Agency Cost

It has been some time I wanted to write about this topic as I use this term very often in my meeting with colleague and friends, of particular interest in governance and compliance issues.

An agency cost is an economic concept concerning the cost to a "principal" (an organization, person or group of persons), when the principal chooses or hires an "agent" to act on its behalf. Because the two parties have different interests and the agent has more information, the principal cannot directly ensure that its agent is always acting in its (the principal's) best interests.

Jump upQuoted from:

Pay Without Performance by Lucian Bebchuk and Jesse Fried, Harvard University Press 2004 (preface and introduction)

This case came to me recently as an illustration of the 'cost' of entrusting things to your manager.

The cold chain item has been mis-handled, may be due to ignorance or just plain laziness. This is cost to the company! Unless they can claim from insurance due to reasons like natural disaster, otherwise mis-handling due to ignorance or incompetence on the part of the employee is not claim able to the insurance during freight.

In this case, the delivery of cold chain transit occurred in a remote airport. The local employee did not immediately deliver the cold chain item and later on the end recipient refused to accept it as the ice box was overdue and cold chain had broken. Whose responsibility was this?

Therefore, it was an agency cost too big to hide. The remote agent did not care for the immediate delivery because of reason known only to himself. He would not want to be responsible for the loss as he was never trained to handle the cold chain. He was just a local runner. Furthermore, that afternoon the traffic was really crazy jam packed! He was having other urgent matter to attend to. These were excuses he gave after having been confronted by the senior manager later on.

And, when the case was taken up to the principal supplier, the local manager was not concerned of the case because it was never his normal routine. His first reaction was push away the bug to his HQ. 

Inevitably, this is a quality matter and serious enough to warrant an investigation. But, the local manager was not the assurance manager and hence, does not take the case seriously. This again will cost the principal company bad reputation as compromising quality of the product in healthcare is a social stigma. It is an ethical matter too. Despite, the local manager would avoid responsibility as the ordering and decision to shipment was out of his area and anyway. In fact, the sales registered was not his! 

Remarks: 
Usually sales is accounted for at the place of payment, so although the goods is sent to remote city, the sales is registered as from the source where the purchase order was issued).

Both parties would avoid claim of damage, and the goods had probably been compromised. It just hope that it will not be given to patient after all.

It is too big an "Agency Cost" to swallow as it is perfectly normal that each and every agent - in this case the local managers, would think for their own convenience and benefits rather than that of the organization or the end users, and try to get away with it!

Reflection

Again, core competence is the key to business success. In the above case, the remote centre never handled the cold chain before, and it is never the manager's job to do so. It was to him a nuisance. Thus, never assume things in order to have all angle covered. Especially when the damage can be too much to bare! Agency cost is a very big part in corporate failure. Governance is a must! And, it comes with a Cost!