The idea for this article was born at Easter, during a cycling tour in Greece, when my friend Drago and I exchanged a few thoughts on the topic of accounting. Back then he was working for an accounting software company with established clientèle in the US aerospace industry. Airliners and rockets belong to the most complex products of our economy and accounting for their development and production can be quite daunting. Indeed, it’s not hard to imagine that a godzillean manufacturing process that involves the punching of several million rivets and the laying of hundreds of kilometres of cable can be difficult to grasp in its various financial facets. Unsurprisingly, spectacular cost overruns happen too.

Accounting relies on the ability to portray the business in terms of money, and do this accurately. Here I want to write about the role of the market in the monetary measurement of assets, internal processes and their input/output. It’s a fundamental role, for without it we wouldn’t be able to express value in terms of money, the standard unit of account.

I found the initial version of this article superficial in its conclusions so I left my thoughts to simmer for a while. Now you should have a much more definitive text in your hands. Management accountants who seek to gain a better system understanding in their work should find this reading useful.

Where do things obtain their monetary dimension?

The purpose of accounting is to measure aspects of a business in terms of money. In business, money is the universal and the ultimate measure, for important things like capital, sales and profit. Therefore, money is the standard unit of account.

The monetary dimension of things, however, cannot be taken with a ruler or derived from a formula. Neither it is given arbitrarily. Instead, it is a result of a dynamic exchange process - the market.

Fig. 1. In the market traded goods and services obtain a monetary dimension

The market value of traded goods and services derives from the interaction between supply and demand, and can change with time, hence is dynamic. You’ll never know how much money something is worth until it’s transacted in the market and because of this market dynamics you can never predict future monetary value with absolute certainty.

The magic of market proximity

This economic connection between monetary value and the market is crucial for the functioning of accounting. Interestingly, financial accountants do not really need to be aware of this to do their job. I call this phenomenon “the magic of market proximity”. According to it, the ease and the accuracy of monetary measurement depends on how close the accounting events are to the market:

In situations when we have to account for transactions that cross the company/market boundary (e.g. purchases or sales, where market distance = 0), there really is no concern with the monetary measurement of the transactions - we simply record the amount that was paid. The market plays its role so well here that we don’t even notice it. It’s almost like magic.

However, as soon as we step away from the company/market boundary (market distance > 0) and enter the domain of management accountants, that is, the internals of the business, things change. When we try to measure the internal business processes and their intermediate inputs/outputs, we notice that they no longer have an immediate monetary dimension. Accounting in this context suddenly becomes much harder.

Fig. 2: Accounting at the company/market boundary is comparatively easier and more accurate. Inside the business, as the distance between accounting objects/events and the market grows, monetary measurement becomes more difficult.

Recreating the lost connection

You can now see how critical the transactional connection to the market becomes as the distance between accounting object/event and the market increases. This is of particulate concern to larger enterprises, with deep and complex processes, which in effect produce a lot of intermediate goods and services for internal consumption. How do you measure the monetary value of things that never reach the market (in a direct form)?

The market connection that financial accountants take for granted, management accountants have to establish themselves.

When we look at the various existing strategies to measure the internal aspects of a business in monetary terms we’ll notice that they all aim to establish an economic link between the object/event to be accounted for and the market. Some approaches provide more accurate linking, others less, but the underlying principle is the same:

The methods to measure cost (direct/indirect costing, Activity-Based Costing, etc.) are based on a simple premise: everything that a business produces (output) is some composition of materials, labour and knowledge (collectively called inputs) obtained from the market. This premise applies whether the output is the final product shipped to the customers or some intermediate stage in the production line. To calculate its cost you add up the costs of the respective composing inputs, which should be traceable back to the market and their price well known. Complications arise when inputs have to be traced over several production steps, or when they spread out over many areas of the business (overheads).

Fig. 3: a) Measuring cost using input decomposition. Complications arise with b) deep production lines and c) extensive cost fan-out as with overheads

The ability to measure how much (customer) value each part of the enterprise creates can be of much use to managers, yet is still underdeveloped. Here you cannot apply simple decomposition as with costs, because the market value of the product is normally different (and hopefully more!) than the sum of its parts. We will discuss this issue, along with a possible solution, at the end of this article.

