Irving Wladawsky-Berger writes:
In other words, businesses have followed an inside-out, “self-centered” model because of the high costs of orchestrating and integrating their various processes, many of which are still labor-based and one-of-a-kind and therefore require quite a bit of management and coordination, which is most efficiently handled with a “classic,” hierarchical organization. Coase also pointed out that, for a variety of reasons, there is a natural limit to what can be produced efficiently within the firm, which is why all businesses also have a more or less extensive supply chain, and strive for an optimal balance between what work gets done inside and outside the firm.
This balance is now in flux. Since we can now use technology, the Internet and open standards to begin to automate, standardize and integrate business processes, those transaction costs described by Roland Coase are dropping precipitously. Consequently, the whole nature of the firm, and what it means to run an efficient business, is going through very extensive changes. These are not easy changes. Not only is there a great deal of innovation required to automate and integrate business processes, but perhaps more important, there are even greater changes in culture required to transform Industrial Age business models to something more appropriate to our Internet era.