19 August 2009 • 7:00 am

The Monopolies Inside Your Organization

With the voices in the debate over U.S. health care reform becoming even more shrill, and opponents decrying the prospective loss of free-market competition in the health care industry, I’ve been thinking a bit on the topic of monopolies.

In economics, a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it, according to the late economist Milton Friedman. We generally think of monopolies as a bad thing; monopolists gain pricing power that enables exploitation of consumers. But the provision of goods and services in a capitalist economy is actually accomplished by a blend of free-market players and monopolies, as it must be. Some monopolies are necessary, and even good.

This is most obvious when the provider must make a significant investment in some infrastructure for service provision. If the town in which I live enabled free-market competition for delivering water to my kitchen sink, I’d have multiple water mains running under my street (one for each competitor), and higher prices for all citizens (since the fixed cost of the infrastructure for each provider would be borne by fewer consumers, and the aggregate cost of the infrastructure would be multiples of the cost of a single system). The same can be said for roadways, sewers, police and fire departments, airports, and electrical power generation.

Several years ago, the electrical power industry lobbied successfully to switch power generation in California from a system of regulated monopolies to free-market competition. The result was higher prices, and poorer service, including some notable blackouts. Depending on the nature of the market being served, monopolies are far more efficient than free-market competition, resulting in lower costs. These cost savings are substantially passed on to the consumer when the monopoly provider is publicly owned (as in a police department), or regulated by a government (as in most electrical power generation). Of course, public ownership or regulation is not perfect, as opportunities for corruption become greater. But modern civilizations would simply not be possible without some regulated monopolies.

Less visibly, regulated monopolies are also found inside organizations. In your organization, there is likely to be only one human resources department, one corporation counsel, one corporate finance function. When there are multiples of these providers (usually in multi-national corporations), their boundaries are strictly defined with no overlaps – it is easy to see that groups within an enterprise competing with one another to provide internal services would be absurd and dysfunctional.

But it is exactly that kind of dysfunction that is found in some organizations; in the information technology function. The “official” centralized IT organization may have to compete with decentralized IT; each division or business unit may have established sanctioned or covert alternate sources of IT services. This condition has been fed by two major technology shifts; from large centralized mainframe computers to banks of servers small enough to fit into a closet, and the advent of cheap, high-speed networks that enable the distance between data, processing, and users to grow to a global scale. Software vendors and offshore outsourcers bypass the central IT organization and sell directly to leaders of business units. The result is a crazy quilt of enterprise information technology.

Does this sound like your organization? The organizations I’ve worked with that have arrived at the crazy quilt model struggle with the inevitable result; decentralized IT costs more in the aggregate than a centralized model. But the defense of the decentralized model is always the same: big centralized IT is too bureaucratic, unresponsive, and unaligned with strategy. Yet it is precisely these organizations whose senior leaders have engaged me to help empower a more effective, stronger, and more cost-efficient centralized IT model.

Is your enterprise IT centralized, decentralized, or some hybrid of both models? How is that working out? What are the benefits of the existing model, and how much pressure is there to change? Please offer your experience and opinions below.

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