Tag: market interfaces

The Uber employment tribunal decision through the prism of the Escondido Framework

How does the Escondido Framework interpret the impact of the decision of an employment tribunal in London that Uber drivers are not self-employed?

The Escondido Framework describes an organisation as both the solution space that exists between the external interfaces, or markets, and the structure, systems and processes within the solution space that mean that it creates value above and beyond what would exist in the absence of the organisation.

The first consequence of the employment tribunal was to address as matter of law as opposed to economics what Uber buys and sells. Uber hitherto has maintained that it provides a platform that brings together drivers and passengers – ie it provides a service that facilitates the provision of rides by self employed drivers to would be passengers who log on to the platform – rather it provides a transport solution to passengers using drivers that it employs. The judgement challenges the first model by effectively establishing that framework of the contract between the Uber and its drivers means that are being treated as though they were employees rather than self employed at arms length by the company.

The Escondido Framework is helpful in understanding how a judgement by lawyers considering employment lawyer can apparently transform the relationship between an Uber driver and Uber. Uber describes a relationship with the driver that makes them a customer of the company – a self-employed person who pays 25% of the fare secured to Uber in recognition of his or her use of the Uber platform. The Employment Tribunal found that, because of the constraints on the driver under the contractual relationship with company, the Uber driver is a supplier of labour – “an employee” – a factor of production in the provision of a minicab service by Uber to passengers.

The Escondido Framework is essentially neutral between the parties to a transaction: each is a customer of the other and is subject to terms that agreed in a contract of one sort or another, either explicit or implicit. Uber has certainly created value in creating and operating the platform, and thereby has created an organisation that occupies a virtual space bounded by market interfaces with drivers and passengers. Other interfaces bounding Uber’s virtual space include: those with its other employees – programmers and software engineers for example[1]; with its investors; and, as illustrated by this dispute and others with city transport authorities that license taxis, with the political and legal interfaces.

Given the restrictions on drivers, meaning that they cannot simultaneously be attached to multiple platforms, and that the passenger, although able to make choices among available drivers and vehicle classes, has relatively little ability to discriminate between drivers (I see a considerable contrast between Uber and other internet platform businesses such as eBay in this regards) it is hard to see Uber as a company selling a platform to users as opposed to selling journeys to passengers with drivers as employed labour, or at the very least suppliers that allow it to provide those journeys. In this interpretation, Uber is a very conventional organisation providing taxi services, with a highly efficient and well developed set of systems and processes that has created a lot of value, and in Escondido Framework language “solution space”, between the market interfaces of supplier/labour and customer.

Visualising the organisation within the Escondido Framework, in its most simple form as a Reuleaux Tetrahedron, one interpretation of the employment tribunal decision for Uber is that the interface with the labour market has moved and changed in shape. Alternatively, the judgement could be interpreted as a movement of the interface with the regulatory and political market place that reduces the solution space by limiting the parts of the labour market interface that are available to Uber (ie the self employment part of the interface is no longer available to it).

The outcome is indisputable. The solution space available to Uber is smaller, with a consequence that the latitude in terms of strategy available to its management is reduced, along with the amount of economic available for capture by the management and any other interested parties being reduced.

But assessing which of the market interfaces has changed to reduce the size of the solution space is more complex. Is it that the consequence of the legal judgement is that drivers will no longer be willing – as a consequence of the protection of rights arising from the employment tribunal decision – to work on the mix terms that they would previously have accepted? If so, this would represent a change in the position and shape of the market interface. Or is it that the market interface – which is collection of points representing an acceptable mix of terms of “employment” to drivers (payment, sick pay, holiday pay, employer imposed restrictions on availability, ability to take other work, ability to turn down rides, access to tips from passengers, discretion about routes to take, condition of the car that they driver must maintain etc) has not changed, but that the movement of the interface with the political and regulatory world (the market for political influence, which in Uber’s case may well have been influenced by other aspects of the company’s conduct), has moved in way that has removed some of these points from being available (see illustration below)

Impact of new regulation to reduce solution space
Impact of new regulation to reduce solution space

[1] Subsequent to this post some very interesting issues arose surrounding the way that Uber has positioned itself against this market interface, giving rise to repeated charges of sexism and sexual discrimination

HBR Case Study: Do Business and Politics Mix?

