We are aware of costs that directly affect the final cost of production. The company buys raw materials, hires people, provides workers with materials and technologies, so that as a result they get the final product, the final cost of which will include all production costs. But there is one more separate type of expenses, which the company is unlikely to manage without in the modern market. These are the so-called transaction costs.
Theoretical concept
Consider the example of the formation of transaction costs. They are not directly related to the production process and do not relate to materials or wages. But they also need to be taken into account when pricing.
According to economic theory, transaction costs (see examples below) are costs that ensure the transfer of property rights from one source to another during the production process. It is very difficult to understand the theoretical material. But the example of transaction costs is very simple.
Suppose there is a company "N", which produces ice cream. The company already has everything: raw materials (milk, fruit additives, sugar, etc.), workers, technology and equipment. But there is no ready room where the whole process will take place.
In this example, the management of the company needs to find as soon as possible who will rent the premises, who will make repairs in it, who will install the equipment. That is, at least three more contractors need to be found and contracts concluded with them. Of course, the company "N" itself can build a building for itself, make repairs in it and connect the conveyors, but it will take so much time that the summer season can already end. In this case, we are talking about an example of transaction costs when the company "N" transfers its authority and rights to a third-party organization, but at the same time protects them thanks to a written agreement.
Types of transaction costs
In the sphere of market relations, five examples of transaction costs in an enterprise can be distinguished:
- expenses related to information retrieval;
- losses during negotiations and conclusion of contracts;
- the costs of the process of measuring a quantity;
- costs of protecting property rights;
- costs of opportunistic behavior.
Information Search Costs
Consider a simple example of the transaction costs of information retrieval. Again, take the company "N", which produces ice cream. The first batch of sweet treats is already ready, but to whom to sell it? The entire population of the nearest small town has already fallen in love with the ice cream company "Z" - "Zeleinoe" and does not want to change it to "N" - "Natalkino". Firm "N" has to look for potential buyers. Management travels to another city 100 km away, spends money on gasoline or tickets, monitors the market, studies the needs of people, their preferences, etc. As a result, the company N finds buyers, but it took time and money to find them.
The same could be done easier. Entrust a marketing company with part of their rights and conclude an agreement, according to which the contractor undertakes to conduct a marketing research of the consumer market in order to determine the volume of future demand. All costs of a contract with a marketing firm would be considered transaction costs.
Negotiating and contracting costs
Consider the example of the formation of transaction costs, when the company "N" has already found a contractor - marketing agency "A". But the second did not accept the initial price, and they ask the employer for a large amount of remuneration. Firm "N" is not ready to pay more, and lengthy negotiations are ongoing, the contract is not signed, production is idle, ice cream is not for sale. This is another item that in accounting will relate to the column of transaction costs.
Measurement costs
This type of cost is associated with quality control of products. On ice cream, this is not so noticeable, since the product must be standard and comply with GOST. But in a field such as automotive, engineering, the appearance of marriage at any stage can lead to the loss of huge sums of money. Such an example of the formation of transaction costs best describes the essence of the costs of measurements.
To exclude marriage, it is necessary at each stage to devote a lot of time to checking the conformity of details.
Costs of specification and protection of property rights
We give an example from the life of transaction costs. Let's say one person invented a completely new technology for making ice cream, which can save on water and electricity. This person works as a creative director in our company "N". Not having time to patent the idea, we introduce it into production. But our company turned out to be a spy who transmitted secret data to competitors. And now the company "Z" also uses our technology.
There is a dispute. In order to protect its rights and its idea, Form āNā files a lawsuit with a claim for information theft. All costs incurred by the company "N" for the patent and appeal to the court will be assigned to the column of transaction costs.
Costs of opportunistic behavior
At first glance, it seems that this is a very complex concept. But the example of a transaction costs enterprise is familiar to almost everyone. The question relates to the main and contracting organizations when one of the parties does not want to perform the functions prescribed by the contract. The reasons for this are commonplace: we will take money, but we will not do anything or will do poorly. This happens all the time. The company orders the construction of the building, and the contractor, taking the money and pulling out the foundation pit, evaporates in an unknown direction. There are costs, but no work. This is called opportunistic behavior, that is, dishonest, unfair attitude to the terms of the contract.