The measurement of asset depreciation (for management purposes and not necessarily for tax reporting) also relies on establishing an economic link to the market, so that the current market value of the asset is well reflected.

Shortening the distance

The following graph gives an idea of how the accuracy of monetary measurement (cost) develops as business processes become more complex and the accounting objects/events more distant from the market. This curve, of course, is a rough guess. More definite curves can be obtained from empirical data or from simulations based on network theory.

Fig. 4. Accuracy of monetary measurement vs. distance from the market

Now that we know the importance of market distance, how can we improve measurement accuracy?

There are two possible approaches:

1. Improve the technical ability of the accounting system to trace costs
2. Restructure the economic connection between the accounting objects/events and the market in order to shorten distance

The first approach has a shallower reach than the second and its potential for improvement is more limited. It is usually pursued by adopting sophisticated accounting technology (e.g. through ERP software) and implementing some organisational changes in order to accommodate the technology. But ultimately, the ability to account for a business is constrained by its structure and functioning. If our business is in a state of mess, expensive accounting systems won’t bring much.

The second approach comes from a different side. In it we realise that improved accountability results from restructuring the underlying business so that it is better connected to the market. If the various parts of your business have a strong, streamlined and economically sound connection to the market, we shorten the distance between accounting objects/events and the market, thus improving measurement accuracy. This, by the way, is the approach of The Transaction Company.

Some of you may be surprised to discover this effect of market-connectedness and orientation on the accuracy of monetary measurement. I love such system insights because they show us how deeply interconnected things can be and reveal new “hidden” options that we have for bringing about improvement.

Seamlessly interconnected

Let’s now examine how The Transaction Company affects monetary measurement within the enterprise.

As the name of the concept implies, it gives employees the ability to conduct monetary transactions among themselves, replacing many of the traditional organisational constructs. Management, allocation of resources, control, remuneration as well as accounting are done through transactions. This essentially leads to an integrated system of transactions to encompass the enterprise from end to end on two related planes:

• All employees across the company in all their work-related interactions
• All processes across the business that make up the value chain

The resulting network of transactions within the enterprise connects seamlessly to the market as the company’s interactions with the market are traditionally also transactional. At the same time, every transaction within the enterprise has a defined monetary value and therefore, whatever becomes subject of a transaction (any activity across the value chain or any intermediate process inputs/output) can be directly measured and accounted for in monetary terms. This in effect restores the lost “magic of market proximity” which I described in the beginning of this article. Wonderful, isn’t it!

Fig. 5. A system of transactions that encompasses the whole enterprise and connects seamlessly to the market. Every subject of a transaction has a clear monetary connection to the market

The magic of transactions works so well, that it brings monetary measurement to a whole new level. It practically does away with the traditional problems of overheads accounting - of how to allocate or apportion costs on an equitable basis. In fact, there is no explicit distinction between variable and overhead costs, because the supporting enterprise activities (according to M. Porter’s value chain representation, i.e. firm infrastructure, HR, development and procurement) are so tightly integrated into the primary ones. If we want to classify a transaction as variable-cost-related or overhead-related, we may have to do that separately by determining the case for it.

Here is a small example showing the engineer Jack and the three production lines of the company he works for. Occasionally the production lines experience technical problems and their respective managers call for his support. When such a case occurs, the manager and Jack agree on a price for his service. Regardless of the range of problems that Jack services and how his work divides among the three production lines, to calculate the cost of his support for a given line you just add up the money that was paid to him by the corresponding manager.

Fig. 6. Example of transactional accounting for overhead support services

Notice that the price for every rendered service is agreed between Jack and the line manager. It is not imposed by some third party within the company. Greater economic independence and self-responsibility of people is central to the philosophy of The Transaction Company. Every employee has the freedom to evaluate of the contributions related to his own job, either received or given, and then negotiate the price to be paid for them.

Measuring how value is generated

This higher degree of economic agency of people in The Transaction Company, which also brings us functionally closer to the market, has many benefits over traditional organisations where employees have more restrictions put upon them. In terms of accounting and monetary measurement, besides the improved cost accounting discussed above, it also makes it possible to measure how much value is added at each stage of the enterprise.

