Does Size Still Matter?

Does Size Still Matter?

Why are we now happy to outsource our HR administration, accounts receivable or IT operations? The trend is being driven by the fact that it's getting cheaper and easier to get someone else to help with the chores

For today's firms, success means knowing how to specialize and focus on what you're good at.

We are on the verge of a broad systematic reduction of transaction costs throughout the world economy. But this isn't breaking news to most CIOs. By the very nature of their job they are aware of the trend to outsource all but the most core specialization of their businesses.

However, research shows their business counterparts still need some assistance in reconciling a frictionless economy with their own corporate future.

Interbusiness Relationships

An explanation requires starting with the basics. Does your business make its own sandwiches? Or does it do its own cleaning? Or for that matter, do you service your own car? If you're like most Australians the answer is no.

The reason for this obvious. If you want to make your own sandwiches - and not poison anyone in the process, you'd need to have a clean kitchen environment in which to do it and some skilled people that know not only how to handle food, but also how to put together an interesting menu. It's the same for office cleaning; do you really want to hire, then manage, office cleaners when you can get a third-party firm to do it for you? And as for your car - well it's all become so complicated who would know where to start?

Not making sandwiches, cleaning offices and servicing cars is part of a larger trend in businesses that sees management focusing their attention and resources on key activities and looking to other firms to provide the rest.

So why is this happening? Why are we now happy to outsource our HR administration, accounts receivable or IT operations? The trend is being driven by the fact that it's getting cheaper and easier to get someone else to help with the chores. A trend that is being accelerated by the inexorable march of information technology.

What impact does this ever more pervasive use of information technology mean for the future of businesses? Do we still have to be a huge corporation to be a successful business, or is there going to be equal opportunity for smaller businesses?

The interesting thing is that while big businesses appear to be getting bigger, the average number of employees in an Australian business is actually going down.

One Size Doesn't Fit All

IT is causing this to happen. So an interesting question is, does size still matter?

To answer this you need to think about how things change over time. For example, why do businesses exist at all and why are they as big as they are?

For an explanation, it helps if you think about how people used to weave cloth. Suppose you lived in a village in the Middle Ages. You'd grow your own flax and make your own dye and spin your own yarn. You'd then weave this on a weaving frame you made out of local components. You did it all yourself.

Contrast that with a modern mass-production created by Henry Ford in his Highland Park car plant in the US in1914. Here work was divided into single tasks, so as a worker on the line you might have put a widget on, and someone else down the line put on the next widget, and so on. Interestingly, in the early days, Ford made most of the bits himself. This was about to change.

As the 20th century wore on, we moved away from making everything ourselves, to getting other people to do things for us. So in Ford's case, he started out making his own steel, and then moved to having someone else make it for him. He even started out growing his own cows for hide and wooden frames of his cars, only to turn to outside suppliers. Over time businesses like Ford's - and everyone else's - came to rely on other companies to fulfil certain parts of their fundamental requirements rather than fulfil them themselves.

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