Scale
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Risk Anatomy™
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The point where the scale opportunities are large enough to require active management.
“Passive” economies of scale flow from the simple fact of size (e.g., adding another user to an existing software licence automatically reduces the per-user cost of the licence, without anyone having to do anything). But these passive economies run off at the point where one needs to divert the firm’s resources and personnel towards managing these efficiencies. One must spend to save, manufacturing scale efficiencies that won’t arise by themselves. For example, negotiating law firm panel arrangements, outsourcing and offshoring).
A firm may engage management consultants, middle managers and eventually a chief operating officer whose only job is to extract efficiencies. As long as the efficiencies wrought are greater than the marginal cost of that person, team, or fiefdom, then the fiefdom can be justified on hard economic data.
But O, Paradox: the COO unit itself can become so complex that it presents its own scale opportunities. Beyond a point, it becomes so complex, so inefficient, that one should appoint a chief operating officer for the chief operating officer’s office, tasked with consolidating all the diaspora of COO functions groups, initiatives and change managers into a single function.