Value is always subjective and is determined on a personal basis. As I mentioned above, it is not the same as the sum of its parts, and cannot be allocated or apportioned the same way costs can. The Transaction Company enables the monetary measurement of value within the enterprise by allowing employees to evaluate directly each other’s work contributions.

The following example shows a simplified value chain of a firm consisting of three employees. Notice how the chain of internal transactions connects to the market on the supplier and customer side. The value added by each person can be calculated by subtracting the values of the inbound from the outbound transactions. It’s then distributed as personal wage (90%) and dividend to the shareholders (10%). The actual percentages can be chosen differently.

Fig. 7. Example of a simplified transactional value chain showing how the added value is measured

Also notice that despite the subjective nature of added value, it is not arbitrary given but regulated economically. On one hand, employees would presumably try to add more value in order to maximise their gain, while on the other hand, they would have to make sure that they fit into the value chain.

Traditionally organised businesses can never truly measure the creation of value to the same extent because their employees have a lower degree of economic interaction and independence. While we can relatively easily determine the margin of the whole enterprise or of a well distinguished value chain, we cannot come to more structured information by simple measurement.

I hope you enjoyed this tour of accounting and the role of the market in monetary measurement. I certainly did!

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After a side project for a client who hired me to do some technical and marketing work I’m now gradually putting my focus back on The Transaction Company.

I’m currently investigating various models of ownership and asset management that would fit nicely within the broader concept and philosophy of The Transaction Company. I see interesting possibilities in this regard that may lead to the emergence of a new kind of tradeable financial instruments. More on that in a next post.

The book writing is on hold for now, until I gather enough practical experience in real-world adoption cases to complement theory with practical advice and observations. That said, I’m now on the lookout for companies to test the concept.

Where is the joy of giving and receiving?

Why can’t we fully experience this wonderful feeling at work?

Do we really live in an exchange economy?

When I was working at PEMTec I used to keep a box of chocolate pralines in the drawer of my desk, Ritter Sport’s yummy Schoggiwürfel. I used to hand them out to colleagues as an expression of special gratitude, for example when a colleague engineer would provide me with a much needed input or when our technician Martin managed to tune an ECM machine to a record level of accuracy. The chocolate was of course of little material value, but it was a wonderful mean to show recognition and foster relations with colleagues.

I also used chocolate as a sweet “bribe” to speed up passage of my paperwork through the bureaucratic mechanisms of the company. The packing of Ritter’s pralines was particularly suitable for this purpose, because they could be easily stapled to documents. Imagine, you sit at your desk and find a piece of paper in your inbox that has a bit of chocolate clipped to it. Of course you’re going to give it higher priority!

As Ritter’s marketing slogan goes: “quadratisch, praktisch, gut”

Some people say the Transaction Company is about internal markets . I say it’s basically about the freedom to give and receive. The market comes as a secondary effect.

We, humans, are social beings and companies are essentially collaborative efforts. People running businesses gradually begin to understand the importance of collaboration. Today we have wonderful technology that enables us to exchange ideas, to make contacts and work together. But we miss a crucial bit: no matter how good our technology is, no matter how well we understand the various benefits of being interconnected, you can’t have real collaboration in the firm unless you give employees the freedom to reward each other for their contributions.

This is what the Transaction Company is about.

To receive your remuneration from your peers with whom you work with feels much more satisfying and fulfilling than simply getting a formal paycheck from the company at the end of the month. Reward, as is collaboration, should feel personal and engaging, have a human face. It doesn’t have to feel anonymous and distant, wearing the artificial face of a “corporate” entity.

One way to imagine the Transaction Company is to think of the World Wide Web with its hyperlinks. The parallels are strong:

The Transaction Company	WWW
Transactions represent work relations that generate value	Hyperlinks relate information
Transactions between employees define the structure of the business	Hyperlinks between documents define the structure of the web
Employees are free to transact with each other	Documents can be freely linked to
Active employees are involved in many transactions	Useful websites have many links pointing to them
Transactions are a measure of economic value and activity	Links are a measure of popularity and usefulness
A simple enabling concept: the transaction	A simple enabling concept: the hyperlink

In a similar manner, the relation between the Transaction Company and the market is very much like the relation between intranets and the Internet.

The underlying philosophy of corporate intranets was to create a secure internal environment for communication and collaboration that resembles the Internet. Likewise, the Transaction Company aims to turn enterprises into places for trusted and productive collaboration that use the highly efficient mechanisms of the free market.

