Synergy Dispatch: Procurement and Economics

Tim Cummins is that rare breed of procurement -- or contracting -- commentator who approaches his subject from a multidisciplinary approach. Perhaps this explains why IACCM, the non-profit association which he heads, looks like nothing else in the market. Indeed, IAACM is comprised of procurement, legal, sales and other professionals -- not just purchasing (or supply) managers. They've been doing some fascinating things of late, and I would strongly encourage you to check them out, especially if you feel that you're not getting what you want out of your ISM, SIG, Conference Board or other association and training relationships.

But I digress. At Synergy, Tim Cummins titled his presentation "Re-Shaping Procurement Organization & Skills". At the start of his talk, Tim mentioned a name that I knew I had managed to sleep through in my introduction to macro-economics course in my first year in university (little did I know I would later love economics and would secretly dream of having the time to pursue a graduate degree in it). The name, you ask? Ronald Coase, who is nothing short of a legend in the University of Chicago movement of Law and Economics.

Coase is perhaps best known in non-econ circles for his essay, the The Nature of the Firm which was, according to Wikipedia, a "brief but highly influential essay in which Coase tries to explain why the economy is populated by a number of business firms, instead of consisting exclusively of a multitude of independent, self-employed people who contract with one another. Given that 'production could be carried on without any organization [that is, firms] at all', Coase asks, why and under what conditions should we expect firms to emerge? Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase's analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task."

I'll continue to quote from the Wikipedia discussion of his essay, as it is particularly interesting given the changing role of procurement today. "The traditional economic theory of the time suggested that, because the market is 'efficient' (that is, those who are best at providing each good or service most cheaply are already doing so), it should always be cheaper to contract out than to hire … Coase noted, however, that there are a number of transaction costs to using the market; the cost of obtaining a good or service via the market is actually more than just the price of the good. Other costs, including search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs, can all potentially add to the cost of procuring something with a firm. This suggests that firms will arise when they can arrange to produce what they need internally and somehow avoid these costs."

Given that markets are becoming more efficient and virtually all procurement costs are coming down (as a trend, not as a rule), one wonders about the increased role that "contracting" will take in the future given that Coases' thesis comes from a different business era. Above all, when procurement is looked at from this perspective, it becomes obvious about its critical importance as a central focus of the future firm. In this world, it is not just about transactional buying and cost reduction or containment. Rather, it is about rethinking how best production -- of both material and intellectual capital -- can best be carried out, either internally or externally.

Jason Busch

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