Virtual Reality: the future of companies

SkypeHave you ever wondered  why do companies exist in the first place?  It may seem obvious now, but consider that only a couple of hundred years ago most people were farmers and artisans, working in very small groups.  The corporation as we recognize it really started in the 1500's and 1600's during the era of colonialism.  Corporations were formed to raise capital to buy ships and pay crew who would go off to exotic places and bring back spices, cloth and other cool stuff to sell and repay the investors.  (The ship's captains were the equivalent of today's Silicon Valley entrepreneurs.)  Companies really took off during the industrial revolution when manufacturing required masses of complicated machines with lots of labor and many steps between the raw materials and finished product.

So if all the skills and materials needed to produce something are available in the marketplace, why cluster them into corporations?  A guy named Ronald Coase suggested that it is more efficient for a company to have a captive labor force and pay them a fixed salary, than it is to hire more people when demand is high and fire them when demand is low.  He concluded that corporations would form when the transaction costs inside the company are cheaper than it would be to transact the same business outside the company.

Building a company to minimize transaction costs made sense right up until  Al Gore invented the internet (just kidding).  It also made sense when you were building some big, heavy, or complicated mechanical or electronic device.  In today's information age, a lot of the transactions that take place involve data which can now move anywhere on earth very cheaply.  What's the result? Outsourcing of activities that either aren't core to a company's business or can be done by cheaper labor.

Some companies have always found it cheaper to acquire the labor and materials on an as-needed basis.  The film industry, for examples, hires the directors, cast and crew they need, and those people come together for the weeks or months it takes to film, and then everyone is fired until the next picture.    You're going to hear about more 'virtual companies' - who outsource most or all of their activities.  The biotechnology industry is one particularly in which startups can begin with some intellectual property and outsource the R&D, clinical studies, application to the FDA, manufacturing and distribution of drugs.  It's a rare company these days that doesn't outsource some component of its business or services. (See the discussion on Shamrock Companies, too).

What does this mean for you?  Well, if you live in a cheap wage country, congratulations.  You'll be seeing more opportunities as work moves to you.  If you live in a high wage country, you might want to consider what aspects of your job could be done cheaper somewhere else.  Think about ways you can increase your value to the company.  Expect that you'll need to manage your career and continue your training and education to stay current and useful.  And expect that you'll be changing jobs several times over your career and build up a cash cushion both for the times you might be out of work and for your eventual retirement.  Or move to one of those low-wage countries where you can be a star.

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