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Ronald Coase, an influential economist who lived from 1910 to 2013, made significant contributions to the field of economics, particularly in the areas of transaction costs, property rights, and the theory of the firm.
In the coming years, we will talk about his work a lot and then completely stop talking about it – because transaction costs that require a firm to exist no longer are going to be valid. The firm is invalid.
Before I get ahead of myself, the firm will exist but as a weaker shell of its former might. But immediately, the worker in a firm is in danger. So the tools he uses (SaaS Software) are also in danger.
The firm exists because the transaction cost of getting things done internally to produce and sell goods, without a firm is prohibitive. Imagine negotiating the price of a stand-up call every day with each participant.
Unless you are (and I am not yet) as old as the oldest turtle, you have accepted the notion of a firm without a question. Your mom and her dad (if you are a youngling) all probably worked in a firm.
Ronald Coase came up with the two defining principles: Transaction costs and the theory of a firm. He won a Nobel prize for it.
Here’s what he has to say about the nature of a firm and its transaction costs.
There was another gentleman by the name F.W Taylor. If you did an MBA and did not sleep-sit through the macroeconomics class, you would know who he is. He is the father of ‘Scientific Management.’
If you are sipping Kombucha on a lonely beach in some visa-free country wondering why you are still writing blogs for a living after five years of work, he is to be blamed. Your content calendar is not a ZIRP-era invention. It was likely invented in a Ford factory when cars were still black in color.
The Firm – Every SaaS Company’s Wet Dream
We talked about the firm, the transaction costs, and the scientific management principles. In short, it’s painful to negotiate every single thing, every day to get work done. So we have employees and employment contracts. If there ever was a master-stroke this was it.
Ronald simply theorized what he observed. F.W. Taylor laid out the principles for the firm and breathed his last before even Ronald was born. He is the one who built the modern hierarchy, silos, and the passive-aggressive duels you have with your co-worker through Slack status messages.
Now let’s talk SaaS. SaaS sells to…*drum roll*…the firm.
Every single firm has one mother of all processes. The process is “to do things that generate enough free cash to do things that will generate more free cash to sustainably distribute the reserves to the investors.”
Like a birthday cake, we cut this monolith into multiple pies. Everyone likes a piece of cake. So the cake is divided into increasingly unrecognizable geometric forms. That’s your average firm. There are departments, jobs, and tasks.
Workflows across the firm. It knows no departmental boundaries, party lines, or favorite causes. But remember F.W. Taylor?
Workers have to be specialists. They do one thing over and over again so that they become good at it. Stack them in a sequence with co-workers. Voila! You have a factory line. That’s how we assembled cars. That’s how Spotify adds music to your playlist – there is a Jazz team, a Death Metal team, and so on. No, but…C’mon, you get it.
Let’s take the process of ‘Order to Cash.’ There is a salesperson, an account manager, a contracts person, an AR team, a treasury management function, and whatnot. Each specialist’s job is subdivided into several artificial specialties until there isn’t any left. And each specialist needs to be the best version of themselves. Ergo, 34 different SaaS tools for each specialist.
A specialist does a collection of tasks that are adjacent. The farther they move from the core specialty, a new specialist role emerges. A collection of these specialists becomes a department with a manager.
Specialists do the work.
Managers provide the inter-departmental context.
Executives drive the outcomes.
So, remember. SaaS exists because workers exist. APIs exist because managers exist. Reports exist because executives exist.
With AI, the entire structure is being examined.
The SaaS Grim Reaper
A sufficiently trained AI agent in a specialist task will replace a specialist. The more you teach that agent, the more its surface area of specialty expands. A conductor agent can conduct the work of several agents.
The specialist is no longer special.
What this will lead to is the breaking of boundaries in the firm. The transaction costs of getting things done between co-workers will become low because AI agents will work with other AI agents at negligible transaction costs.
Tasks will merge, and get eliminated. Departments will merge, and get eliminated. SaaS categories will merge, and get eliminated. I don’t know when but understanding trends matters.
SaaS is a Product of a Constraint
Do we really need 1700 CRM tools that the sales team hates? But each specialist wants to collect a bunch of tools because it’s aspirational. It vaguely signals progress and control over the firm’s progress and destiny.
But the forces of tech are against this constraint. Work is not a preserve of human specialists. The future worker need not be managed. They will simply be orchestrated/conducted. The future firm will still care about outcomes. But those outcomes will not be cud-chewed through a long-winding pipe of goey organs and expelled. Work will move freely across the firm, with machine workers tending to the AI agents until they become autonomous.
Embrace that future without cynicism. It doesn’t matter that autonomous agents don’t exist. It doesn’t matter that today’s demos fail. If and when the market is redrawn, your sprinkled-here, sprinkled-there AI-SaaS won’t stand to win. The winner in AI-dominated work categories will be building paperware today. That’s how even cars were built.
This article was originally published on LinkedIn.
