The horizontal economy

In the late 1930s, economist Ronald Coase (later to win the Nobel prize) wrote an influential paper examining why firms tend to keep some activities in-house, yet rely on an open market of suppliers and partners for other things. Coase learned that "transaction costs" -- the costs associated with coordinating and collaborating with outside firms -- often were just too high. Under the circumstances, vertical integration made perfect sense. Unfortunately, it often tended to undermine entrepreneurialism, replacing it with excessive rules and schlerotic corporate bureaucracy.

Much has changed since then. New technologies of communication,information and transportationhave radically reduced transaction costs. Now, it's possible for companies such as Dell Computer and Procter & Gamble to tout "virtual integration" -- a business strategy focused on building dynamic relationships with partners and suppliers.

We haven't seen anything yet. As David Moschella notes in his impressive book Customer-Driven IT, Web services have the potential to go way beyond today's focus on internal IT integration andleverage to drive far-reaching new waves of collaborative commerce. Imagine purchasing business processes and serviceson the Web -- often, in real-time -- much as we now purchase books from Amazon and tickets from Travelocity.

"The real change, if it is to come, will have to be in the fundamental structure of companies and even the economy itself," he writes. "Many Web services advocates have argued that by increasing the flow of information and lowering transaction costs, the Web will eventually create a much more specialized horizontal economy in the United States and other technologically advanced nations. According to this scenario, longer, more integrated value chains will become the dominant economic pattern as specific business processes evolve into specialized third-party offerings."