It is important to realize that clients often care more about the outcome, not necessarily how the supplier got there. How, you might wonder, is explained below. I argue that Agile decreases both contract and monitoring costs. Consequently, the Agile approach reduces time-to-market (short cycles), improves flexibility (feedback loops) and increases customer satisfaction. A product is created incrementally from the start of the project instead of trying to deliver it at once. The most notable is ‘Agile working’. In an Agile culture a project is broken down into bits of user functionalities that can be prioritized and are continuously produced and presented in short cycles (sprints). Over the last few years, various methods have been introduced to optimize business performance and business efficiency. ![]() Logically, finding a party that you trust lowers monitoring efforts significantly. As clients often do not trust suppliers, effort and costs invested to successfully monitor suppliers are high. But how do you evaluate if those hammers are sustainably and fairly produced? Once a contract is signed a client monitors if a supplier honors its commitment throughout the contracted period. For example, it is relatively easy to check if a supplier has delivered all 10 hammers that you ordered. ![]() The more complex the product or service, the higher contract costs will be. Drawing up a contract that includes all necessary details for the business arrangement to succeed takes time. Once a supplier is chosen, the client and supplier have to agree on the price and quality of deliverables. The rise of internet and applications like LinkedIn decreased the information costs tremendously. Information costs refers to time and cost invested in finding the right supplier and client. These invisible costs are divided in three types: information costs, contract costs and monitoring costs. Each business transaction, especially between a client (or employer) and its supplier (or employee), comes at invisible costs, time and effort, that could have been invested in something else. Williamson claims that transaction costs theory exist when unnecessary costs have to be made by firms in order to generate a successful exchange with another party. In his article ‘The economics of organization: The Transaction Cost Approach’ published in 1981, Oliver E. Hence a firm, like the supermarket, is primarily a means to lower transaction costs. In other words, a firm is a means to draw up long term contracts (hire entrepreneurs), when short term contracts are no longer profitable (regular and continuous negotiations). In 1937, in his article ‘the nature of the firm’ Ronald Coase already argued that businesses come into existence when it is too costly to continuously find the right people or products, bargain about the prices and monitor the performance of the supplier. This implies that supermarkets significantly decreased transaction costs for themselves and for people who shop for their daily groceries. This showed that the concept of supermarkets are successful because it is simply easier and cheaper to shop for all your groceries in one location. Customers really liked the concept and while the number of stores declined, sales increased. As a result, transportation costs dropped, followed by the prices. Products from all departments could now be delivered at once and by one transport company. The chain grocers realized that regular negotiations with these entrepreneurs, about all sorts of things, took up more time than need be. In the beginning, one of those stores consisted of a separate baker, grocer, fishmonger and butcher. They wanted to offer customers more products in one building. In the early 1920’s a couple of chain grocers in the United States experimented with diversifying their products. This blog explains what transaction costs are, what Agile is and why transaction costs are lower in Agile development processes than in traditional ones. In the last decade, the Agile way of working has dramatically decreased transaction costs in the development of new (IT) products.
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