O. Williamson classification
Examples of transaction costs can be divided into two categories: by the frequency of transactions and by the specificity of assets.
A one-time or easiest exchange on the market with unknown sellers and buyers. This process is accomplished by each of us almost daily. Let's say you need batteries. You go to the store and buy batteries, and the next time you go only when they sit down again. The seller is indifferent to whom to sell, and the buyer is not to whom to buy. A similar situation arises with any small household items.
When it comes to expensive equipment, there will no longer be a one-time deal. The buyer will carefully choose, look closely, ask the price before making a choice.
Recurring exchange
In this type of exchange, assets do not have specific features. But constancy is already being traced. For example, every day you buy milk from the same seller. You know that his product is of good quality, you are satisfied with the price, and you come again and again. Thus, we see an example of reducing transaction costs.
If there is one and the same seller, then you do not need to run around and look for others, and even give regular customers discounts. Therefore, it is more profitable to conclude reusable transactions with trusted partners.
For the same purpose, supermarkets come up with bonus or accumulative cards. Having a good discount at one supermarket, the buyer will not run to others, and the store will receive a regular customer.
In business, two things are important:
- find a reliable seller;
- retain a loyal customer who will become a regular.
If the company has a circle of regular customers who make revenue, then you do not need to look for others. Thus, there is an example of reducing transaction costs by the manufacturer.
Duplicate contract related to investments in specific assets
Specific assets are funds aimed at achieving a specific goal. Such a transaction is updated every time it is concluded, and a certain amount of money is allocated for it.
Consider an example. Let's say the company "N", which produces ice cream, needs to build a workshop. She hires a contractor, and they make up the contract. Targeted funds are allocated for the construction. When the workshop is already built, the company will use it for the purpose for which it was built, that is, work in it. If the company wants to do something else in the workshop, for example, hand it over to the warehouse, then it will incur additional costs, which will be absolutely unprofitable for it.
Investment in unique, exclusive assets
In this case, we consider assets in the alternative use of which their value is lost in general. Most often, this category refers to monumental structures that were built for specific purposes. For example, a metal smelter built a blast furnace. What to do with it, except how to melt the metal in it? Nothing. For other purposes, it is not intended.
Factors affecting transaction costs
These include:
- the presence of bureaucratic red tape in the drafting of contracts;
- barriers to entry;
- the presence of a large number of sellers whose work quality is unknown;
- the presence of opportunistic behavior;
- high cost and inaccessibility of information;
- specially created difficult conditions for the functioning of the market due to ill-conceived policies;
- inefficient management of the company;
- high risks.
Transaction costs are associated not only with the loss of finance. In many cases, time and human resources are incurred.
An example of reducing transaction costs in Russia is the development of outsourcing.
Outsourcing: a method of reducing transaction costs
The concept of outsourcing means the transfer by the company-customer of some of its functions to an external organization on the basis of an agreement. In this case, the partner company must be an expert in its field and have a reliable reputation.
The most common example of outsourcing is accounting. It is not profitable for small firms to hire a person separately, pay him a salary, plus the awkwardness of vacation: who will keep records when the accountant leaves for a vacation? To avoid embarrassing situations and save on the whole division, it is more profitable for a company to turn to a third-party company that conducts accounting reports.
Types of outsourcing:
- IT outsourcing consists in servicing computers, creating websites, programming, installing software.
- Industrial. Transfer of part of production functions. For example, using the services of a carrier company, delegating assembly of components to another company.
- Outsourcing in the field of management includes the selection and training of personnel by a third-party agency.
- The transfer of secondary functions, such as accounting, marketing and advertising, logistics.
Outsourcing helps companies save time, money and labor resources where there may be high costs, allowing you to focus only on the main production process. It is effective for large and small enterprises, regardless of the degree of wealth and type of property.