Organizational Architecture

• Incomplete contract:
• • • • Not a complete contract(!) Not every possible contingency can be anticipated Cannot provide for every aspect of performance Cannot observe behaviour all the time and cannot enforce non-performance of many aspects of the contracted deliverable
• Agency problem
• Incomplete contracts, shirking, free riders
Agency problems
• Agents non-performance of their contractual obligations
Principal and Agent
• Principal—one party to a contract
• Has ownership or decision rights over resources • Has objective/goal to achieve
• Agent—counterparty
Organizational Architecture
Lecture by Ganesh Vaidyanathan
What is this topic all about?
• Cost information is critical for:
• Making decisions • Controlling activities performed whilst implementing decisions • Assessing whether outcomes are in accordance with expectation • This is a key part of an organization’s success or failure • Its all about influencing and shaping the behavior of individuals in the organization: • People perform the activity! People design the activity!!
• Hired by or works for the principal to perform tasks for the principal
• Self interested behaviour by the agent leads the agent to maximize his/her personal utility NOT that of the principal
• Must specify the benchmarks and consequences for a) not meeting benchmark; b) meeting benchmark; c) exceeding benchmark
• But to assess, you must observe, record and then review against the standards
Team Production: Logical Implications
• Banding together has implications
• Need rules for band-operations to govern the behaviour of the members • Need to set goals and objectives • Need to assign tasks and responsibilities and describe how to measure the performance • Need to assess performance
• Control Systems—Three legged stool
• Leg 1: Assignment of decision rights • Leg 2: Measurement of performance • Leg 3: Reward and punish performance
Building Blocks: Self interested behaviour
• பைடு நூலகம் complete contract:
• one which spells out every contingency; • specifies the role of each party in a way that non-performance can be ascertained and penalties enforced • Implies that actions can be monitored/observed
• Turned on by: $$$; stuff; prestige, love, respect etc. • Have preferences over these elements
• People are willing to trade-off preferences: must make hard choices due to constraints on resources
Organizational Architecture
• The backbone of a control system is its structure:
• Organizational architecture
• The struts, nuts and bolts, and the frame of the system
Team Production
• The pursuit of constraint relaxation and enlarging the choice set leads people to band together to achieve as a group more than what will result as a sum of the individual accomplishments with each person acting alone and in isolation • Band together team production
• Instead of multi-way contracts, members contract with the firm: efficient contracting
• The firm and the team are synonymous here
Complete and Incomplete Contracts
• Control is about influence so the root premise is: “individuals act in their self interest to maximize their utility”
• People are rational, utility maximizing individuals
• Time, money, skill, knowledge • Constraints limits the size of the choice set and forces trade-offs among preferences
• People spend a lot of resources to try and relax the constraints so as to expand the choice set and improve utility
• Observation comes first
The firm as a contractual intermediary
• Team members have a problem:
• Self interested behaviour compels members to try to shirk his/her responsibility and free ride on the work of the other members • Other members have an interest in preventing shirking and free-riding
• Means that productivity of any resource owner is affected by the productivity of all other resource owners:
• Team productivity = f( own contributions, own contribution x other’s contribution) • This is called interaction and means that you are not in complete control over the impact your contribution will have on the output of the collective
• Control
• Accounting control systems key tool: provide information and analysis in support of the control function • The control system must be DESIGNED, INSTALLED and OPERATED • Poor design root cause of many problems • Topic of Organizational Architecture concerned with issues to keep in mind when designing/developing/evaluating/understanding management control systems
• Your impact DEPENDS on the co-worker(s) performance • Logically to figure out your impact, you must be able to observe your effort, and the effort of the others and how you all interacted together and the effect of that interaction • We have to be able to do this so that we can hold people accountable for their assigned responsiblilties and recognize that the observed impact might not be all entirely due to their own effort
• Shirking: Avoiding responsibility
• Responsibilities—decision rights, authority over resources etc are laid out in a contractual arrangement with fellow members • The firm is the intermediary through which team members contract with each other