This month’s column pays a tribute to Elinor Ostrom, who shared the Nobel Prize award in economic science in 2009 with Oliver Williamson. Ostrom, who died at age 78 on June 12, was cited by the Nobel Committee for “her analysis of economic governance, especially the commons,” a term that refers to resources that are owned or shared in common among communities.
It’s well past time to recognise Ostrom, and sadly I wish I would have given her the credit she deserves before her passing.
First, hats off for Ostrom for challenging traditional wisdom. Traditionally, economics taught that ownership of common resources results in excessive exploitation, as when fishermen overfish a common pond. This is referred to as the as the Tragedy of the Commons, which is outlined in the excellent but older Science Magazine article. The Tragedy of the Commons suggests that common resources must be managed either through privatisation or government regulation.
Ms Ostrom spent her life challenging the logic of the Tragedy of the Commons, suggesting that collaboration and cooperation can effectively govern to the benefit of the group. In fact, she spent her life studying cases around the world – from Indonesia to Nepal to Maine – in which communities successfully regulated resource use through cooperation.
She delved deeply through research and fieldwork in exotic locations into the use of collective action, trust, and cooperation in the management of so-called “common pool resources” (CPR). Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom observed that resource users frequently develop sophisticated governance mechanisms for decision-making and rule enforcement to handle conflicts of interest. She concluded that the outcomes are more often than not better than predicted by standard theories.
In a nutshell, Ostrom’s unconventional work showed how humans interact with ecosystems in nature and in institutions to maintain long-term sustainable resource yields. She went beyond markets and states in the governance of those systems to a “polycentric governance of complex economic systems.”
In Ostrom’s words, she explained that “Classical Game Theory is very predictive in some environments but not fully predictive, by any manner/means, in an environment which is a social dilemma. [It is] helpful for us in analysing and as we develop a behavioral theory of humans and of other formal mechanisms we can explain why people do cooperate in some settings and not others.
“That’s what I’ve been working on for all my life! Humans have great capabilities and somehow we’ve had some sense that the officials had genetic capabilities that the rest of us didn’t have…There are many other small to medium-sized groups that have taken on the responsibility for organising resource governance.”
It is easy to make the connection on how Ostrom’s work can be applied to the governance of resources such as fisheries and social problems like global warming. But you might ask, how does this relate to outsourcing? The answer is easy! Buyers and suppliers (and the people who run them) are really an ecosystem. They need to set social norms and manage their ecosystem as they seek to optimise performance among the organisations – the “System” per se.
But is anyone really applying her theories in the real world? The answer is yes! Look no further than McDonald’s – which thinks about its supplier and owner/operator franchise relationships as a “System” and applies sound governance mechanisms to help everyone live up to the “System First” promise. McDonald’s also helped apply Ostrom’s concepts as they worked with suppliers and NGOs to solve for fish sustainability. We share McDonald’s world class approach to governing their System in our upcoming book Vested: How P&G, McDonald’s and Microsoft are Redefining Winning in Business Relationships.
It’s long past time for me to give Ostrom her due. Her big thinking emphasised collaboration and cooperation, a cornerstone of the Vested concept and one that all companies should study as it relates to the governance of their own “systems.”
Fellow outsourcing professionals, let’s all take our hats off in respect to Eleanor Ostrom.