Poor Competition In Personal and #SME Banking (and What the CMA Plans To Do About It)

The Competition and Markets Authority has been investigating the state of competition for personal and small business bank customers, and the results are pretty shocking. The full report is here, the summary of findings here and the possible remedies are here.

We have until 20 November to comment on the findings and remedies (email retailbanking@cma.gsi.gov.uk). The CMA's provisional decision on remedies is due in February 2016 and the final report in April 2016.

Most glaring is the fact that 99.9% of all UK businesses are small - over 5 million of them - and the vast majority of them are sole traders. Yet small businesses do not benefit from most of the customer protection and other measures aimed at improving services and increasing competition for personal customers.

You would also think banks would do more to look after small businesses, given they are responsible for at least 5 million self-employed roles, and most new jobs come from that sector. But only 60% of SMEs survive beyond three years and only 40% make it past the five year mark. It's true that no job is for life, anymore, but poor financial services must surely be a factor in such high business death rates.

More has to be done to help this sector thrive. Have your say! 

What Happened To 'Class A' Political Journalism?

My appetite whetted by this week's local electoral melodrama, I've been searching for some Class A political journalism to feed my lust for pragmatism. 

There were little flashes of it from a few of the TV people. Michael Crick, who blew the lid off the Andrew Mitchell stitch-up, was rude as hell to Farrago, no doubt furious at having stuck to him like a leech in the hope of discovering anything coherent and coming up empty-handed. That left the usually mild-mannered Gary Gibbon to go after the rest of the gang. Desperation set in after the AutomEtonian responded to every single question with the line that this week was simply about local councils. He genuinely seemed to forget he was the Prime Minister, and I guess it's easy to see why. This seemed to put Gary in such a foul mood that he went after Flash Nick and Millibore like a mortar crew on speed. Each prevarication was interrupted with a fresh round down the tube, and another explosion of disbelief at the factually-twisted response. 

The only problem with the Gibbon assault was the apparent premise of the questions on capital spending: that it's the job of the state to fill every hole in the infrastructural landscape. Creating a whole new mountain range out of UK public debt is strange medicine indeed, whatever the cause. Ironically, Flash Nick went closest to a straight response, saying that while they'd barely invested a bean of new public money, the coalition has done a great job of attracting private capital to public projects. If that's true, then let's hope they've overcome the planning fallacy, and the PFI vultures leave a little flesh on the state carcass for the rest of us. 

As for Ed, well... 

In the end, the howling in my soul could only be quieted by re-reading "Fear and Loathing on the Campaign Trail '72". Forty years on, nothing has changed. The vicious wheels of the party political machines are still flattening the best interests of the citizens into the road in the rush for power and patronage, and Thompson's substance-fuelled take on the political animal is so brutally right that the recognition will make you laugh like a hyena. This, for example, could have been written today:

"This also reinforced my contempt for the waterheads who ran Big Ed's campaign like a gang of junkies trying to send a rocket to the moon to check out rumours that the craters were full of smack."

Now why doesn't anyone write about politics like that anymore?

Is it merely because today's journalists are sober, or have they abandoned hope that we can produce anything different to the current stage-managed pantomime?

LSE Gets It: More Pragmatism, Less Politics

Having recently made the same point, I'm encouraged to see the London School of Economics setting out in detail some of the ways in which the UK could benefit if pragmatic political consensus were to replace party-political dogma. 

However, it would be wrong to think that this approach is only needed in the areas of education, infrastructure and innovation, on which the LSE's report focuses in particular. It's a general shift in attitude that is required in every aspect of our lives. 

This doesn't simply mean that politicians and civil servants should adopt a different top-down attitude. It means inverting the institutional narrative altogether. Politicians and the public sector must adopt a pragmatic, bottom-up view of what works and what does not work at the individual level, for the common good. The public sector must monitor and disclose publicly whether - and, if so, how - its activities, regulations and incentives distort all kinds of local and national markets in favour of private and public sector institutions, thereby constraining innovation and competition. Critically, this extends to the wasteful way in which the public sector purchases its own goods and services.

In practical terms, that shift in attitude requires the civil service and politicians to focus on obtaining data, defining problems, measuring their scale, analysing root causes and implementing lasting solutions. After all, hard choices are easier for more people to accept when they can be shown to be driven by harsh reality rather than party political dogma.

