Technological progress, organizational change and the size of the Human Resources Department



unmanageable pressures leading to absenteeism, sick pay, turnover, injuries, com-
pensation and litigation costs, damage to equipment and production or reduced
performance. Yet, the costs of coordinating activities and workers are not limited
to safety and health conditions in the workplace. Precise empirical evidence on the
extent of coordination costs is hard to find in the economics literature (unlike psy-
chology, sociology, management and computer science where coordination costs are
subject to a wider attention), with a notable exception in the literature on transac-
tion costs3 , but several estimates may help evaluating the extent of horizontal and
vertical coordination costs.

As regards horizontal coordination costs, task-switching induce behavioural (neural
or cognitive) switch costs. When people switch back and forth between tasks, there
are both mental and physical costs, due for instance to ‘inter-tasks learning’. Such
costs persist even when people know in advance the identity of the new task and have
ample time to prepare for the switch. Empirically, task-switching costs are measured
by psychologists and neuroscientists in terms of response time and acuracy, that is
slower response and lower percentage of correct response4 . Recent evidence shows
that the behavioural costs of task switching may lead to around 3% of errors on
average5.

Overall, if we restrict our attention to an average error rate of 3% due to switch
costs, horizontal coordination costs might represent a minimal loss of 3% of firm
output, which would be the least costly scenario.

As regards vertical coordination costs, there are financial losses evaluated in
terms of human resources management when tasks assignment becomes more com-
plex. More precisely, the time wasted by managers and directors in managing errors
in tasks coordination and underperformance has been documented in a recent study
by the Future Foundation. In 2004, US managers reported a waste of 34 days per
year and senior executives 7 weeks a year - an hour per day - in managing employees
underperformance. Overall, the reported time spent redoing or correcting mistakes
of others amounts to 21% in Hong Kong, 16% in India, 13% in the US, 12% in
Australia, 9% in the UK, 11% in the Netherlands and 7% in Sweden6 (Future Foun-
dation and SHL, 2004). Financial losses due to vertical coordination costs may also
include the loss of wages or income and the additional expenditures (health care and

3 For Wallis and North (1986) transactions costs can be decomposed into motivation costs
(agency costs and conflict of interests among managers, owners and debt holders as well as costs
of cheating and opportunistic behaviours) and coordination costs (costs of obtaining information,
coordinating input in production and measurement costs). Both marketed and non-marketed
transaction costs (e.g. resources spent in waiting, getting permits to do business, cutting through
red tapes etc.) are concerned. In developed economies, the transaction sector would represent 60%
of GNP and non-marketed transaction costs 11
.3% of GDP per capita (Wang, 2003).

4For Lien et al. (2006), when a typical response to a single stimulus takes 300 milliseconds,
adding a second task increases the response to about 800 milliseconds. Extending the difference
to a car driving 60 miles an hour, the response rate more than doubles.

5 This figure is a gross average of percentage of errors observed in some recent experiments in
psychology. See e.g. Schneider and Logan (2005)

6 This survey was conducted in 2004 over 700 managers across sectors over these 7 countries.



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