Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

Subcontracting and Efficiency

Written by johnleemk on 3:08:25 pm Apr 28, 2007.

While browsing through the essays of an internet entrepreneur, I found an interesting idea. The entrepreneur posed a query: what is the smallest number of employees that a successful company can have?

When it comes to programming, sometimes less is more. A famous book (I believe it is called The Mythical Man Hour) once hypothesised that adding more programmers to a particular project can sometimes slow it down, as the new colleague has to be brought up to speed on the work previously done before he can contribute anything useful.

This has been the reason that many successful computing and internet enterprises have successfully gotten off the ground with only a few core employees. Yahoo and Google were both founded by two men; Youtube was founded by three, but one of them left before the website became famous. Even some non-programming companies, such as Dell, were founded with very few employees (Dell started with Michael Dell selling computers from his dormitory).

Now, mind you, these were all start-ups; as they got off the ground, they began hiring more and more employees. But what if a company gets off the ground, but does not substantially increase its employee base?

This of course a bit of an academic question, because any truly successful company would not be able to so substantially automate its operations to the point where it obviated the need for employees, unless it were in an incredibly tiny industry.

Still, it is a question worth considering, because as many critics have noted, even in a market economy, firms are run like planned economies. In almost any substantial enterprise, supplies and work are allocated by a central authority. The incentive for suborganisations to step up their work is often minimal.

I think the answer to these problems (both the intellectual question of how few employees can be taken on, and the practical question of making the internal workings of a firm more competitive) lies in subcontracting.

A good firm, I think, would not subcontract its core business. A college, for example, would not subcontract the job of hiring faculty or the job of setting its academic curriculum. A business that subcontracts the heart of what it does basically becomes a management company.

There is no reason, however, not to subcontract peripheral businesses that are, at best, tangentially related to the main objective of the firm. Again, let us take a college as an example.

The cafeteria, the photocopy centre, the bookshop, and maybe even the library are all not part of the college's core business. But because these aspects of the business are normally either directly run by the college, or subcontracted for an indefinite time to some other firm, the efficiency of the services provided suffers.

An efficient subcontract would last for a limited period; once this was up, any other company would be allowed to bid for the job. Thus, a very strong incentive arises for the subcontractors to do a good job, lest they lose the contract.

Since I am not exactly a businessman, I can't say how practical or effective this idea of subcontracting is; I am merely a speculating theorist. But it seems worth a try, and at the moment, I can't see any practical reason for it not to work.

On a small scale, it may make sense for a business to handle its own peripheral tasks. There is no point in subcontracting out the job of procuring stationery supplies if there are only half a dozen employees.

However, when the firm has grown to a substantial size, having a practical subfirm with a complete monopoly over its own area of business does not contribute much to the efficiency of the business, or to the bottom line. At this point, subcontracting may make sense.

The overall efficiency of the economy is also increased by such subcontracting, because of the economies of scale and specialisation made available. By subcontracting, say, a cafeteria to a firm that specialises in catering, this firm will be able to buy its ingredients in bulk (cutting costs), and also bring to bear greater expertise in the area of catering that might not be available if the job is done in-house.

With subcontracting, it thus becomes feasible for a firm to be doing very well, with a core employee base focusing only on the heart of its business. Such streamlined organisations would greatly aid the efficiency of the economy, and create a win-win situation for all.

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