Market Magic

A bigger obstacle, though, is the control thing. Most managers "assume that if there's a problem, the solution is to put some person in charge of it," says MIT's Malone. "If there's a problem, there should be someone to blame." But internal markets require that managers give up some control and let the market decide what to do, which is "scary" for some people even though "in many cases the outcome may be better and more in line with what managers actually want," he says. Malone, however, thinks the fear of losing control is largely overrated. "In reality, managers can still be in control of the process," he points out, "because they set the rules, and can intervene if necessary."

Another difficulty with internal markets is that employees may be reluctant to publicize what they know. "You might ask a question like, 'When can we ship a product?' through a market," says Dahan. "If the consensus of the managers is that you're going to be six months late, though, they're not going to want it known." In efforts to protect certain types of information, then, players may collude with one another in order to manipulate prices to show a different expectation. One potential solution to the collusion risk, Malone says, is to reward participants relative to their peers, rather than to their absolute profits in the internal market.

When it comes to resource allocation, HP's Huberman and his team have recently come up with a "truth-telling" mechanism within a reservation system for computing resources that helps others determine how likely those reservations are to be kept. Employees can choose a low-cost reservation with a high penalty for cancellation or pay a higher price upfront with minimal penalties for opting out later. "By choosing how much you'll pay and how much penalty you'll take, it reveals to us how likely you are to use your reservation," says Huberman, creating more incentive for employees to take only what they need.

No doubt there are more glitches to be fixed. But researchers are hard at work perfecting the concept. Meanwhile, if CFOs have any faith in Adam Smith, it may be worth their while to start thinking about how markets can help their companies — both inside and out.

Alix Nyberg Stuart is senior writer at CFO.

• « previous
• 1
• 2