This is my reply to Ron’s comment on Transactional Remuneration Based on Work Relations. In that post I focused on remuneration in The Transaction Company. Now I’m going to write about the pricing of output/contribution and why we shouldn’t be worrying about it.

Here is the central bit of Ron’s comment:

But I’m going to push back a bit. For me, systems thinking is one key to the transformation of the corporation. One reason is that ultimately we have these complex systems that produce value in ways that aren’t always particularly clear to the managers of them, much less the participants in them. Your system seems to casually assume that people actually know the value of their output, or the value of someone’s contribution to them. So often, projects are 18 months away from launch and the revenue is uncertain, much less what any one person would do to help generate those revenues. Lots to talk about on this score, but what kind of system would you suggest for creating market signals akin to stock market indices or commodity prices?

The Transaction Company says only two things about the pricing of output/contribution:

1. People are free to value output/contribution as they see fit
2. Transaction value is mutually agreed upon

These two points are enough. To attempt to specify more would lead to a sub-optimal organisation. If you look at the market, you’ll see that it’s defined by the same kind of conditions. They may seem too minimal, but they work: the market is the most efficient and proliferating economic system today.

The rationale behind these two points is simple:

When we look at value, we see that it’s man-made concept. It’s a subjective measure of worth given by man to things. There is no such thing as intrinsic value. Therefore, value cannot really be “known”.

The Transaction Company recognises this subjective and fluid nature of value and eschews distorting it in any way, e.g. by pretending that there is a “right formula” to value output.

The second point simply says that people are free to set the terms of their work relations between themselves, implying that no central authority will be dictating how output is to be valued.

This unrestricted way for valuing output, of course, doesn’t automatically install a system with market-like mechanisms and efficiency. It only creates an environment that allows this to happen, gradually, depending on how fast people in company learn and grow.

We shouldn’t therefore worry how people are going to go about valuing output and contribution. They’ll sort it out, with excellent outcomes, so we should just step back and allow this to happen naturally. This is how the market functions.

An engineer, for example, might get the latest IEEE salary survey and check the average salary level that matches his skills, then aim at a monthly transaction balance that matches this pay level. If the company where he works is able to make economic use of his skills, he’ll get his reward. Else, he might look for a different place to work.

A salesman might try to negotiate a certain percentage that he finds acceptable and rewarding. If his sales contribution is valued, he’ll get his reward, maybe even a bonus.

But once again, we shouldn’t worry about these things.

The question of project management under uncertainty is a topic worthy of a separate post. For now I’ll just say that one has to distinguish between internal uncertainties (coming from within the organisation) and external ones (coming from the external environment), but understand their interplay as well. The Transaction Company has no formula for estimating revenues. But it does reduce business risk by making the company more nimble and responsive.

Remuneration in the Transaction Company is decentralised. Employees are rewarded through their work relations with colleagues. Third parties, who don’t have direct work relations with a particular employee, are not involved in determining his remuneration.

This principle of remuneration comes from the realisation that the results of your work are best valued by those who make use of them. It is efficient, motivating, and fosters collaboration in the company.

Producer/Consumer Work Relations

The Transaction Company is concerned with work relations of the type “producer/consumer”. It isn’t concerned with “power relations” in the organisation because they don’t generate economic value.

Any situation where an employee uses the input of a colleague in order to carry out his job qualifies as a producer/consumer work relation.

Four examples of such work relations taken from our fictional company StellarWays:

It is through their work relations that employees fulfil their economic potential. Therefore, the success of the company, as a collaborative venture, depends on the extent to which people are able to maximise this potential through their work relations.

Shortcomings of Centralised Remuneration

Traditionally, the tasks of performance measuring and remuneration in companies have been carried out centrally, as a compartmentalised management function. Herein lies a fundamental weakness of centralised remuneration as it tends to become detached from the work relations that make up the value creation process of the business. This has a number of implications:

• It is difficult for a manager to determine the productivity of an employee with whom he doesn’t have significant work relations of the type producer/consumer.
• From a systems perspective, centralised remuneration, as a measuring/rewarding mechanism, is prone to inaccuracies and lags. This eventually affects the stability of the entire business.
• Centralised remuneration can present a costly overhead, which can be further worsened by attempting to correct its shortcomings with more formal and bureaucratic compensation procedures.
• It favours power relations over productive collaborative relations.
• If sufficiently detached from the purpose of the organisation, it may (unwillingly) reward counterproductive, pretentious or deceptive behaviour.
• All of the above can turn into a major source of frustration among managers and employees concerned with correctness and fair pay, eventually leading to conflicts.

