The governance of telecommuters: an agency and transaction cost analysis.

Author:Brice, Jeff, Jr.
Position:Company overview


This paper seeks to stimulate research about the managerial challenges of a constantly evolving bureaucratic workforce. Specifically, this work seeks to add to organizational theory by integrating transaction cost theory and agency theory with forecasted trends in the governance of telecommuting employees. Telecommuters, or "teleworkers", are employees that are allowed to perform organizational work from a residence, or other location, instead of reporting to a centralized office location (Siha & Monroe, 2006). While the two managerial theories have been applied in a large number of organizational settings and circumstances, there have been no prior attempts to integrate these theories to forecast the effects of uncertainty on the control of a telecommuting workforce. This paper proposes a managerial framework that incorporates transaction uncertainty (from transaction cost theory) and outcome uncertainty (from agency theory) as determinants of employee control. First, the two theories are described and then adapted to present the hierarchical governance of a telecommuting workforce. After which, propositions are developed about which managerial control mechanisms are to be used under varying degrees of transaction and outcome uncertainty, considering the gravity of the work to be produced and the level of trust in the employee.


Transaction-Cost Theory

Transaction costs are the costs of negotiating, monitoring, and governing exchanges between people (Williamson, 1975). In transaction cost theory, a main purpose of the organization is to reduce the overall costs of exchanging goods and services in the environment and the costs of supervising exchanges within the organization. In-house transaction costs are generally labeled as "bureaucratic" or "hierarchical" costs and are the costs that are germane to this analysis. Internal business exchange structures of interest here are those that concern the governance aspect of distance employees, commonly referred to as "telecommuters".

Determinants of Transaction Costs

The major determinants of transaction costs are identified as transaction uncertainty (Jones, 1987) and performance ambiguity (Ouchi, 1980; Jones, 1987).

Transaction uncertainty is associated with the extent that the employer-employee alliance is not consistent. This is primarily due to a lack of familiarity of the employer with the employee. The lesser the degree of familiarity with the employee, the more confirmation concerning the employee's work methods, attitude, and capability is necessary for the employer. Transaction uncertainty may decline over time, with augmented communication and interactivity, allowing the operational relationship of both parties to become less unpredictable (Jones, 1987).

Performance ambiguity is linked to the accepted hazard that an employee takes on when work is carried out for an organization (Ouchi, 1980). Specifically, the implicit exposure involves the costs that must be endured by the employee when work is delivered that does not have acceptable utility for the employer. The consequences suffered for sub-par work are typically a deficiency in the agreed upon remuneration for such work and/or the economic opportunity cost related with having to rectify the mistakes or recreate the deliverable(s) entirely. Accordingly, performance ambiguity refers to the employee's capacity to appraise work accurateness and to appropriately assess it's usefulness for the employer (Ouchi, 1980). It is a function of task specificity, employer assistance, and the employee's competence in the performance of said task. The higher the levels of task specificity, employer assistance, and employee competence, the lower the level of performance ambiguity (Ouchi, 1980; Jones, 1987).

Agency Theory

The goal of agency theory is effective control of employees using some form of monitoring (Eisenhardt, 1988). Agency theory approaches the problem of employee control as a matter of risk sharing. It implies that observability (employee monitoring) and outcome uncertainty (the probability of incorrect work) are the determinants of control; and, that there is an element of risk with regard to income streams in any control system (Eisenhardt, 1988, 1989; Kren & Kerr, 1993). The more an employee can be observed, the less risk (performance ambiguity) the employee has to assume. Because of monitoring, the employer is more knowledgeable about the work performed and, thus, uncertainty is decreased.

