, California. Here, the structure changed quite a bit as old employees became more experienced and were able to take on more of their own work. It was started by a few executives, including the chief executive officer of Starbucks, Target, and a few managing directors from Goldman Sachs. There was a breadth of top level experience, and thus there was no need to give much responsibility to lower level employees. The structural change was a cleaning up of sorts. There was a widespread decision to let go of employees who were at the lower levels. The whole company became made up of only 11 people who each owned a portion of the equity. Each employee then was given the autonomy to find and filter their own deals, hire interns, and bring investment decisions to the rest of them. Transaction costs thereby were lowered; when a deal was done there was much less collateral payment needed to lower level employees, most of the work was done by those seeing most of the profit.
I also worked at a real estate development firm. However, this firm was the much smaller counterpart of a much larger company- its purpose was to invigorate the local economy where the company was headquartered, and make a local name for itself. The large company did over a billion dollars in revenue, its real estate arm probably had holdings of around 50MM. The real estate company was organized such that it was its own independent company with offices inside the parent company. There was one CEO/supervisor, a man with great experience in real estate. He ran most of the operations himself, and hired out only when it was absolutely needed. This way the company could stay running lean and operate efficiently. There was little need for more organizational intricacy due to the people in place. The CEO of the real estate company would report to the Vice President of the larger company, who would guide him on top level investment decisions. Thus there was still some level of checks and balances.
Transaction costs in real estate are always a big ticket item. There is significant upside for sellers to sell their properties themselves. At the real estate firm I worked at, there was a broker on the team who charged less of a commission because he got to sell all the properties our firm ever sold. The transaction cost of selling a piece of real estate is the commission the broker receives when he matches a buyer to a seller's property. The seller can forego that transaction cost, at the risk of not being able to find a buyer as well as the broker might have.
I also worked at a private equity firm in Menlo Park, California. Here, the structure changed quite a bit as old employees became more experienced and were able to take on more of their own work. It was started by a few executives, including the chief executive officer of Starbucks, Target, and a few managing directors from Goldman Sachs. There was a breadth of top level experience, and thus there was no need to give much responsibility to lower level employees. The structural change was a cleaning up of sorts. There was a widespread decision to let go of employees who were at the lower levels. The whole company became made up of only 11 people who each owned a portion of the equity. Each employee then was given the autonomy to find and filter their own deals, hire interns, and bring investment decisions to the rest of them. Transaction costs thereby were lowered; when a deal was done there was much less collateral payment needed to lower level employees, most of the work was done by those seeing most of the profit.
I also worked at a real estate development firm. However, this firm was the much smaller counterpart of a much larger company- its purpose was to invigorate the local economy where the company was headquartered, and make a local name for itself. The large company did over a billion dollars in revenue, its real estate arm probably had holdings of around 50MM. The real estate company was organized such that it was its own independent company with offices inside the parent company. There was one CEO/supervisor, a man with great experience in real estate. He ran most of the operations himself, and hired out only when it was absolutely needed. This way the company could stay running lean and operate efficiently. There was little need for more organizational intricacy due to the people in place. The CEO of the real estate company would report to the Vice President of the larger company, who would guide him on top level investment decisions. Thus there was still some level of checks and balances.
Transaction costs in real estate are always a big ticket item. There is significant upside for sellers to sell their properties themselves. At the real estate firm I worked at, there was a broker on the team who charged less of a commission because he got to sell all the properties our firm ever sold. The transaction cost of selling a piece of real estate is the commission the broker receives when he matches a buyer to a seller's property. The seller can forego that transaction cost, at the risk of not being able to find a buyer as well as the broker might have.
Before commenting on the post, let me note that the default font size in your post was very small. I wonder if you can change that in your blog settings.
ReplyDeleteYou chose to give several different examples rather than spend more time on just one example. In the future I'd prefer that you get into one example and look at it more deeply. There are a variety of questions that will arise if you (1) take the perspective of the reader who wasn't there so needs more context to understand things, (2) ask whether you are illustrating ideas that have come up in class or in the PowerPoints and what it would take to do that, (3) consider whether there are any puzzles to still be explained.
Let me illustrate here. Were each of these jobs summer jobs? If so, how did you find them? Were any of them possible career opportunities for you after graduation? If so, did you go back to work at any of them for a second summer?
On the last example, real estate, what was the nature of the business? You said its purpose was to invigorate the local economy. That doesn't convey anything to me. Can you talk about what it actually did? For example, did it buy residential properties for future resale? Or something of the same thing but with commercial properties? What did it actually do.
You used the term transaction costs repeatedly, but not in the way we mean it to be used in our class. I did say last Thursday that it is the costs entailed in preventing the transaction from getting screwed up. If you had applied that here, you might ask, how might things go wrong and what did the company do to prevent that from happening? Writing about that would have made your essay more interesting.