59. Flexibility, but not too much         

We are told that everything has to be flexible, because that is good for innovation and innovation is needed. It should be possible to easily break relationships, fire workers, and sell parts of firms, and organizations must continually turn themselves around. There is something to that. Flexibility is needed to prevent rigidity, to allow room for novelty.

But flexibility can go too far. Revolving door employment is not good. For a fruitful relationship, within and between firms, one must invest, and that takes time. Often, the investment is specific to the relationship, i.e. cannot be recouped outside it, so that the relationship must last sufficiently long to make the investment worthwhile. Otherwise, the investment will not be made and the relationship remains shallow. Specific investment is needed when one makes the high level, specialized products, with unique combinations of features, which yield the highest profit.

Flexibilization is often accompanied; see the US, with legalistic relationships. Shorter relationships are less personal, less based on personal trust. They require a more contractual control of relationships. That increases costs, and the irony of it is that it reduces the flexibility of relationships by locking them up in the straightjacket of a contract.

Ironically also the drawbacks apply especially to innovation, while that is where flexibility is most advocated. Innovation typically arises from surprising novel combinations, from people and firms with different capabilities. As a result, people do not immediately understand each other. They must invest in sufficient mutual understanding and that requires patience and is also a specific investment.

Relationships entail risks. First, the risk of mutual dependence, especially when one makes specific investments for the quality of the relationship. Second, the danger, especially in innovation, is that knowledge or the innovation is captured by a competitor.

Especially under the uncertainty of innovation it is difficult to cover the risks with formal, contractual means. Firstly, the uncertainty is too large for one to be able to specify all relevant contingencies. Secondly, a contract can impose a straightjacket that stifles initiative and leaves no room for the surprising turns that innovation can take. Thirdly, the demand for a detailed contract is readily seen as a sign of mistrust, which evokes further mistrust, in a vicious circle that is difficult to turn around in the building of trust.

When contracts are difficult, as in innovation, trust is more needed. Where it is not present at the start it has to be built up and that again is a specific investment that requires the perspective of a sufficiently durable relationship to make it worthwhile.

In sum, especially in innovation one should not strive for maximum but for optimum flexibility, in relationships that last sufficiently long to evoke investment in mutual understanding and trust, but no so long as to obstruct the change and renewal of relationships.