Shift from Centralised Remuneration to One Based on Work Relations

The Transaction Company removes centralised remuneration by allowing employees to make their work relations transactional, thus integrating the mechanism of reward into them. This can be outlined by two simple steps:

1. Determine your work relations - those where you act as “producer” and those where you act as “consumer”;
2. For each work relation, agree on deliverables and price with the respective colleague.

An employee is remunerated only through his work relations. The pay derives from the difference between what he received (as “producer”) and what he spent (as “consumer”).

	Jack’s Monthly Transactions for December 2006	+ / -
1.	Supplied John, the R&D director, with a new engine design for higher fuel efficiency	+$10′000
2.	Help from James in tuning the fuel control system	-$4′000
3.	Maintenance of 5 spacecraft for Jill, the fleet manager	+$5′000
4.	Monthly pay to Juho, the sys admin, for IT	-$500
5.	Bonus to Juho for being extra friendly and patient	-$200
6.	To Jennifer for Xmas decoration of the office	- 100
Balance		$10′200
Shareholder dividend @ 10%		$1′020
Monthly pay		$9′180

While transactions can be formalised across the company to make their administering easier, employees are generally free in determining the terms and the prices of the transactions between themselves. Employees also have discretion in choosing which work relations should be rendered as transactions, e.g. for activities with negligible value or for activities they wish to render for free.

Benefits of Transactional Remuneration

The benefits of transactional remuneration derive essentially from integrating a monetary reward mechanism into the work relations of employees. This can also be described as aligning the vectors of value creation and reward so they don’t conflict with each other.

Despite the relative simplicity of transactional remuneration, its effects are significant and complex:

• As an integral part of work relations and taking the form of transactions, remuneration becomes more objective and differentiated. Instead of receiving a lump sum at the end of the month, the pay is itemised, giving important feedback about the value of the individual activities that the employee undertakes.
• Remuneration naturally and efficiently follows individual productivity, thus becoming a quasi automatic process. Companies which used to have complicated bureaucratic systems for employee appraisal and remuneration can achieve considerable administrative cost savings in this regard.
• The tactics to earn more money is not “impress the higher powers that have authority over your salary”, but developing profitable work relations with colleagues in order to maximise the results of your work. This fosters collaboration in the company.
• There is no artificial organisational ceiling limiting how much a person can earn.
• The richer interactions and the ability of everyone in the company to give and receive rewards makes for a satisfying workplace.
• Creates an environment where people gain a better awareness of their job - its value and how it relates to the company business as a whole. This environment teaches self-responsibility - employees realise that how much they earn is, first and foremost, up to them.
• Reduces the organisational need for costly projection of supervision and control by fostering individual initiative and responsibility.

Edited 29 Jan. 2007

This weekend I met with my friend Yovko. He works at IBM Bulgaria, but is mostly known for his consistent and year-long activity in promoting the ideas of the Internet, open source software and Creative Commons in the country. I often like to say that he is the consciousness of these communities in Bulgaria.

We had an engaging discussion on the Transaction Company and what it would take for IBM to become one. I know quite a few friendly chaps from IBM and would very much like to see it become an even better place to work.

All you need to start a revolution is a vision and a handful of activists. If you look at history, you’ll see that all major changes have been triggered by relatively few people. Not even a 50% + 1 majority, but rather something in the order of 1% of 1%.

About 330′000 people work currently at IBM. Applying the above 1% of 1% rule of thumb, we get 33. You need 33 people to change the largest IT company in the world.

A few months into the book I realised I was creating a bad masterpiece of dry synthetic thought. At times the writing process felt so regular and boring, that I would literally doze off. I don’t mind sleeping, but I started worrying I would never be able to finish the book that way. Was Morpheus trying to sabotage my writing or was it my book that needed a change?

