There’s a theory from 1937 that explains why companies exist. And right now, AI is starting to challenge it.
In the late 1930s, a young economist named Ronald Coase asked a question nobody had really thought to ask: if markets are so efficient, why do companies exist at all? Why not just buy every service you need on the open market, one transaction at a time?
His answer was simple. Markets are expensive to use.
Finding vendors, negotiating contracts, managing handoffs, managing communication between teams — all of that friction adds up fast. So companies internalized work instead. They hired people, built departments, and created org charts. Not because hierarchy was elegant, but because it was cheaper and more efficient than constantly going to the market for everything.
That paper, The Nature of the Firm, eventually earned Coase the Nobel Prize in Economics in 1991. And for close to a century, the logic held.
Until now.
When people talk about AI in business, the conversation usually centers on productivity: writing faster, coding faster, answering emails faster. That’s real, but it misses the deeper shift.
The bigger story is what AI does to coordination costs.
Think about how much time your business spends on internal handoffs. The meeting where marketing explains what they need to engineering. The email chain because your CRM doesn’t talk to your billing software. The manager whose entire job is translating between departments. Those aren’t inefficiencies you can simply solve with a better spreadsheet. They’re the structural cost of running a company at scale.
AI is beginning to reduce those coordination costs in a meaningful way. Systems that can interpret documents, summarize decisions, route information, and pass context between platforms are reducing work that historically required layers of human coordination. Tasks that once required multiple meetings, follow-ups, or manual oversight can increasingly happen automatically and in real time.
When that friction starts to disappear, the math behind Coase’s theory begins to change.
If internal coordination no longer requires as many layers of management and administration to hold everything together, the case for building large, vertically integrated organizations gets weaker. Teams get smaller. Functions get leaner. Work that once required an entire department may soon require a handful of people supported by the right technology planning and advisory support.
Economists and business thinkers are starting to refer to this as the Coasean Singularity: the point at which coordination costs fall low enough that the traditional structure of the firm begins to change.
This isn’t just theory. You can already see it happening in the market.
The comfortable middle ground of business — the companies that served “good enough for most people” — is getting squeezed from both directions. Mid-tier restaurant chains are filing for bankruptcy. Traditional retailers are struggling while low-cost giants and hyper-specialized boutique brands continue to grow. Software companies that built moats around complexity are being challenged because AI tools are increasingly able to simplify or bypass that complexity altogether.
What’s replacing the middle is a barbell.
On one end: massive scale with ultra-low costs.
On the other: highly specialized businesses delivering exceptional expertise, precision, or customer experience.
The generic middle is thinning out.
AI is accelerating that shift because it compresses the advantage of mediocre organizations. Coordination becomes easier. Access to tools becomes cheaper. Distribution becomes more democratized. The inefficiencies that once protected average businesses start disappearing.
For business owners, that creates both pressure and opportunity.
The pressure is that differentiation matters more than ever.
The opportunity is that smaller, more focused organizations can now operate with capabilities that once required far larger teams.
Technology sits at the center of all of this.
Few areas inside a business are more coordination-heavy than IT. Modern companies rely on dozens of interconnected systems, vendors, cloud platforms, cybersecurity tools, workflows, and communication channels. Historically, managing all of that complexity required building internal IT departments simply to keep the machine running.
That logic made sense for a long time.
But as AI reduces the friction of communication, monitoring, documentation, troubleshooting, and orchestration, the advantage begins to shift. Businesses no longer necessarily need to carry the full fixed cost of building large internal support structures. Instead, they need access to the right expertise at the right time, coordinated effectively.
That’s exactly where managed IT services become increasingly valuable.
Not as a vendor you call when something breaks, but as a strategic technology partner that functions as an extension of your business. One that can scale with you, bring specialized expertise across multiple disciplines, and adapt as your organization evolves.
As companies flatten, streamline, and rely more heavily on automation and AI-driven workflows, the question isn’t whether IT matters.
It’s whether maintaining that capability entirely in-house is still the most efficient model.
Coase’s theory never predicted the end of companies. It predicted that the shape of companies would evolve based on what coordination costs look like at any given moment.
That’s exactly what we’re starting to see now.
The firms that win over the next decade may not necessarily be the biggest. They may be the ones with the least friction. The ones that figure out what truly needs to stay internal and what can be trusted to specialists. The ones that stop treating technology as a reactive cost center and start treating it as a strategic capability.
Flexible IT has been supporting Long Island businesses for over 40 years. We’ve watched the technology landscape change more than once, but the core challenge has remained the same: helping businesses operate without technology becoming a burden that slows them down.
As organizations become leaner, faster, and more AI-enabled, that challenge isn’t going away. It’s becoming even more important.
If your business is starting to feel pressure to streamline operations, reduce friction, and move faster with fewer layers, we’d love to have a conversation.
This piece draws on Howard Yu’s essay “The Coasean Singularity: Why AI Is Ending the Org Chart As We Know It”, published in Inc. Magazine.
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