Most of us learned about friction in high school science class: For example, “dry friction” is the resistance to relative lateral motion of two solid surfaces in contact; “fluid friction” is between layers of viscous fluids; “skin friction” is a component of drag, as in an airplane body moving through air or a boat hull through water; and “internal friction” is a force resisting motion between elements in a solid material undergoing deformation.
We learned that the predictable consequences of friction were twofold: kinetic energy converted to heat, and also caused the wear or deformation of the substances that were experiencing friction over time. Finally, you may have learned that friction wasn’t a “fundamental force,” but a byproduct of fundamental forces, such as electromagnetism. That, in turn, made the calculation of friction, by necessity, a result of empirical testing and theorizing rather than the product of a set calculation.
As technologists, that was about all we needed to know to understand why moving parts in our infrastructure wear out. Disk drives fail, as do power supply fans and tape cartridges. We know that heat is transferred into our data center as a function of inefficient power conversion and kinetic energy transference—both friction-related. Energy costs being what they are, we’re all dealing with the costs of friction and doing our best to contain them.
Friction also has meanings, perhaps metaphorical, that align with specific non-scientific endeavors. Carl von Clausewitz wrote about it in his military treatise, Vom Kriege (On War), using the term to describe the impact of misfortune and mistakes and misinformation—the so-called “fog of war”—on the accomplishment of even seemingly simple goals; such friction increases difficulty.
Economists, business school professors, and financial sector reporters often use the term friction to describe the impact of transaction costs on a financial market. Oliver Williamson, who was awarded the 2009 Nobel Prize in Economics, is the latest to popularize the financial usage, noting that friction may result from both internal and external transaction costs. The distinction may be useful even for technology planners to understand.
External transaction costs are essentially the costs of engaging in transactions that are imposed by external institutions in the marketplace. Everything from forces of nature, to government regulations, to negative press, to graft and “breakage” are said to impose transaction costs as goods are exchanged between companies A and B. By contrast, internal transaction costs may be represented by the need to build or buy a highly specialized piece of equipment to support a special important or urgent business process—equipment that can’t be repurposed to other activities to improve their return on investment, extend their useful life, or otherwise realize some sort of economy of scale.
Some would say that buying a specialized or proprietary technology device—say, a proprietary storage array or a proprietary server hypervisor software kit—is introducing friction into your environment. Once the decision has been made to use a specific technology or product, changing to a different technology or product usually has a prohibitively high transaction cost. At the same time, staying with the selected technology in a monopolistic relationship with the vendor is also fraught with high internal transaction costs that may include expensive warranty and maintenance agreements, replacement part costs, user/administrator training expense, supplier-proscribed upgrade paths, etc. These internal transaction costs have a way of increasing over time. This phenomenon is called a technology lock-in, and the friction it embodies generally creates its own kind of heat and wear. We see the consequences as declining efficiency, increasing cost of ownership, angry budget-makers, addiction to headache medicine, alcohol or worse, and the like. It’s all scientific, metaphorically speaking.
According to Williamson and others, the logical outcome of high internal transaction costs—or of the friction created when internal transaction costs appear to be greater than external transaction costs—is business downsizing, often via outsourcing. Confronting business operations with intractable internal transaction costs, business planners look for options and there’s always an outsourcer who is ready to do the function at a lower cost (whether or not their claims are valid). Limited rationality and opportunistic behavior, says Williamson, often determine behavior and decision-making.
Conversely, when external transaction costs are greater than internal transaction costs, the logical outcome is business growth as processes are performed internally rather than externally sourced. The idea is to do things less expensively or with greater certainty of outcome or with greater reliability in terms of quality.
We would do well to keep this insight about financial friction front of mind as we consider the options for delivering IT services to our firms. Your comments are welcome.