While, fortunately, there's plenty of evidence to suggest that this change is already underway as part of longer term trends discussed on this blog, the voices of institutions like the LSE are critical to those trends becoming mainstream behaviour sooner.  Let's hope similar reports follow from others shortly.

Pragmatism Grows At Night

In "India Grows at Night" the writer and commentator Gurcharan Das shares his insights into how India's growing, pragmatic middle class can achieve the country's necessary political and economic reforms. While inspired by Das's presence in Tahrir Square two years ago, these insights also resonate with the plight of Western democracies whose growth is inhibited by extractive private and public sector institutions.

The title of the book comes from Das's belief that India's knowledge economy powered her economic growth because: 

"Bureaucrats did not know how to regulate it and could not choke it with red tape, in the way they stifled India's industrial revolution through licences, permits and inspectors... India's knowledge economy literally grew at night while the government slept."

But India's problems are not over. Das explains that the "puzzle is... how can a vibrant democracy with a rising economy and an energetic civil society have allowed the state and governance to decay"?  He then describes the evolution of the Indian state from before British rule until today, tracing the tensions between social and official structures, and the shortcomings of the political system and key market failures.

Despite different starting points, this 'decay' also awaits Western democracies who have not been alert to the need for ongoing political and economic reforms. There's an ominous familiarity, for instance, in the complaint that the Indian state is preoccupied with the quantity of schools and other public services rather than their quality - "which is what really drives shared prosperity." The problems in our financial system are well rehearsed.

Das's description of the reasons for India's institutional decay is also echoed in Phillip Blond's explanation of the 'political bankruptcy' in Western countries. I understand them both to be saying that right wing policies allow the concentration of wealth amongst relatively few extractive institutions and their management and investors, rather than creating an environment in which widespread entrepreneurship can flourish. Meanwhile, left wing policies that are designed to 'redistribute' income through taxation and public spending are grossly inefficient by comparison to markets. The self-interest of partisan politics has gone too far, and legislators have no real commitment to the common good. Electoral battles fought along social and cultural lines distract everyone from critical long term issues, as well as being dangerously divisive. As a result, we lack appropriate regulatory frameworks and incentives to address market problems that stifle innovation and competition. Not only does institutional decay reflect the bankruptcy of dogma-ridden political parties, but as that decay constrains growth the economy itself drifts into liquidation.

Das argues that successful reforms will only be achieved through more active political participation by the members of the rising middle class, since they are the most conscious of the problems and the most impatient for the necessary reforms. He argues that the intransigence of existing Indian political parties creates the need for an entirely new, 'bottom-up', liberal political party. Das explains that this is a 'classical' rather than a 'social' liberalism - tolerant on social and cultural matters, yet wary of state intervention where the private sector and the market can be more effective.

This also seems to reflect the "renewed political idealism" and "participative democracy" for which Phillip Blond argues. 

In UK terms, this would seems to place Das's vision for a 'liberal party' somewhere between the Tories and the Liberal Democrats. And it seems quite telling that UK voters have forced those two political parties into coalition.

However, I disagree that the formation of a new political party or even a new political idealism is a necessary pre-condition for achieving political and economic reform.

As discussed in Lipstick On a Pig, the bottom-up approach that Das refers to has already been unleashed, largely enabled by the Internet's 'architecture of participation'. The 'Arab Spring' and developments in sub-Saharan Africa emphasise both the global nature of this phenomenon and its effective political impact. This process of 'democratisation' requires no more structure than the social media and a city square, and its power lies in the fact that it isn't confined to politics or economics. Greater transparency, knowledge and reform in one area creates the desire for change elsewhere. The result is both seismic and chaotic, yet significant reform is bound to be 'messy', not orderly and neat. As a result, I've suggested we're seeing the evolution of a "personal state" in which we're acting pragmatically as individuals in a highly collaborative fashion through the services of facilitators, rather than passively relying on our institutions to set the pace of reform.

New political parties and ideals might well emerge in this environment, but they will be a symptom of reforms achieved by each of us acting personally, not the cause.   

The Personal State

This decade is not going well for Britain’s institutions. The 2010 election did not magically restore our faith in a scandal-ridden Parliament. Bail-outs failed to improve the conduct of UK banks. Our public sector finances are in an appalling state. And as more sunlight has revealed the self-serving conduct of our mountainous bureaucracies, the gradual melting of our trust in them has become an avalanche. We want to know how rotten our institutions really are. More importantly, however, we want new models that work. 

