ANALYSIS - Ready, Set, Go Virtual

ANALYSIS - Ready, Set, Go Virtual

Businesses are moving past the limits of their own perceived core competencies to become virtual businesses-stripped-down entities that with available technology perform nothing more than business functions that create "unique value." These companies outsource all business functions that are not capabilities unique to the company.

This evolution in commerce is the final dismantling of the vertical integration legacy of the Industrial Age, when the world's largest-and most successful-corporations sought to become self-supporting, mega-enterprises that could mine raw materials, transport them to factories, produce goods and sell themthrough wholly owned distribution networks. But since the early 1990s the focus on core competencies has had businesses outsourcing everything from building maintenance to transportation to offshore manufacturing. In operations areas such as logistics, order fulfilment and customer service, where a CIO may not ordinarily expect outsourcing, the effect on the business and the IT that supports it will be especially profound.

Unique Value

Traditional companies are becoming virtual. Egghead Software, now, abandoned its brick-and-mortar retail stores to sell exclusively over the Internet. Computer wholesaler NECX, networking vendor Cisco Systems Inc. and industrial supplies distributor W.W. Grainger Inc. have extensive online sales efforts that are outgrowing their conventional sales channels. And Minute Maid subcontracted the entire production and distribution part of its business to work exclusively on developing and marketing juice products.

Some businesses are simply born virtual. Internet startups such as Inc. and CDnow Inc. were created as virtual businesses, relying on partnerships to provide all but the unique value proposition to their customers. For example, CDnow doesn't own a warehouse and keeps no physical inventory-it has partnered with record distributor Valley Media, which fulfils and ships every order placed through CDnow. Likewise, has no inventory of cars; instead, it supplies potential buyers with manufacturer information on models, and its network of partner auto dealers provides buyers with the car of their choice.

Just what does a virtual business do to earn its profits? Three business functions remain as the unique value these companies can provide: 1. Create new ideas for lucrative products and services.

2. Position the product in the marketplace. This is both the development of brand image for the new product or service and the unique customer service capabilities offered online such as Cisco's online configurator, which checks all assembled equipment for compatibility before fulfilling an order.

3. Create a team of partner companies that together provide a new, unique offering.

Beyond unique value offerings, virtual businesses contract out remaining functions, including manufacturing, logistics, accounting and IT infrastructure.

Most of this business model is not new, at least to some companies and their CIOs. What is new is the need for logistics outsourcing on a functionwide, global scale. Today many companies outsource their shipping, some outsource warehouse operations, and a few outsource customer support, repairs and returns or order fulfilment. But no one outsources all these functions to outside contractors on a global scale-yet (see "Functions and Systems").

In fact, no current service providers can meet all these outsourcing needs-let alone do it globally. But Forrester Research Inc. expects a new breed of outsourcer, the virtual logistics outsourcer, to emerge during 1999.

Third-party logistics providers such as Schneider National Inc., Penske Corp. and SkywayFreight Systems Inc., overnight delivery services such as Federal Express Corp., United Parcel Service of America Inc. and DHL International Ltd., and consortiums such as the Star Alliance already meet a portion of virtual logistics outsourcing needs in some parts of the world. Indeed, these companies are the front-runners in the race to offer complete global virtual logistics outsourcing.

Logistics Wishes

A company moving toward a virtual business model needs providers to operate global business functions for them. It's no longer just about scheduling trucks and packing warehouses. A virtual business needs more functions supported by its outsourcers, including:-- Order taking.

Customers can place orders at either the virtual business Web site or by calling a toll-free number. Web orders are sent electronically to the logistics outsourcer for fulfilment; the logistics outsourcer's call centre answers toll-free calls and submits orders.

-- Build-to-order, repairs and returns processing.

Outsourcers build products to order from components stored in their warehouses, or those of another outsourcer, to meet customers' specific needs.

Requests for returns or repairs-whether transmitted via Web site or phone-are handled by a logistics outsourcer, who arranges for pickup, brings the product to its repair facility and redelivers the repaired unit to the customer.

-- Global supply chain infrastructure.

Virtual businesses can be supported by entire end-to-end supply chain systems that will be operated by virtual logistics outsourcers, similar to networks already in place at Federal Express or Emery Worldwide for moving packages.

Partner businesses will tie into the outsourcers to support the virtual business through Internet connections.

-- Order fulfilment.

A logistics outsourcer will pass the order to its inventory- management and transportation systems for global delivery from the nearest outsourcer warehouse. All transportation and inventory will be managed for the virtual business by other outsourcers. Warehouse replenishment orders are sent daily to the contracted manufacturer on behalf of the virtual business.

Virtual Outsourcing and IT

Whether a company outsources these four components piecemeal to a dozen providers or all at once to some future virtual logistics outsourcer, the implications for the IT infrastructure are considerable. When outsourcing a business function, a company has three IT options: It can outsource the business function while maintaining supporting IT applications in-house; it can outsource both the business function and the current supporting applications to be run by the outsourcer; or it can outsource the business function to an outsourcer that operates its own business-function IT applications.

As a basic rule, the more general the business process to be outsourced, the easier it is to outsource supporting IT functions. A business with a large amount of customer specialisation generally requires a more customised IT solution, so it should continue to be controlled by an internal IT organisation rather than turned over to an outsourcer. For example, shipping goods and taking telephone orders are functions that lend themselves well to outsourcing, but specialised supporting applications and IT infrastructure for a business function that is very specific to a particular industry or company is not a good candidate for outsourcing.

Get IS Ready

A quick decision by senior management to outsource global operations support could have a devastating impact on an unprepared IT organisation. Like Boy Scouts, CIOs should "be prepared" to go virtual. CIOs can follow this three-step plan to stay a step ahead of any unexpected business function outsourcing.

Determine likelihood of becoming a virtual business.

Complete the questionnaire in "Can You Take the Heat?". If your business scores a 2 or higher, your company is a potential logistics outsourcing customer.

Inventory IT operations.

For customer service, order processing, inventory management, transportation and returns and repairs, determine the current state of supporting IT infrastructure. Assess each system's design, operations and maintainability.

Does the system design meet operational and business needs? Can the system generate the kinds of reports required to run and monitor the operation? Can it be easily maintained and enhanced as needed? Is running the current system in an operational environment easy and cost-effective? Lay out an IT contingency plan.

Determine the best IT strategy for each business function under the assumption that it will be outsourced. This may mean replacing the current IT systems with a best-of-breed solution owned and operated by the logistics outsourcer; outsourcing the business functions but keeping all current internal IT systems in-house to run them; or keeping the current systems but outsourcing the operation of both the function and the internal supporting IT to the logistics outsourcer.

Once armed with the necessary information to respond to any move toward becoming a virtual business, a CIO can immediately inform other business leaders of the move's IT consequences. But the information does more than just furnish IT with a solid contingency plan-it endows the CIO with knowledge on the state of business operations and current IT support levels. This can be used to justify further investment in upgrading IT infrastructure for business operations that are often overlooked. Best of all, an effective plan for converting to virtual business functions can offer a vision of a new, more efficient way to operate-as a virtual business.

(Steven Bell, an analyst for business, trade and technology at Cambridge, Massachusetts.)

Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.

Join the newsletter!


Sign up to gain exclusive access to email subscriptions, event invitations, competitions, giveaways, and much more.

Membership is free, and your security and privacy remain protected. View our privacy policy before signing up.

Error: Please check your email address.

More about AutobytelCDNowCiscoDHL InternationalFederal ExpressForrester ResearchGraingerNECXStar AllianceTransportationUnited Parcel Service

Show Comments