Blog Post 1: Transaction costs in organizations
I am not currently involved in any RSO's so my best example of participation in an organization would be my summer job of the past three years, which is teaching swim lessons. I teach children between six months and fifth grade at Sholem pool (a public Champaign pool) each summer. Some background information that will be important for these examples is that the summer is cut up into two week sessions. Within these sessions the children are placed into classes based on a variety of swimming skills, not by age. After each session, the children have the ability to move up or down in class level at the instructor's discretion. For our purposes we can consider the organization as run by two coordinators, one who oversees the general swim lessons, we will call her B, and one who oversees the organization of private swim lessons, we will call her R.
One perfect example of transaction costs occurred for me two summers ago while working. After a particularly successful class session, I had a few parents request that I continue to teach their children for the following session. This of course should have been easy to organize, and after relaying the information to B and having it confirmed as possible, I relayed to the parents that I would be able to teach their children the next session. The issue arose when during the next two week session, I was teaching only five of the seven children. Due to one child moving up in level and another to a different time of the day, I was unable to teach all of them. This in turn made their parents and oddly enough some of the parents of the five children that I was still teaching very angry. They thought this was unfair and the two children who were not included that session actually never came back. This one simple miscommunication ended costing us two customers and the respect that we had earned from five more.
Another instance of transaction costs occurred between the coordinators and the seasonal employees later that summer. During our mid season evaluations, which were completed by R, many employees received poor reviews with no warnings in advance. While B was at the pool daily, R was not, however B had many other responsibilities, so performance reviews fell to R. This created an issue with morale and trust, because normally when a problem arose, the instructors would quickly coordinate with B, find a solution and work from there. After these reviews, it seemed like those conversations were being tallied against the employees. Because these were all that R knew about, they were the only thing that she could grade each instructors performance on. The result was a backlash of distrust from the instructors and eventually a divide that prevented coordination between the two levels. For the remainder of the summer instructors would try to solve problems on their own, or even just to conceal them. This of course exasperated the problems as the coordinators began to trust the instructors less and less as more situations were poorly handled. In the end, this small miscommunication lead to multiple instructors quitting, a large drop in morale and a complete break down of communication and coordination between the two levels.
While those are the two most significant examples of transaction costs that I can think of, I found the concept of managing down and managing out to be very relevant to this organization. While B was fantastic at managing out, which included recruiting new customers, dealing with upper level management and talking down rabid parents, she wasn't always great at managing down. Our training included a lot of messing around (many workers have been at the pool for years and good friends), no real instruction on how to teach past what skills should be taught, and ended with a large party at her apartment. Her instructions were often vague and left a lot of room for interpretation, but when things went wrong the blame always fell on the instructor.
On the other hand, R was fantastic at managing down. She was very friendly with the instructors, but she ran a tight ship. She was very specific on how to handle private lesson customers, what to teach, when to show up etc. She was also very creative and found many new ways to improve the model of private lessons while she coordinated them. One particular improvement was giving us a small bonus per hour for teaching the lessons during the busier times of the summer. This made sure that no parents went without lessons who wanted them(just some simple supply and demand manipulation, but cool to see). Unfortunately, R was not great at managing out and many of our private lessons ended up being kids whos parents like the instructors and thought that their kid would benefit more from private lessons than the public times (sort of like stealing our own clients). In the end the client base was as large as any other year for private lessons, but R's recruitment of new customers was far lower than it had been in previous years.
One perfect example of transaction costs occurred for me two summers ago while working. After a particularly successful class session, I had a few parents request that I continue to teach their children for the following session. This of course should have been easy to organize, and after relaying the information to B and having it confirmed as possible, I relayed to the parents that I would be able to teach their children the next session. The issue arose when during the next two week session, I was teaching only five of the seven children. Due to one child moving up in level and another to a different time of the day, I was unable to teach all of them. This in turn made their parents and oddly enough some of the parents of the five children that I was still teaching very angry. They thought this was unfair and the two children who were not included that session actually never came back. This one simple miscommunication ended costing us two customers and the respect that we had earned from five more.
Another instance of transaction costs occurred between the coordinators and the seasonal employees later that summer. During our mid season evaluations, which were completed by R, many employees received poor reviews with no warnings in advance. While B was at the pool daily, R was not, however B had many other responsibilities, so performance reviews fell to R. This created an issue with morale and trust, because normally when a problem arose, the instructors would quickly coordinate with B, find a solution and work from there. After these reviews, it seemed like those conversations were being tallied against the employees. Because these were all that R knew about, they were the only thing that she could grade each instructors performance on. The result was a backlash of distrust from the instructors and eventually a divide that prevented coordination between the two levels. For the remainder of the summer instructors would try to solve problems on their own, or even just to conceal them. This of course exasperated the problems as the coordinators began to trust the instructors less and less as more situations were poorly handled. In the end, this small miscommunication lead to multiple instructors quitting, a large drop in morale and a complete break down of communication and coordination between the two levels.