The case study feature in the November 2014 issue of Harvard Business Review is titled “Do Business and Politics Mix?” At the most basic level, this is a daft question.  The fact that it has been worded like this illustrates some of the shortcomings in the way that business in general, and the nature of firm in particular, is discussed.  It is not a matter of whether they mix, business operates within a political environment. Indeed , many businesses engage with least two “markets interfaces”  that are essentially political in nature. The question should not be “do they mix”, but how does a firm position itself on each of the political market interfaces.

The case study describes a fictional US business called Natural Foods that has made donations to a “super PAC” (a peculiarly American artifice for getting round restrictions on the financing of candidates for political office) funding pro-business candidates, only to discover that one of the candidates backed by the super PAC takes an anti-gay stance.  The characters in the case study debate whether or not they should be trying to engage with the political establishment, by funding candidates in order to secure influence with the legislative and executive branches of government, and how they should present themselves to their public and to their immediate stakeholders, who are socially liberal.

The value of this case study is not the specific conundrum faced by the management of the fictional business or the advice provided the pundits assembled by HBR to comment on it. Rather, it is elegant illustration of the significance of political aspects of market interfaces illustrated in the case: the interface with the branches of government as regulators and enablers, and the political dimensions of the market interfaces with employees and customers, for whom the political positions with which the company is identified are considerations in their dealings with the company.

Buying and selling: two sides of the same coin

There is a programme on Radio 4 early on a Sunday morning, repeated late in the evening, called “Something Understood”.  Originally presented by Mark Tully, who as the BBC’s correspondent provided for many years a most wonderfully insightful window on India for the domestic British audience, it generally provides a reflective and gentle introduction to the day of rest for those cursed to wake early and be incapable of rolling over and returning to sleep.  A catholic mix of music and literary extracts, it is generally a pleasurable experience, but one morning in early July 1999 it strayed into dangerous territory.  Selling was its subject, or rather its target.  And when Charles Handy, sometime corporate man, then business school professor, and finally purveyor of folksy philosophy joined the fray, I found myself with hands clenched in fists of rage.  Worse still, I switched the radio late in the evening to find something to lull myself to sleep, only to find the late evening repeat.

For what the programme failed to understand, and Charles Handy, who should know better, was that selling is merely participation in an exchange, in which both parties are selling.   One may be selling goods or services, the other is also selling, at the very least selling cash that can be converted into other goods and services.  The cash being exchanged is merely a more flexible and fungible form of goods or services, superior to a primitive barter exchange in that it leaves the party receiving the cash able to acquire and services that they need.  Handy seemed to suggest that he felt guilty if he was able to sell something for more than its value to himself, in other words to make a profit.  But, he seemed to forget that sometimes he might have bought something for less than he would have been prepared to pay for it, in other words for less than its value to himself.

Life is about exchange, about transactions.  Most obvious in the commercial world, it is well recognised also in social, political and emotional domains.  Without this exchange, these transactions that create value for the participants in the transaction, there would be no advantage in love, no evolution beyond the primitive amoeba, no advantage in community.  For these transactions take place because they create value for the participants.  What the editor of “Something Understood” clearly did not understand, but which I am sure that Handy if challenged would demonstrate that he does, is that it is not the transaction that is the potential problem, nor that fact that the transaction gives rise to a surplus in which at least one of the participants and possibly both feels that they have come out ahead  but there are potential imbalances in that mean that one side or other may secure a great deal more of the value created than the other, and that this means that those who start weak and vulnerable generally find themselves selling their goods and services for only just enough to justify their participation in the transaction and those who start advantaged capture most of the surplus value.  These are the consequences of what classical economics would describe as the imperfections in markets (ie without which you have “perfect markets” ) and of the unequal endowments of the conditions of our birth.  But this is not the basis for saying that selling is worse than buying, or denying the value created by the transaction.