I boldly scrapped the text and decided to make a fresh start. I knew I had a really exciting topic at hand. It just had to be presented in a fun and entertaining way. No matter how serious a business or economics book is, it shouldn’t feel soulless and distant.

Eventually I came to the idea to create a fictional but very realistic business, called StellarWays, which is made up by a bunch of sweet comics-like characters. Each of them gets his own chapter in the book where he’s free to give his personal and informal account what it’s like to work in a typical Transaction Company. I promised not to censure them in any way, so everything is permitted, including harsh criticism and venting of emotions! This, together with their distinct personalities and various positions within the firm is surely going to make for an interesting read.

So, let me introduce to you some of the main characters from StellarWays:

	Jeffrey, The Pointy-Moustachioed Boss of StellarWays Restless veteran of space exploration, instead of peacefully retiring, founded StellarWays to pioneer space tourism. Rides a Harley.
	Ju, Jeffrey’s Assistant Keeps Jeffrey up-to-date with the latest developments. Occasionally has to remind him it’s late and time to go home to his wife.
	John, Director of Engineering Seasoned rockethead, formerly with the space agency. Designed the first StellarWays liner.
	Jerry, Marketing Director Sales guru. Persuaded hundreds to go into orbit with StellarWays, but he’s himself afraid of flying. Eclectic and talks a lot.
	Jill, Fleet Manager Hard working and uncompromising, especially when it comes to the punctuality of the flights.
	Jamal, Supply Chain Manager Brilliant free-market economist, if a bit thrifty. Made major headlines when he turned StellarWays into a Transaction Company.
	Jennifer, Secretary in the Engineering Department Sexy and cute, the only female creature in the engineering dept. Productivity dropped 30% after she joined the engineers, but nobody really minds.
	Juho, Sys Admin Makes sure all computers are up and running and users are happy. Linux hacker and Nokia fan.
	Jazztaman, Free Electron and Corporate Blogger Joined StellarWays as an intern. Hyperactive and full of breathtaking ideas, often gets extra pay in order to leave others in the company alone.

This morning I googled for the term “internal monetary transactions“. The search engine returned 5 hits only. The top two were pointing to this website, the other three pages seemed irrelevant to me (stuff about Angola, Slovenia and Bosnia).

I was hoping to find some interesting information, like business articles or research papers in economics. Now I know that the topic of internal monetary transactions is vastly disregarded and therefore has great potential for future development.

I did a few additional searches with Google in order to create the intersection graph below (see the Wikipedia article to find out what an intersection graph is). The terms “monetary transactions” (371′000 hits) and “internal transactions” (91′600 hits) seem to be relatively widespread, while there was virtually nothing for “internal monetary transactions” (5 hits).

Search engines are a useful tool when you want to find how popular a particular concept is in relation to other concepts. It’s also useful in analysing how concepts overlap.

Do you know good software for creating nice intersection graphs? I couldn’t find one on the web, so I had to draw the graph by hand with my vector drawing program Inkscape. It’s not quite to scale, but it looks nice!

It’s time to return to the quiz that I posted last week.

As a whole, it was about transparency (Q1, Q3), economic reward (Q2) and employee involvement (Q4) in the company. These three factors are important for the following reasons:

• Transparency removes uncertainties and helps decision making. People who work and invest in the company can see their business context more clearly. Transparency reduces stress and the potential for conflicts within the organisation.
• Economic reward makes for satisfied and happy people. If poorly structured it drains motivation, energy is spent on counterproductive activities and frustrations.
• Employee involvement depends a lot on the above two factors. People can’t act effectively unless they feel motivated and work in a clear environment.

Most businesses, if not all, won’t get past question 1a, thus effectively failing the quiz. Some of you may have found the questions absolute and uncompromising. You might be asking yourself, how can you possibly have a company that passes the quiz with 100%?

I tell you, this can be done. What seems exceptional today will be the norm in a couple of years. The key is called “transactions”. Let’s now go through the quiz questions and see how this key applies to them:

Question 1: Quantifying individual performance

The first question asks every employee in the company for three basic figures:

• his reward: whether he knows his salary, e.g. “My salary is $10′000″ (1a)
• the value of his work output: whether he knows the value of his work, e.g. “This month my work contribution was worth $25′000″ (1b)
• his productivity: whether he knows how productive he is, e.g. “My productivity is normally 40%” (1c)

Figures stating the value of input/output and productivity are also used to describe the business performance of companies. And while employees may have difficulty quantifying their performance, the companies where they work are normally able to report aggregate figures stating corporate expenditures, sales and profits.