As explained in “Lipstick On a Pig”, this plunge in faith in our institutions coincides with trends that are democratising the means of producing goods and services. Using digital technology we are personalising the one-size-fits-all experience traditionally offered by the likes of record labels, publishers, retailers, banks and political parties, and manufacturing our own physical products using desktop industrial machines. Rather than merely accepting what is ordained from the top down, both individually and as members of the ‘crowd’ we are shaping products, markets and political policies to solve the problems we encounter in our day-to-day activities. 

This process of ‘democratisation’ is being facilitated by organisations that are intently focused on helping us solve those problems. I call these organisations ‘facilitators’ to distinguish them from ‘institutions’, which exist to solve their own problems at our expense. The characteristics that I believe mark an organisation as being either a facilitator or an institution fall within broader themes of alignment, openness, flexibility, transparency and responsibility. In other words, a 'facilitator' solves its customers’ problems openly, flexibly and transparently, and takes responsibility for the impact of its activities on the wider community and society. 

Why are these features so critical? You might argue, for example, that focusing on ‘creating shareholder value’ or maximising management and staff compensation have proved to be more successful for some organisations than focusing on customers. As Anthony Hilton, Financial Editor of the Evening Standard, once said, “The City has done very well over the past 50 years dreaming up any old product and shoving it down peoples' throats.” 

But if that’s such a successful strategy, why are those City firms suddenly the subject of scandal after scandal and fine after fine for mis-selling and other misconduct? Why aren’t they able to recover quickly from their mistakes and move on? Why is Parliament labouring over new banking and financial services legislation? Why are people taking to the streets in protest? 

Because these firms are not 'facilitators'. 

In “Lipstick on a Pig” I explored the distinction between facilitators and institutions in the context of financial services, which then marked the latest consumer frontier. That sector also provides a great illustration of how organisations that produce complex products with hidden fees that their own staff can neither explain nor justify to customers become hooked on revenue and profits that disappear when the regulators finally wake up. How clubbing together with competitors leaves the whole club vulnerable to the same event or the consequences of the same mistake. How ignoring complaints and covering up problems leaves an organisation unable to understand the causes of issues it needs to fix. And how, when it finally emerges that the institution is not managed in the interests of the wider community, that community will no longer support it.

Since then, however, the frontier has expanded to confront the public sector and how society works – or doesn’t - as a whole. So I've been focused on the extent to which the public sector shares the same institutional characteristics that afflict our banks, and how facilitators are emerging in that wider context to help people solve their day-to-day problems that are being ignored. 

Whether an organisation is a facilitator or an institution is ultimately a matter of personal judgement for each of its customers. You might consider that a supplier is on the cusp of either category. Some will shift categories over time - although the drift from facilitator to institution appears to be easier than reform the other way. Some may never be reformed. Instead, they will gradually wither away while alternative models grow around them. 

Ultimately, however, the success or failure of our institutions and the facilitators that replace them is down to each of us. We are obsessed with ‘our rights’, but we must also realise that each of us bears responsibility for the wellbeing of everyone else. With our rights come duties and obligations that each of us must perform personally. The state cannot perform these obligations for us. The state can only act as a facilitator for our own endeavour. This is “the Personal State”. 

The Personal State is a simple concept. But it is of course a hugely complex dynamic, fraught with deeply-rooted life and death problems. For it to operate effectively, each of us must act pragmatically - in an informed way, rather than by adopting “uninformed, stupid practice”. That means no longer describing problems in terms of political dogma and propaganda. It means thinking critically and practically to identify and solve real problems. It means praising what works and explaining what doesn’t. It means spending, saving and investing our money in productive ways, and declining state benefits we don’t need. It means finding ways to improve the efficiency and productivity of the public sector to reduce public spending. Of course we must punish the gross mismanagement of our institutions and other violations of public trust. Yet we must also encourage entrepreneurs to engage in survivable trial and error, in order to promote innovation, competition and growth. In short, we must help each other wherever we can. 

Now a state like that would be worthy of some lipstick.

Image from Makeup Artist.

