Contracts and coalitions

We talk a lot in the arts about ‘organizations’ — their missions, their purpose, their operations, their business models, their relationships with communities and constituents. Organizations have boards that oversee them, and executives who operate them. It’s rather easy to think about an organization as a ‘thing’ or a material being (dare I say ‘corporeal being,’ since it comes from a related root to ‘corporation’?). And, of course, the United States Supreme Court has thought this way more than once.

Mr. Squiggles

cc flickr Bob West

But if your job or your passion requires you to create, manage, or lead an organization, an overly simple definition of the thing doesn’t help you much. It would be like building or maintaining a facility with no specific insight on what that facility was or did — courthouse, adobe hut, nuclear power plant, fast-food restaurant, sculpture garden, or minivan.

Two related but distinct ‘theories of the firm’ (which is what we call such theories of organization) are helping me to engage the question. One is economic. One is behavioral. Both help describe what it is, exactly, that we’re managing when we’re managing an organization.

One useful economic theory of the firm defines an organization as a ‘nexus of contracts’ — a solution to market and coordination problems that occur when creating complex goods and services. Instead of hundreds of independent, temporary, individual agreements between producers, suppliers, owners, operators, and coordinators, an organization creates a single mooring to tie many contracts to the same pier.

When it’s cheaper/easier to get something done within that mooring, you create ‘internal’ contracts (through hiring staff, purchasing buildings or equipment, and so on). When it’s cheaper/easier to get something done on the open market, you create ‘external’ contracts (through freelancers or consultants, leasing rather than purchase, and so on). To facilitate this consolidation, our legal systems have given independent rights to organizations to make such contracts. While organizations/corporations aren’t people, they have legal rights to do some of the things that people can do.

More recent scholarly work suggests that the internal/external distinction isn’t particularly useful or true (for example, the ‘purchase/lease’ distinction becomes pretty squishy when the lease is for decades). So, instead of thinking of an organization as a clear, hard shell around a bundle of contracts, it’s better to think of it as a hazy nexus or network of contracts, some of which are explicit (written and signed) and some of which are implicit (mutually understood or forged through tradition). There’s a dense center bundle and a looser surrounding bundle, but the boundary between them is fuzzy and gray.

While economic theories tend to explore markets and pricing mechanisms (where people and firms are ‘rational actors’ seeking to maximize gain), behavioral theories focus on observed human behavior (suggesting that neither people nor firms are primarily rational, nor do they know what they’re maximizing).

One behavioral theory of the firm, therefore, suggests that organizations are always coalitions of individuals, and that those individuals have complex, changing, and often unrecognized motives. Contracts (or explicit agreements) are one way of aligning or directing these individuals, but observed behavior suggests that they are insufficient. Even the profit motive isn’t as magical as we think it is in aligning behavior. As Richard Cyert and James March put it in their foundational book A Behavioral Theory of the Firm:

We can argue that entrepreneurs, like anyone else, have a host of personal motives. Profit is one, perhaps, but they are also interested in sex, food, and saving souls.

As we know from observing government and our own networks, coalitions are formed by aligning intent and purpose, or through side-dealing, manipulation, and coercion when other means aren’t working (I’m looking at you, House of Cards). While contracts often have defined descriptions and durations, coalitions are shifting and organic things requiring constant care and conversation. Coalitions also cross organizational and sector boundaries, including partners and affiliates and supporters and advocates and funders and others. And coalitions don’t have ‘centers’ as much as they have ‘nodes’ or multiple anchors, each with its own complex network.

So, to consider an organization as a stable ‘thing’ that can have a vision and mission, that you are employed by, and that exists as some material entity is not just a legal fiction, it’s a delusion. The more useful question for managers is whether they are managing a nexus of contracts or an amorphous and continually changing coalition defined by power, passion, politics, and individual preferences.

To which the answer is: Yes, exactly.




  1. says

    Interesting stuff, Andrew. It seems to me that the “nexus of contracts” idea does a better job of describing structures in which money changes hands (i.e., employees, consultants, freelancers, vendors/suppliers, sales, grants), whereas the “coalition” idea does a better job of structures that are driven by volunteerism and altruism (board service, relations with individual donors, collaborations between organizations, artist collectives, small founder-led initiatives). Do you feel that’s a useful distinction?

    • says

      Thanks Ian. I was originally thinking of these as complementary models, as well (contracts as transactional, coalitions as social/political). But I’m beginning to think that’s a trap similar to considering an organization as a ‘thing’. Contracts are defined and motivated by many variables, including money, but also reputation, mutual interest, shared need for scarce resource, and lots of sloppy individual needs. Coalitions are often informed by economic relationships, too, even though we tend to think of the term as social and political.

      I think the two are always deeply intertwined, although one frame may be dominant over another in some situations. And more than that, your ability to deliver value through contracts is highly dependent on your coalitions of partners, supporters, and defenders; and your ability to build and sustain coalitions has much to do with your nexus of contracts.

      This is partly why the rich and connected tend to get moreso, while the rest of us…not so much.