Friday, 2 January 2015

Peter Thiel | coordination costs and red flags

This was a lecture given by Peter Thiel at Stanford. (Disclosure: I am a huge fan.)

Cant agree more. I have experienced the internal coordination diseconomies first hand at two businesses I have worked in.

"Companies exist because they optimally address internal and external coordination costs [Ed: economies of scale]. In general, as an entity grows, so do its internal coordination costs. But its external coordination costs fall…

Size and internal vs. external coordination costs matter a lot. North of 100 people in a company, employees don’t all know each other. Politics become important. Incentives change. Signaling that work is being done may become more important than actually doing work [Ed: even having to update multiple stakeholders often is inertia. Then add the politics and it's a receipe for decline].

These costs are almost always underestimated. Yet they are so prevalent that professional investors should and do seriously reconsider before investing in companies that have more than one office.

Severe coordination problems may stem from something as seemingly trivial or innocuous as a company having a multi-floor office. Hiring consultants and trying to outsource key development projects are, for similar reasons, serious red flags [Ed: This is a sure sign that the company is racing to the bottom. Get out]."

These lectures lead to Thiel's book, "Zero to One" which I recommend.

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