Rise Of The Facilitators: Big Society Capital

Last night, at a ResPublica event, I heard Nick O'Donohoe, CEO of Big Society Capital, outline a pragmatic vision for a social investment market in the UK. Critically, BSC's role is not to hand out £600m in cash to well-intentioned social entrepreneurs. Instead, it's focused on creating the capability for deprived communities to identify, manage and finance projects that will have a mainly social impact, but with the expectation of some financial return. 

Let's say you want to introduce 'makerspaces' for local people with expertise in operating machinery to invent stuff and make individual items to order. It seems reasonable to believe this could help regenerate some industrial towns. Consider the adventures of Chris Anderson, who recently announced his departure as editor of Wired to run a drone manufacturing business he built as a hobby, as described in his latest book. 

How would you make it happen? How would you establish the feasibility of such a project, identify the right equipment, locate an appropriate building, obtain any necessary planning permission and so on? 

This takes time and expertise, not to mention seed money. Numerous intermediaries must be available to help entrepreneurs co-ordinate and finance their project locally. It can't be done by Big Society Capital from its offices in Fleet Street. It can't be done by civil servants from Westminster, or even by the local council. This has to be a distributed effort all around the country, leveraging online resources where that makes sense. Such intermediaries - or facilitators - will include social banks, active social investors, professional and other support businesses, as well as platforms that enable funds to flow directly from people with cash to social entrepreneurs. The role of Big Society Capital is to invest in the development of a strong network of these social investment intermediaries.

But maybe we shouldn't be too definitive about what is 'social'. I think this approach will be truly successful when facilitators and entrepreneurs aren't necessarily conscious of the fact that the positive social impact of their activities is far greater than the scale of their financial results. To this end, we should factor into all our corporate and project objectives an obligation to take responsibility for somehow improving the community to which the corporation or project relates. In this way, all businesses would have an overlapping social purpose as well as a financial one. 

Similarly, financial services need to support this broader responsibility. Of course it's critical that investors know exactly whether they are donating money, receiving interest payments or getting a share in a company. But if I'm putting £20 directly into any project, my customer experience shouldn't be different depending on whether I'm offered a ticket to a concert, interest at 3% per annum or 2 shares in the project operating company - in fact the same project should be able to offer me all three, seamlessly. That's the sentiment behind efforts to proportionately regulate peer-to-peer finance. All types of enterprise should be able to offer all kinds of instruments over a proportionately regulated digital platform, within an ISA.

Now that would generate some serious big society capital.

Innovation Is Vital For Growth, Not Just Cost-Cutting

There's a lot of concern about how to grow the UK economy. Some have pointed to banks and the public sector as 'the enemies of growth' because they are 'extractive', rather than inclusive 'facilitators'. Government spending is too high, as are taxes, and there's a concern that national public sector pay awards have 'crowded-out' private employers. Banks are not lending. 

But there's much more to this, of course. 

Clearly even the generous private credit available during the noughties merely went on houses and consumer spending, rather than building sustainable and globally competitive businesses, especially in the regions. As Steve Randy Waldman of Interfluidity recently explained in the context of southern Europe's troubles, it's the poor allocation of capital, not lack of finance or high labour costs, that causes "an incapacity to produce tradable goods and services in sufficient quantity." Governments aren't alone in their ability to waste money and other resources.

How do these things fit together?

Experience shows that countries whose governments try to spend more than 30 - 35% of their overall output (GDP) gradually produce less and less. That's because governments impose taxes to pay for spending (and borrowing), and tax is a 'deadweight cost' or economic inefficiency. As output declines, the government receives less and less tax so ultimately must spend less on public services. Those services then start to break down. Eventually, everyone speaks Greek. UK government spending is about 50% of GDP. Yet tax receipts have averaged around 38 per cent of GDP over the last twenty years and have never exceeded 40%. The UK government can a funding gap (deficit) of up to 2.5% of GDP before it becomes a 'structural deficit' - an albatross around the country's neck that takes a special effort to remove - George Osborne's current challenge. By contrast, the Australian and Swiss governments spend around 35% of GDP (source: OECD, IEA, p. 47).

On a regional basis, the UK picture gets worse. Public spending in London and the South East has remained under 40% of regional GDP. But public spending equates to 45% of regional production in the East, and a whacking 70% of what the North East produces. Public spending in England is cruising at 50% of national output, while in Scotland it's at 60% and in Wales and Northern Ireland the good citizens are dragging around a millstone of government expenditure equal to 80% of their GDP  (source: HM Treasury, hat tip IEA, p. 57).

