The corporation is dead, long live the corporation!

Companies are smaller now. They’re also… bigger.

It seems like smaller and smaller companies are lifting bigger and bigger mountains, at least in startopia.

As it gets easier for a small team to do more, standing on the shoulders of giants in infrastructure, communication, payments, data, and other areas, are we seeing the beginning of the evaporating corporation? Will organizations just get smaller and smaller until, one day, poof? Will we work, in the future, for companies of one?

The logic would go like this: Why do corporations exist at all? People could work independently and coordinate their activities with one another, buying and selling services as needed (“You want that weekly update on sales? Sure, $1,000.”) The answer is that it’s too complicated to make it work in practice or, in economish, “transaction costs.” Corporations are formed because it’s less expensive to transact with someone within the same company — you trust each other, your incentives are more aligned, you have a common language and expectations, among other factors.

As those transaction costs go down — reputations are shared online, so people trust each other, marketplaces help you find ever-more granular business services, communication becomes free — the corporation could disassemble into its components, with one small firm (or even a person) doing each task and coordinating with others.

The trick is that those same falling transaction costs can also make it easier to do business within a company, too (Intranets instead of employee manuals, Slack instead of a phone tree, etc.) — which might make some companies bigger as they’re capable of managing bigger staffs.

So those same falling costs of communicating both bring down the cost of internal coordination (which might, all other things being equal, make firms bigger) and communication between firms (making firms smaller).

In the data, which is it? Are companies getting bigger or smaller? Both.

Most companies are (a bit) smaller now

Average does seem to be getting a bit smaller — at least for the last 10 years or so. In 2001, a firm had just under 23 people on average, and a decade later, just under 22. That’s a modest shift (and might be hard to separate from other effects, like changing composition of industries), especially given all that happened in the world in that decade — it’s when you look closer, you can see the change may be more significant.

When you exclude the biggest companies (and we will see why that is relevant in a moment), the smaller ones are now a third smaller than the same set a decade earlier. For all companies smaller than 500 employees, the average firm size was roughly 19 in 2001, and roughly 13 ten years later. You can find the raw data here.

The median firm size has always been small — fewer than 4 people, which has been true recently and a decade ago. Though the percentage of all firms that have 4 or fewer people went up (by a hair) over the most recent decade for which we have data.

The tail is starting to stretch a bit longer, as it is in so many industries disrupted by modern technology. The flipside is that the head is getting taller…

The biggest companies are getting (much) bigger

In 2000, the biggest company in the US (by number of employees, and several other measures) was Wal-Mart — with 1.15 million people on staff. By 2012, they’d almost doubled in size to 2.2 million people. (The next three on the list went from having 300,000 employees or so to 400,000 employees or so, a significant jump.)

The average size of companies with between 500 and 10,000 employees — large companies by any standard — also increased, by roughly 35% during those 10 years (to, near as I can see from the data, roughly 2,200 employees on average).

Because those large companies are so so big, most people now work for a company with more than 500 people — and in the year 2000, that wasn’t the case. So even though the average company is now (a bit) smaller, more people work for large corporations because the biggering ones are getting (so much) bigger. Math.

And while it seems that market forces, management styles, and technology may be bringing company size down— they are also enabling the megacorporations to grow to sizes previously inconceivable. Will those trends continue? It’s hard to see reasons why they won’t, though I’m open to learning more.

The O’Reilly Next:Economy conference gave me the excuse to make some progress on this research — promises to be a great conversation there.

Thanks for a review from one of the most direct and practical numerate people who I know, Jed Kolko (who reminded me, among other truths, that (1) there are different companies in each year’s set of data, so companies aren’t exactly shrinking so much as the companies in one year’s set are smaller than another and (2) that it’s just as remarkable how stable the distribution of firm sizes has been over the years, all revolutions considered).

And to research from Wonder — fast, phenomenal — for literally every fact in this piece. All your errors are belong to me. #proudinvestor