Thursday, September 5, 2013

The Org: The Underlying Logic of the Office by Ray Fisman and Tim Sullivan

It feels odd to be composing this review of Ray Fisman and Tim Sullivan’s The Org in the days following Ronald Coase’s passing. Coase was an unusually creative and influential thinker - one who identified some basic truths of organizational life that had not been generally recognized: the kind of simple things that, once pointed out, cannot fail to be seen.

Coase and the work that followed Coase form much of the subject matter of The Org, a book-length meditation by Ray Fisman and Tim Sullivan on the science of the organization. Indeed, Fisman and Sullivan launch the book with the story behind Coase’s posing of the grand question: “Why orgs?” Young Coase travels to Chicago, meets with managers, and reads the Chicago phone book. He is struck by the range of scale and activities pursued by the firms he finds. Why then, asks Coase (and ask Fisman and Sullivan), are some activities conducted within firms and others between firms (that is, via the market)? Coase’s answer (transaction costs) may or may not be correct (‘transaction costs’ always seemed to me to be a convenient label for a still elusive explanation, almost a tautology); what is important is the question.

Organizations are mysterious. We fit them on like suits of clothing - and instinctively know how to push and pull their levers. Fisman and Sullivan focus on what happens within the firm - how organizations compel human agents (because that’s what we are) to pursue organizational goals. The resort to organization is by and large a given. At this point, they collect the principal/agent mysteries that form much of the challenge to understanding how firms work. Fisman and Sullivan do not confine themselves to business organizations in The Org - indeed their best coverage involves organizations that are not business firms: the Baltimore police department, Methodist churches and the military.

Their first argument is that incentives do matter. We respond to incentives - whether we’re corporate executives or cops on the beat or Methodists ministers. Carrots do not merely goad us into greater exertion - they also guide us as to what exactly we should do on any given day. This is particularly important for the vast number of institutional agents who are charged with ‘multitasking’. Multitasking, for Fisman and Sullivan, is not the envied ability of teenagers to do algebra homework while watching YouTube while chatting with seven friends. Rather, multitasking refers to the multiplicity of charges we have in our organizational roles. As a teacher, I am expected to show up for class, grade exams, produce a respectable quantity of scholarship and attend mind-numbing committee meetings; multitasking refers to the school’s challenge of appropriately distributing my limited attention to these disparate goals. To incentivize one task (rewarding Baltimore police officers for the arrests they make) might perversely distract the agent from others. Incentives can overshoot their mark. Fisman and Sullivan cite Luis Garicano’s “Heisenberg Principle” of incentive design: “a performance metric is useful as a performance metric only as long as it isn’t used as a performance metric.”

The authors’ second point then is that the design of institutional roles is important - and this is very much a continuation of the focus on incentives. It is as much the design of the ‘compensation package’ that distributes our energies and attention as the formal tasking set out in a job description. Perhaps they are optimists, but Fisman and Sullivan pay much more attention to the use of rewards (that is, carrots) than punishments (sticks). Sticks are important as well, particularly in hard times featuring rampant job insecurity.

But in the end, incentives are not everything. This is particularly true as we move from business organizations (which presumably exist for gain and little else) to other types of organizations. One doesn’t join the army or the ministry or the police force to maximize monetary compensation - there are other values in play. Fisman and Sullivan assert the presence of a “higher purpose” in certain organizations that supplements compensation.

Fisman and Sullivan present ‘culture’ as an additional explanatory element to account for organizational cohesion. Misreading organizational culture can be disastrous (the FBI will do better chasing mobsters than terrorists) - and culture can be feigned, at least in the short run (Massey Energy, the notorious owners of the Upper Big Branch coal mine, crowed about its care for its workers). But the role of culture within an organization demands more extensive treatment than provided here. If organizational ‘culture’ is real (that is, if it is a discrete and identifiable force), we need a deeper understanding of what it is and how it works. As presented in The Org, culture (like Coase’s transaction costs) is little more than a vessel with unknown content.

The Org is long-listed for the 2013 Financial Times and Goldman Sachs Business Book of the Year Award.

See my reviews of these other long-listed books for the 2013 FT/Goldman Sachs Award:

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