So, if you live somewhere outside London and the South East your community has a choice. Either you ask the government to start spending a hell of a lot less on you. Or you make sure the region produces enough so that government spending only represents about one third of your output. Pick neither and you'll αρχίσουν να μιλούν ελληνικά.

It's possible that high public sector pay rates make both of these tasks harder - it means the government is spending more (on its staff), and it's more expensive for businesses to hire the staff they need, so they charge higher prices and their products are are less competitive.  Public sector pay is mainly agreed centrally, in national pay awards. Those who work in more expensive places than the average, like London, get paid a bit more. But employees who work in places where it's cheaper to live than average don't get paid less. So their communities will find it harder to keep government spending in the right proportion to what their community produces.

But this does not necessarily mean labour costs are the main reason for some regions being more competitive than others. Steve Randy Waldman, of Interfluidity, argues that competitiveness is about capital much more than labour:

"... to the degree that unit labor cost statistics capture what they claim to capture ... European workers, North and South, have come to earn roughly equal pay for equal product. Southern European workers do earn less overall, simply because they produce fewer or lower-value goods and services than their Northern neighbors. [But] unit labor costs are not the problem at all: it is the scale of aggregate output. And what determines the scale of aggregate output? Is it the laziness of workers? No, of course not. We all know that when residents of poor countries emigrate to rich ones, the same weak bodies and flawed characters that produce very little at home suddenly explode into economic vigor. The difference is “capital depth”, broadly construed to include all the physical equipment, business organization, public infrastructure, and governance that collude to enable two small hands and a broken mind to accomplish outsize things. Workers’ pay level is not the problem in Southern Europe [or, say, UK regions]. It is deficiencies in the arrangement of capital, again broadly construed, that have left Greece and Spain unable to produce value in sufficient quantity to compete with their neighbors."

 As a result, Steve suggests: 

1. "If Southern Europe lacks competitiveness, the part of the cost structure that needs to be reformed has to do with rents paid to capital rather than the sticky wages of workers; and

2. "The European periphery was rendered uncompetitive by toxic patterns of capital allocation." For this he cites Arnold Kling's recent paper for the Adam Smith Institute, which concluded:

"...economic progress involves creating new patterns of [sustainable] specialization and trade [PSST]. When new opportunities suddenly emerge, there can be periods in which high productivity growth in industries with relatively inelastic demand creates a surplus of workers. It takes time for entrepreneurs to discover new ways to exploit specialization and comparative advantage, and it takes time for the labour force to adapt to new skill requirements. These real adjustments are needed in order to restore full employment."

In short, the UK and each of its regions needs to foster self-employment and entrepreneurship, by creating an environment in which it's easy to start and grow new businesses. Removing the difference between public and private sector pay may help incentivise public sector workers to move to the private sector - as could laying off more public sector workers. The necessity to find new work may be the mother of invention, after all. But that doesn't remove the ultimate need to focus on fostering the process of creating new businesses for those workers to join.

Image from NE Generation.

 

Does Ownership Structure Matter In The Long Term?

Thanks to The Foundation for another entertaining Forum last night - this time on whether ownership structure is the only thing that matters for long term growth.

The discussion opened with some insights on ownership from Michael Green of Philanthrocapitalism fame, Luke Mayhew, former managing director of John Lewis (who also chairs the remuneration committees of some large corporations), and the inimitable Anthony Hilton, Financial Editor of the Evening Standard. 

And there was plenty of vibrant discussion about the merits of competing forms of business ownership, whether by employees, shareholders, customers, partners, joint venturers and even benevolent dictators. 

But it was clear that how a business is owned has little to do with long term growth.

Anthony Hilton said it all in his answer to my question whether solving the problems of customers or potential customers mattered more in the long term than ownership structure. He said that customers don't matter at all, as the City has done very well over the past 50 years dreaming up any old product and shoving it down peoples' throats.

To the extent that you believe that this demonstrates long term success, then I would only observe that City firms characterise every form of ownership. So ownership structures themselves have played no particular role in the City's exploitation of its customers.

But of course you might share my view that it would be wrong to judge the City has having done 'very well' with this strategy, as it is hardly in the best of health.