Comparing employees and companies side-by-side in this manner, it may occur paradoxical that a larger, compound economic entity can be more transparent in terms of figures describing its overall economic activity. But in fact, there is no paradox here.

Companies operate on the market, where their activities (buying and selling goods and services) take the form of transactions. Because transactions are discrete and have an associated price, company performance on the market can be easily measured. For example, to find out the annual output of a company, you simply have to sum up the values of its sale transactions over the year.

Contrast this with the situation within companies, where work relations between employees lack the discrete form and the pricing mechanism of transactions. In such a fuzzy context individual contribution and productivity can only be roughly estimated. For example, one could take a key figure that describes the company performance on the market (e.g. revenue) and divide it by the number of employed people. But this is an overly simple approximation.

This fuzzy business environment has a considerable overhead:

• Significant efforts are spent on trying to measure and understand performance within the firm
• Lack of transparency makes managing and investing riskier
• Frustrations among employees and managers who are concerned with fair pay

Fortunately, now we know how to get out of this blurred situation. The formula for more clarity within the firm is simple: allow people to transact among themselves.

Question 2: Remuneration proportional to productivity

The second question is concerned with remuneration for work, more specifically how closely it reflects the productivity of an individual and whether artificial limitations exist.

You can’t have objective and fair remuneration, unless you know the exact figures for output and productivity of everyone in the company. Discussion and conclusion are similar to the above section. The key to this question therefore is the same: for objective remuneration you need transactions. They also have the additional advantage of making remuneration a simple and quasi automated process.

Question 3: Process transparency

This question is about how transparent and measurable your business processes are. Any business process is essentially a series or network of stages, which would ideally deliver an increment of value.

In manufacturing businesses it is relatively straightforward to observe and measure the production process. But in a service or knowledge oriented business you don’t have assembly lines and components.

The universal solution is to allow for transactions between the stages of the process. That way you get to see how value is added at every stage, how money, resources and knowledge flow from one stage to another.

This “flow” information is integral to markets. If we follow the paths of transactions between market participants, we can identify distribution chains, observe the process of value accretion, spot areas with growth potential. This market information isn’t collected centrally on a large scale due to various issues such as privacy. Within companies however, fewer technical and social issues exist, so the only prerequisite to make work flow and value chains transparent is to introduce internal transactions.

Question 4: Business awareness and involvement of employees

It’s increasingly recognised that decentralising responsibility and decision making is a way to make the enterprise more competitive. But you need more than just good will to have successful decentralisation:

• A major limiting factor is the quality of the fabric that couples the individual departments, teams and employees. Ideally, it would allow for both a high degree of independence and a high degree of interconnection. Suppose you have highly independent teams which excel at what they do. But all this competence is wasted unless they have a chance to pass on their results to those in the company who need them.
• Clear separation of responsibilities based on the rule “you can only be responsible for yourself”. Failure to understand this results in stagnant dependencies and control situations across the company.
• Clear and simple internal relations
• A transparent environment, where teams and departments can easily measure their own performance. To have poor feedback means to stray away. Good feedback mechanisms promote learning and raise the business awareness of everyone in the company. This in turn allows for decentralisation to happen.

Transactions offer a simple mechanism for decentralisation of companies. If you look at transactions in the market economy, you’ll see that they provide optimal independence and interconnection of businesses, without blurring of responsibilities. The market is also an excellent learning environment and doesn’t require central control to function(*).

To return to the actual quiz question, you now shouldn’t be surprised that you can have a company where every employee would be able to initiate and oversee investments related to his particular job function. Of course, the all-embracing investment plans will still be led by the corporate HQ. But investments which pertain to a particular department, team or employee will be initiated and managed on the same level where they are being consumed. Once you have functioning internal transactions in your company, you can establish an internal capital market with a credit rating system to further streamline the process of internal investing.

(*) Recently I’ve been playing with the idea that the urge for governmental regulation of the market is proportional to the level of centralisation of businesses. More about this in a future post.