The Externalisation Imperative

The Externalisation Imperative Success in the 21st century will require new levels of corporate candour Externalisation is rapidly becoming a corporate mantra. The ability to connect quickly and meaningfully with business partners and customers to improve the movement and potential quality of goods and services is now a competitive imperative. Enterprises have always had to communicate beyond their borders, but relationships and information feedback loops have been erratic at best.

Information technology to facilitate communication is still immature but corporate cultures themselves have proved the major roadblock to broader, deeper relationships. Indeed, enterprises have been quite insular in sharing internal information. They felt their processes gave them a competitive advantage and wanted to protect them. In the past, most enterprises hid their information behind layers of bureaucracy and secrecy. But we're entering a new phase. I don't believe it is exaggerating to call it a business revolution. In the century ahead, companies increasingly will be judged and even valued by how well they can "expose" this information to facilitate collaboration on products, customer service, marketing, sales, distribution or manufacturing.

This effort to externalise (see "Externalisation Initiative") will be measured by what we have dubbed "the collaborative coefficient" (see "Collaborative Coefficient"), which reflects the capability of an enterprise to partner with other enterprises. Ultimately, it is a measure of agility.

Companies are rapidly "devolving" from self-contained, vertically integrated organisations to more virtual entities that rely on business partners to fulfil major parts of their supply chains. Driving this devolution are competitive forces that attack the soft underbelly of large enterprises -- that is, their inefficient groups, bureaucratic processes or weak product supply chains. The chief weapon here is disintermediation (eliminating the middleman) to become more cost-effective or responsive. and 1-800-FLOWERS have used this approach well. Disintermediation is spurred by the networked economy enabling companies to focus on providing a specific component in a supply chain -- whether it be a manufactured part or subassembly, customer service or distribution -- and become a best-of-breed partner in a total solution. Some companies will try to maintain their own supply chain components. They will be successful only if each component is among the best of breed when faced with competition. Many PC companies now use Federal Express, UPS (United Parcel Service of America) or DHL Airways to pick up and deliver broken or repaired units. Doing it themselves, most direct sellers would incur additional costs and delays, which would inconvenience and alienate customers. With delivery trucks travelling throughout the world all day every day, the distribution companies' efficiency is tough to beat.

Twenty-first Century Keiretsu

The externalisation imperative will manifest itself in more collaboration between enterprises, with the most successful ones developing "keiretsus" that enable greater focus and business discipline by their partners. Keiretsu is the term for the postwar Japanese model of intercompany cooperation, in which vertically linked industrial conglomerates were typically linked horizontally via banks and trading companies. Keiretsus historically were based on tradition, cross-investment and hidden (personal) agreements. But the 21st century keiretsus will be ephemeral and open, loosely coupled but tightly integrated when necessary, and with generally little or no cross-ownership.

They will be built on cooperation -- especially information sharing -- along and across interdependent supply chains. Competitors may even share a common keiretsu. In any case, membership will need to be reviewed periodically, based on performance and business goals. If a member's performance lags compared with other suppliers, or if new directions are desirable, relationships may change. The relationship of Dell Computer or Compaq Computer with Seagate Technology, Intel, Microsoft, 3Com and others represents the beginning of such modern keiretsus. In the effort to externalise, companies must rethink their current supply chains and make sure their business components can be integrated easily across enterprises. They will do this by sharing knowledge about their processes, then engaging and enveloping their partners' processes. The knowledge capital of such relationships will have a specific, measurable value that can be balanced against switching costs. Reordering, eliminating and integrating supply chain components to improve efficiency, or "reintermediation", represents a new business order with the potential to create new products, services and markets.

It also forces enterprises to examine externalisation. A compelling example of this is EMC, which designs, sells and services enterprise storage and retrieval systems. While IBM is its largest, fiercest competitor in the DASD (direct access storage device) market, EMC purchases key components such as the disk drive assembly from IBM. IBM competes with other disk drive suppliers on price, reliability and availability. The most successful PC suppliers, Dell and Compaq, are also virtual companies. Their expertise is packaging and marketing; they manufacture almost none of the components that go into their "boxes".

Virtual companies and reintermediation will become the primary mode for 21st century commerce. Financial services providers such as banks and insurance companies are already in the cross hairs of companies like Charles Schwab & Co and Fidelity Investments. Beyond their own businesses, these two companies are exploiting their strong customer relationships, financial muscle and distribution channels to sell other companies' "wholesale" financial products through their channels. Intercompany connectivity must be far deeper than the simple EDI that some companies have already used. Internet and Web connectivity and presentation standards will help and are becoming pervasive. Still, there will be tremendous IT challenges in security, bandwidth availability, server scaling, application interfaces, data access and support. Partners must have a common, consistent view of end-product demand and establish standards for mass customisation. The goal throughout the supply chain is near-zero inventory and constant status, requiring partners' information systems to communicate at a high level. For instance, Dell keeps inventories low by informing suppliers when one of their components has been ordered. The suppliers can in turn coordinate the manufacturing, scheduling and distribution of those components.

The IT Burden

Externalisation will place a heavy burden on companies' IT groups and on virtually all IT systems because information will be a critical linchpin.

Indeed, the information supply chain between companies will challenge physical distribution channels, forcing more planning and process integration before goods are moved or even manufactured. Consequently, information about transactions will often be more valuable than the transaction themselves. This is already true in some settings: for example, Dun and Bradstreet and Equifax make billions of dollars selling information about business and customer transactions. New cybercompanies such as DoubleClick or LinkExchange enable Web advertisers and product purveyors to capture information about who is visiting their sites, for how long and what they're perusing. This information enables better targeted marketing and selling. In this environment, information sharing within a well-defined information constituency will often outweigh intracompany information requirements.

In the networked economy new forms of revenue generation, along with increased channel efficiency, will make electronic commerce and externalisation the focus of IT spending. By 2003 we believe electronic commerce will be a $US300 billion market, about 25 per cent of the total IT market. Partnerships will increasingly be formed around external information constituencies that are part of a 21st century keiretsu rather than artificial internal constituencies. For example, the electricity generation business of an energy utility will have a greater information-sharing affinity with its suppliers of raw materials and generators than it will with its retail counterparts, which will increasingly buy energy through "energy traders". The networked economy will emphasise business agility (for collaboration, mergers-acquisitions and divestitures) and demand new IT infrastructures to support it. CIOs must take a leadership position in helping to craft this new environment and these evolving information process and product issues. To do so will require a business-savvy, innovative IT organisation that can sell its vision, fracture dysfunctional business processes and reintermediate with internal and external partners. The IT organisation in general, and CIOs in particular, are in a unique position to lead this revolution.

Dale Kutnick, president, CEO and co-research director at Meta Group (US), can be reached at dalekutnick@metagroup.comCollaborative Coefficient This checklist outlines requirements for maximum corporate agility General business requirements: - Define clearly products/services and their component boundaries - Identify specific product/service component costs-fully allocated - Delineate business process relationships - Establish an information value chain model; define linkages - Describe customer relationships - Specify business discipline and capabilities - Reorganise/reassign/mobilise human capital - Articulate intellectual capital assets-and value - Assess risk and access capital quickly IT-specific requirements: - Define information policy and governance - Describe clearly IT architecture and infrastructure - Explain value chain automation - Detail IT organisation structure, competencies, agility - Identify performance/business effectiveness/alignment - Delineate operating procedures