The law firm I worked at provided a great insight into the very basic economics of an organization. As a professional services firm, there were no production costs in the traditional sense. It really was a way to understand the basic economics of an organization with very few fixed costs, outside of basics like rent, supplies, and a few administrative salaries. The compensation of the two attorneys was determined solely by the amount of work they were able to bring in, and due to the nature of the firm and their client base, there were very few transaction costs outside of licensing, filing, and legal fees.
The small accounting firm had a slightly more complex organizational economic structure. This was again a professional services firm so there was no production or manufacturing, but now more employees had to be factored in to the mix. Things such as travel had to be factored into the budget as well, causing much higher overhead costs than the law firm I worked at.
The large accounting firm definitely had the most interesting and complex organizational economic structure of all the places I have worked. Employing hundreds of thousands of workers led to a much more complicated economic structure. As a massive international firm and market leader, the overhead costs were enormous. Fixed costs were much higher as well. However the firm's size also allowed many economic advantages. Having offices and employees all over the world allows the firm to handle engagements much more efficiently and effectively. The firm also had many different service lines giving them the capability to handle many different needs for a client, greatly increasing their clients. Not having to outsource certain tasks allowed the firm to save greatly on transaction costs, and prevented any competitors from chipping away at their market share.
When you say there were no production costs (referring to the law firm) do you mean that the main costs were the attorney's own labor time? Were they partners or was one an Associate and the other the Owner? In the partnership case they share the profits. An associate probably earns just a salary, maybe a bonus as well, but it is the owner who is the residual claimant. Those arrangements are different.
ReplyDeleteIn the second example, you talked about travel as overhead. I'd consider it part of variable cost. In my experience, service firms bill directly for the travel of staff. It's the salaries of the higher ups that I'd count in overhead.
I gather the last example was one of the Big three. It would have helped there to provide one source of economies of scale. You mentioned have offices located all over the globe. But suppose each of those offices were their own separate company. What would that be less efficient? (I'm not saying it is equally efficient, only that in your post you should make an argument for why bigness leads to efficiency.)