The Economic Problem

One of the main tasks any company needs to do is allocate resources. Regardless of the product or the industry they're in, they have to decide how to employ the assets they have to make money. No one has really "solved" this problem, and that's why there are swarms of resource planning systems, project management tools, and cultish trend-following.

After a C-suite shuffle at James B's employer, one of the newly installed C-level execs had some big ideas. They were strongly influenced by one of the two life-changing books, and not the one involving orcs. A company needs to allocate resources. The economy, as a whole, needs to allocate resources. If, on the economic level, we use markets to allocate resources because they're more efficient than planning, then we should use markets internally as well.

For the most part, and for most groups in the company, this was just a book-keeping change. Everyone kept doing the same thing, but now instead of each department getting email accounts for every employee, each department got a pile of money, and used that to pay for email accounts for each employee. Instead of just getting a computer as part of the hiring process, departments "rented" a computer from IT. It created a surprising amount of paperwork for the supposedly "efficient" market, but at least at first, it wasn't a problem.

Before long, though, the C-suite started to notice that a lot of money flowed in to the IT department, but very little flowed back out. The obvious solution, then, was to cut the IT budget entirely. It would fund itself using the internal market, selling its services to other departments in the company.

The head of IT reacted in a vaguely reasonable way: they jacked the internal billing rates as high as they could. Since they technically owned the PCs, they installed them with physical locks on the cases. If you wanted a hard drive replacement, you needed to go through IT. The problem is that IT had exclusive contracts with vendors, and those vendor SLAs were pretty generous- to the vendors. One HDD failure could take a PC down for weeks while you waited for a replacement.

James was a victim of one such incident. While using a loaner PC to do his work, he and his boss Krista, got to talking about how frustrating this was. They were, after all, a software development team, and "having access to a computer, with all our software installed" was a priority.

"It makes me want to break the lock and replace the drive myself," James said. "It'd probably be cheaper too."

Krista laughed. "It'd be a lot cheaper. Heck, I could just buy you a new computer for what they charge to replace a hard drive."

Krista paused, then started mentally running the numbers. "Actually... I could do that." She immediately called a local vendor, a small company, and ordered a laptop for James. It arrived the next day, and once James set it up with his network credentials, he had full access to all the other IT services, like the shared drives.

Krista's team was one of the smaller teams in the company, but they needed a lot of IT services. Billed at the internal billing rates, that was a significant amount of money, and a big chunk of IT's budget came straight from Krista. But if she shopped around on her own, she could get everything- hardware, software licenses, basically everything but company email addresses and login credentials, for a fraction of the price.

And that's exactly what Krista did. She went through her department and found every piece of hardware they "leased" from IT, from PCs to network switches to even the cables, and replaced them.

The IT department wasn't happy about this. Most of their monthly spend was overhead that didn't change just because one tiny department stopped using their services. With Krista's team cutting off their funding, this meant IT had a budget crunch. Worse, other teams were starting to grumble.

This lead to a call where the head of IT laid out an ultimatum to Krista: "If you don't purchase your infrastructure from us, we will cut off your team's access to the network entirely. You can't just be plugging in any device you like to the network, it's bad for security."

"That's fine," Krista replied. "We can work on our own private LAN, and when we need to give software releases to the distribution team, we'll just walk down the hall and drop off a thumb drive or a CD, instead of using the network drive."

"You can't do that!"

"Why not? You're trying to bill me six figures a year to deliver a service I can replace with a short walk down the hall."

While the war between Krista and IT raged, elsewhere in the company, similar battles played out. Krista may have fired the first shot, but the internal market became a war zone.

The division which made Product Line A had no interest in selling Product Line B, despite the products being complimentary; their budget only made money when they sold A. Other departments tried to internalize other corporate functions- one department tried to spin up its own HR department, another stopped doing its primary job and just started selling accounting services to other departments. One of their hardware departments discovered that they could shift to reselling competitors products and make more money that way, so they did.

Within a year, the internal market was canceled. The C-level executive who had pushed for it had already moved on to another C-suite in another giant company, and was still preaching the gospel of the internal market. Without that influence, James's company instituted a new "Company Family" policy, which promised "no departmental boundaries". People still used internal budgeting to help them allocate resources, but gone were the big piles of money that could just be spent however. No department was trying to make money off other departments. The grand experiment in internal capitalism was over.

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