Outcome uncertainty is also decreased by the nature of the work involved (Eisenhardt, 1989). Standardized, routine outputs are negatively related to outcome uncertainty because the employer and employee know exactly what is to be produced and received. The more secure the employer is about the usefulness of the employee's work, the more certain is the employee's compensation. However, in instances where observability and/or product standardization is low, outcome uncertainty is high and the employee suffers the risk for producing the wrong outcomes. Thus, compensation is dependent on the organization's perceived utility of the outcomes produced. The consequences that the employer suffers when an employee produces low-utility output are a function of the import of the project assigned. If incorrect employee output causes a loss of future income for the employer, the economic ramifications (costs) are high.

Transaction Cost and Agency theories are complements of each other because performance ambiguity and outcome uncertainty are near equivalents. In prior research, performance ambiguity was conceptualized as the costs that client organizations incur to monitor and evaluate the performance of other parties in an exchange (Jones, 1987). Telecommuters may be conceptualized much like independent organizations or other separate entities. Traditionally, telecommuters maintain their own working schedules and have little physical interaction with the traditional organizational center (Bailey & Kurland, 2002). In this paper, performance ambiguity is related to outcome uncertainty as the economic opportunity cost (risk) incurred by employees under conditions of low observability and/or non-routine product expectations within the organization. Non-routine output increases the risk of incorrect employee performance and increases the likelihood of lost economic opportunities by the employer.

Outcome uncertainty is related, therefore, to the real or economic costs (risk) suffered by employers associated with telecommuting employees and the non-standard (or routine) character of their work.

The Transactional Nature of Internal Organization

A transaction is a bilateral exchange between two or more parties. In an employment transaction, the conditions for execution are determined and work is carried out according to procedures developed and/or agreed upon (Commons 1950). Williamson (1975) writes that all societal, financial, and political transactions bring about transaction costs. In transaction cost theory, organizations transform, in both capacity and internal alignment, in order to diminish transaction cost difficulties over time (Yarbrough & Yarbrough, 1987).

The origins of transaction costs may be viewed as transmission problems that are introduced into the exchange process of a market transaction (Williamson 1975). Transaction costs are the negotiating, monitoring, and enforcement costs that must be endured to facilitate a transmission between several parties (Klein, Crawford, & Alchain, 1978). The six main causes of transaction complications (Jones & Hill, 1988) are:

  1. Bounded Rationality--Rational human behavior is determined within the bounded limits of each individual's knowledge and the cognitive facility to process information.

  2. Opportunism--People tend to act according to what is aligned with their own self-interests. Opportunism occurs when one, or both, of the parties to a transaction seek to alter the provisions of an agreement after the fact.

  3. Uncertainty / Complexity--There is extensive uncertainty and complexity in the business environment.

  4. Small Numbers Trading Relationships--Reliance on a single supplier for any resource will likely result in opportunistic behavior on the part of the supplier. However, these types of trading relationships are commonly found.

  5. Asset Specificity--Significant sunk costs in resources (assets) that have limited use outside of an individual business transaction.

  6. Information Impactedness--In a typical business exchange, it is common for one party to the transaction to have more knowledge than the other(s).

    Each one, or any combination of these sources, may bring about transaction complications and increase costs. All of these factors make business dealings risky and inefficient. For example, behavioral uncertainty on the part of an employee may increase the cost of enforcing contracts due to the possible lack of productivity brought about by agent opportunism. In order to prevent this situation, the employer must incur the increased cost of authoring comprehensive agreements that will restrain employee behavior under a diversity of situational contingencies (Arrow, 1974). Given that the employer is limited by the bounded rationality of their own cognitive experience and cannot plan for every contingency, increased transaction costs due to opportunism may still be apparent because of information impactedness in favor of the employee. In other words, the employee may find weaknesses in the contract and exploit these to their benefit. In addition, the threat of increased costs due to opportunism may be heightened if there is asset specificity or small numbers bargaining conditions, which further restrains the employer from seeking other agency alternatives due to the high switching costs involved (Pisano, 1990).

    There is an economic benefit to the organization when the use of hierarchy is selected over the use of the market as a basis for employer/employee...

To continue reading