So ownership is just one of many dynamics that a business has to manage. 

If you are looking for the most important dynamic, then I believe it is whether a business is focused on solving its customers' problems, rather than solving its own problems at its customers' expense.

In other words, the key to long term growth is to be a facilitator, rather than an institution.

Image from The Philosopher's Magazine.

Role of The Entrepreneur

I recently made the point that, instead of looking to the state for our personal wellbeing, the buck stops with each of us personally - whether as voters, taxpayers or whatever - to ensure the wellbeing of others. Some basic, inevitable economic constraints mean the state simply can't do that job for us on any sustainable basis. This is also the difference between an entitlement culture in which we behave as passive victims of our institutions, and an empowerment culture, in which we seize control of those relationships. Ultimately, the state can only serve as a facilitator, enabling each of us to meet our fundamental personal obligation through private enterprise.

But how can we meet those obligations? Which business activities will be the winners of tomorrow? And how can the state help?

Peter Urwin's "Self-employment, Small Firms and Enterprise" very helpfully explains the role of self-employment, with and without employees, as our primary source of "genuine entrepreneurial insight". Big corporations are of little use here. Businesses don't start big. Entrepreneurs start out self-employed, either with or without staff. Yet, picking winning business ideas is impossible: while "entrepreneurship is crucial for economic growth... we have no idea where it will come from - not even in the most general terms." As a result, the best that we - and government - can do is to ensure "a climate in which enterpreneurship can thrive".

Peter lays out some interesting stat's for the UK:

• over half of all new businesses won't exist in 5 years time - yet this is no bad thing: serial entrepreneurship seems to have a greater influence on success than academic qualifications;

• you're more likely to be self-employed if you have dependents under the age of 16;

• about 20% of males who are active in the labour market are self-employed (42% of those aged 65+);

• there is no obvious impediment to being self-employed, and people who struggle for various reasons to fit the big firm mould tend to be self-employed or work for small firms;

• small firms are easy to start, but face impediments to growth through tax and regulation, such as taking on employees - in the UK, only 6% of new firms create over half of all new jobs.

• in particular, "the costs of compliance... are regressive, as there are economies of scale in tax compliance... product market regulation and employment protection legislation". These costs have remained constant despite efforts to eliminate red tape. However, these costs don't prevent people starting up or remaining self-employed with no employees, they inhibit expansion.

It's suggested that there's a distinction between being self-employed for tax planning purposes, and being self-employed for 'genuine' enterpreneurial reason. But if it's impossible to pick who among the self-employed will be successful, then I don't see how you can reliably make this distinction, except with hindsight. Step one to starting your own business is to become self-employed. Perhaps you take that initial step for cynical tax planning reasons, or maybe with a view to figuring out what sort of business you might start. In either case a bigger business could emerge, with lots of employees. Life's what happens to you while you're making plans. The motives are pretty meaningless.

However, Peter rightly points out that there's little room for entrepreneurial activity in large firms - even if self-employed people with the "skills of entrepreneurship" are involved. Those skills essentially being to provide "the central concept around which the firm is initially constituted" and "to unearth the unknown unknowns." I've worked in two start-ups, both of which are still running after 10 and 7 years respectively, and various large firms. Once a bunch of people unite around any business plan it becomes tough to change. Add more years and more people and the job gets harder.

So it's laughable to see big corporate executives and entrepreneurs lumped into the same category, as Luke Johnson recently explained, though the CEOs still at the helm of the companies they created are in a category of their own. This latter group also prove the case for a lack of demand for genuine entrepreneurial skill in big corporations. It's the original vision of the founder that rules, and competing strategic visions aren't welcome. In fact, it's not uncommon for a business to oust its founder only to welcome him back to rescue the ship from doom (e.g. Steve Jobs).

Ultimately, Peter is to be applauded for essentially recommending that small firms should be allowed to retain all their staff as self-employed individuals. This would allow for the rapid expansion of a business around an entrepreneurial concept as it emerges, rather than straining its resources and strangling it in red tape before it has a chance to discover whether the concept will 'fly'. Of course, firms could still choose to offer employment to staff where that is necessary in order to compete in the labour market. But given the healthy, inevitable failure of most small firms within 5 years, and the inability to predict the winners, it seems pointless to require all of them to grind through the cost and admin involved in creating and maintaining the employment relationship.