While those are the two most significant examples of transaction costs that I can think of, I found the concept of managing down and managing out to be very relevant to this organization. While B was fantastic at managing out, which included recruiting new customers, dealing with upper level management and talking down rabid parents, she wasn't always great at managing down. Our training included a lot of messing around (many workers have been at the pool for years and good friends), no real instruction on how to teach past what skills should be taught, and ended with a large party at her apartment. Her instructions were often vague and left a lot of room for interpretation, but when things went wrong the blame always fell on the instructor.
On the other hand, R was fantastic at managing down. She was very friendly with the instructors, but she ran a tight ship. She was very specific on how to handle private lesson customers, what to teach, when to show up etc. She was also very creative and found many new ways to improve the model of private lessons while she coordinated them. One particular improvement was giving us a small bonus per hour for teaching the lessons during the busier times of the summer. This made sure that no parents went without lessons who wanted them(just some simple supply and demand manipulation, but cool to see). Unfortunately, R was not great at managing out and many of our private lessons ended up being kids whos parents like the instructors and thought that their kid would benefit more from private lessons than the public times (sort of like stealing our own clients). In the end the client base was as large as any other year for private lessons, but R's recruitment of new customers was far lower than it had been in previous years.
We will talk about performance reviews later in the course. There are multiple issues with them.
ReplyDeleteLet us consider the first example, which I didn't fully understand. Is it correct that in the very next session you taught all 7 of the children, but after that you did not? That's my current understanding. What you didn't describe at all is whether there were capacity constraints in the lessons or if you could have accommodated those other two children in your group in the next two-week session. In the capacity constraints case (other students had moved up a group and were taking the place of the students who had moved up to the next group) what should have happened? Should the students who moved up into your group been denied? And if there were no capacity constraints, so you could have continued to teach the students who moved to another group, why leave this matter to the staff without the parents being involved. I didn't get that. This doesn't seem to me transaction costs so much as bad customer relations.
Then, before getting to your second example, it would have helped to know how B and R got along with one another. The way you described things instructors like you had a dual reporting line. As a rule that is not a good thing, having two bosses. If they work very well together, maybe it is not a problem. Oftentimes, however, it is. So it would have helped to understand how they got along.
Since you were working at the pool for a few years, it would have helped me to understand things how the mid summer review went in years past. What changed this time around to produce the negative reviews? Were there complaints from parents (other than the one related to your first example)? Was there some other situational change that explains what happened. The way you wrote this, it was an uncaused outcome. Normally we like to have some causal explanation for what happens, if that can be identified.
As to what you wrote in the last paragraph, it would have helped me to understand the segmenting between the group lessons and the private lessons better, both on the cost end for the parents and on the learning end for the students. If a parent had enough bucks to afford either would the parent still send the kid to a group lesson for some other reason? Understand the customer's perspective on this would then help in figuring out the supply decisions.
I had hoped that the last few sentences of the opening paragraph would be sufficient to explain the model, but I can see why there would be confusion. The issue in the first example was that I was no longer able to teach one child and the other child was forgotten the next session, because they had changed the time of their lessons. When I asked B if it was possible, that was all she took it as, a theoretical question, when the reality was more complicated. The first child I had recommended for promotion, so he was sent with an instructor who was teaching a level higher class, while I remained with the other children. Another child had a conflict with the earlier lessons, so during the next session, he took lessons during a time that I didn't teach (I had summer classes during that time). Both of these were complications that B and I didn't think about before making the promise.
DeleteB and R's relationship was relatively smooth. I don't think that they were friends outside of work, but they got along well enough as co-workers. The issue in my opinion was the structuring of two bosses, who were in charge of all the same employees, yet had completely different goals. This and a lack of communication between the two often made life difficult for the instructors.
Creating a baseline is a good point. I realized too late that I mentioned that R did the reviews that year, but I din't say that in the past it had been B. I think that part of the problem was that B does the hiring every year (she is full time and R was just seasonal), so she didn't feel the need to be harsh on reviews because she already knew who she was going to hire. On the other hand, R knew that they were used for rehiring next season, so she wanted to give a more comprehensive and in depth review. R also had some personal life things that may have influenced the negative reviews, if we're looking at causes.
The cost difference was very significant between private and public lessons. The public lessons were about $10 per session (if you are a champaign resident) and the private lessons are $19 for one. The the pool actually makes the same amount for the private and the public lessons. The trade off was that with a half an hour of pure attention, many kids would make a weeks worth of progress from the group lessons and many parents recognized this. From there, the main benefit being that they only had to come to the pool once a week and they could have their child make the same amount of progress for only $10 more.