1993 Tomorrow’s Company paper and latest paper for Cranfield Renewing Capitalism project

Two papers setting out some of the key ideas in the framework have been added to the site.  A paper written for Tomorrow’s Company, when in its initial phase under the sponsorship of the Royal Society of Arts, can be found on the Origins page.  A recent paper written for the Cranfield Institute’s Renewing Capitalism initiative can be found on the home page.

A new way of looking at the firm

The Escondido Framework starts from the assumption that the company (in common with many other forms of organisation) is defined by its interfaces with the various market places in which it operates, in the simplest form the markets for labour, raw materials, capital and finished goods or services. These are, in effect, its boundaries.  And while there are differences between markets, in essence they all reflect an exchange between two parties for mutual benefit – the employee receives payment and other non-financial rewards for his labour; the supplier of raw materials payment for the goods provided; the supplier of funds either interest or dividends and the prospect of capital growth for forgoing use of those funds for his own short term benefit; and the customer goods or services in exchange for payment.  The Framework also reflects the view that being a party to the exchange does not of itself mean that the other party has a “stake” in the company or “own” it in any absolute sense.  There may be a contractual relationship between the party and the company which reflects the terms of the exchange and provides structure for enforcement but essentially this is a mutually beneficial relationship in which both parties have duties to deliver their side of the bargain.

Within the Framework, there is no assumption that any of the providers to the company – of labour, raw materials, capital or revenue – any superior rights or claims over the company, in traditional parlance, “ownership”. Legal devices may be put in place by the state, or may exist in the form of contractual agreements that provide these other parties with rights, for example: in the form of wages and employment rights; to payment for goods at a particular point in time; to payment of interest or dividends; and to return of capital under prescribed terms and with differing degrees of confidence. The contracts and legal frameworks may also define mechanisms under which these other parties may enforce these rights, but enforcement is also be a function of other considerations that reflect market conditions rather than the law, for example: what alternatives are available to a workforce with a specific set of skills and ties to a particular geography; what other customers are available for the raw materials, and how much  are they willing to pay; what will other prospective providers of capital pay for these shares or bonds, and how easily can we replace the existing board and executive team; and how often do customers in consumer markets consider, let alone read terms and conditions.

The Framework suggests that the company can be considered as a “virtual space”, existing between these market interfaces.  The location and shape of each of the market interfaces reflects what economists think of as the demand function and marketing academics describe as indifference curves, i.e. how customers make trade-offs between the various attributes of a product. These are also shaped by the competition that the company faces: when recruiting from a limited pool of skilled employees; for sourcing scarce raw materials; seeking funding from a limited capital market, or seeking the custom of consumers who can buy from other companies or who may be able to substitute one item for other goods. Remove the competition and the market interface or boundary moves outwards, increasing the volume of the “virtual space” available to the company. Improve the operating efficiency within the company or secure a competitive advantage over other participants in one of the markets concerned and the volume of the “virtual space” will also increase.

At any particular point in time, for any particular product or service it sells, these interfaces will be brought together, or resolved, at a single virtual point at which of each of the providers is rewarded at prices that are, all things considered, satisfactory to them. In perfect market equilibrium, all prices would be at market clearing levels, no-one would realise economic rents, and there would one point at which the interfaces would be resolved.  No self-respecting economist has ever viewed the perfect market paradigm as anything other than a useful benchmark for understanding a world which is dynamic and virtually always distant from the paradigm, and in this the Escondido Framework is no different. In reality, the “virtual space” is just that, an available set of points at which the price levels may be resolved. Depending on the scale of the external market failures that allow for the internal organisation of economic activity to generate greater efficiency, there is potential for the management of the company to elect where to set prices and where on the indifference curves to locate the marketing proposition to each of the other parties (suppliers or labour, raw material, capital and custom), and how to allocate the economic surplus that the absolute volume of the “virtual space” represents.