If you came to the E*Trade site just three or four years ago, you would see your brokerage account on one screen page and your lending on another. Today, said Caplan, “On one page you can now see exactly where you stand in terms of your brokerage in real time, including your buying power, and you see your bank account and the scheduled payments for your loans—what is pending, what is the balance on your home mortgage, and [what is your] line of credit—and you have the ability to move seamlessly between all three to maximize the benefit of your cash.”
While Fadi Ghandour coped with the triple convergence by taking a small company and devising a strategy to make it act very big, Mitchell Caplan survived by taking a big company and making it act very small so that his customers could act very big.
Rule #4: The best companies are the best collaborators. In the flat world, more and more business will be done through collaborations p. 353 within and between companies, for a very simple reason: The next layers of value creation—whether in technology, marketing, biomedicine, or manufacturing—are becoming so complex that no single firm or department is going to be able to master them alone.
“What we are seeing in so many different fields,” said Joel Cawley, the head of IBM’s strategic planning unit, “is that the next layers of innovation involve the intersection of very advanced specialties. The cutting edge of technical innovation in every field is increasingly specialized.” In most cases, your own company’s or your own department’s specialization is going to be applicable to only a very small piece of any meaningful business or social challenge. “Therefore, to come up with any valuable new breakthrough, you have to be able to combine more and more of these increasingly granular specialties. That is why collaboration is so important,” Cawley said. So you might find that a pharmaceutical company has invented a new stent that allows it to dispense a whole new class of drugs that a biomedicai company has been working on, and the real breakthrough—where the real profit is created for both—is in their collaboration in getting the breakthrough drugs from one firm together with the breakthrough delivery system from another.
Or take a more colorful example: video games. Game makers have long been commissioning special music to go with games. They eventually discovered that when they combined the right music with the right game they not only sold many, many more copies of that game, but they could spin off the music for sale on CD or download as well. So some big game companies have recently started their own music divisions, and some artists have decided that they have a better chance of getting their music heard by launching it with a new digital game than on the radio. The more the flattening of the world connects all the knowledge pools together, the more specializations and specialists there will be out there, the more innovation will come from putting them together in different combinations, and the more management will be about the ability to do just that.
Perhaps the best way to illustrate this paradigm shift and how some companies have adapted to it is by looking at a very traditional manup. 354facturer: Rolls-Royce. When you hear the word “Rolls-Royce,” what immediately comes to mind is a shiny handmade car, with a uniformed chauffeur sitting in the driver’s seat and a perfectly tailored couple in the back on their way to Ascot or Wimbledon. Rolls-Royce, the quintessential stodgy British company, right? What if I told you, though, that Rolls-Royce doesn’t even make cars anymore (that business was sold in 1972 and the brand was licensed to BMW in 1998), that 50 percent of its income comes from services, and that in 1990 all of its employees were in Great Britain and today 40 percent are based outside of the United Kingdom, integrated into a global operation that stretches from China to Singapore to India to Italy to Spain to Germany to Japan and up to Scandinavia?
No, this is not your father’s Rolls-Royce.
“Quite a long time ago we said, ‘We cannot be just a U.K. company,’ ” Sir John Rose, chief executive of Rolls-Royce PLC, told me in an interview while we were both visiting China. “The U.K. is a tiny market. In the late 1980s, 60 percent of our business was defense [particularly jet engines] and our primary customer was Her Majesty’s government. But we needed to become a world player, and if we were going to do that we had to recognize that the biggest customer in everything we could do was the U.S., and we had to be successful in nondefense markets. So we became a technology company [specializing in] power systems.” Today Rolls-Royce’s core competency is making gas turbines for civilian and military airplanes, for helicopters, for ships, and for the oil and gas and power-generation industries. Rolls-Royce has customers now in 120 countries and employs around thirty-five thousand people, but only twenty-one thousand are located in the United Kingdom, with the rest part of a global network of research, service, and manufacturing workers. Half of Rolls-Royce’s revenue is now generated by businesses outside the United Kingdom. “In the U.K. we are thought of as a British company,” said Rose, “but in Germany we are a German company. In America we are an American company, in Singapore we are a Singaporean company—you have to be in order to be close to the customer but also to the suppliers, employees, and communities in which we operate.” Today Rolls-Royce employs people of about fifty nationalities in fifty countries speaking p. 355 about fifty languages. It outsources and offshores about 75 percent of its components to its global supply chain. “The 25 percent that we make are the differentiating elements,” said Rose. “These are the hot end of the engine, the turbines, the compressors and fans and the alloys, and the aerodynamics of how they are made. A turbine blade is grown from a single crystal in a vacuum furnace from a proprietary alloy, with a very complex cooling system. This very high-value-added manufacturing is one of our core competencies.” In short, said Rose, “We still own the key technologies, we own the ability to identify and define what product is required by our customers, we own the ability to integrate the latest science into making these products, we own the route to the market for these products, and we own the ability to collect and understand the data generated by those customers using our products, enabling us to support that product while in service and constantly add value.”
But outside of these core areas, Rolls-Royce has adopted a much more horizontal approach to outsourcing noncore components to suppliers anywhere in the world, and to seeking out IQ far beyond the British Isles. The sun may have set on the British Empire, and it used to set on the old Rolls-Royce. But it never sets on the new Rolls-Royce. To produce breakthroughs in the power-generation business today, the company has to meld together the insights of many more specialists from around the world, explained Rose. And to be able to commercialize the next energy frontier—fuel cell technology—will require that even more.
“One of the core competencies of the business today is partnering,” said Rose. “We partner on products and on service provisions, we partner with universities and with other participants in our industry. You have to be disciplined about what they can provide and what we can sensibly undertake . . . There is a market in R & D and a market in suppliers and a market in products, and you need to have a structure that responds to all of them.”
A decade ago, he added, “We did 98 percent of our research and technology in the U.K. and now we do less than 40 percent in the U.K. Now we do it as well in the U.S., Germany, India, Scandinavia, Japan, Singapore, Spain, and Italy. We now recruit from a much more internap. 356tional group of universities to anticipate the mix of skills and nationalities we will want in ten or fifteen years.”
When Rolls-Royce was a U.K.-centric company, he added, it was very vertically organized. “But we had to flatten ourselves,” said Rose, as more and more markets opened worldwide that Rolls-Royce could sell into and from which it could extract knowledge.
And what does the future hold?
This approach to change that Rolls-Royce has perfected in response to the flattening of the world is going to become the standard for more and more new start-up companies. If you were to approach venture capital firms in Silicon Valley today and tell them that you want
ed to start a new company but refused to outsource or offshore anything, they would show you the door immediately. Venture capitalists today want to know from day one that your start-up is going to take advantage of the triple convergence to collaborate with the smartest, most efficient people you can find anywhere in the world. Which is why in the flat world, more and more companies are now being born global.
“In the old days,” said Vivek Paul, the Wipro president, “when you started a company, you might say to yourself, ‘Boy, in twenty years, I hope we will be a multinational company.’ Today, you say to yourself that on day two I will be a multinational. Today, there are thirty-person companies starting out with twenty employees in Silicon Valley and ten in India . . . And if you are a multiproduct company, you are probably going to have some manufacturing relationships in Malaysia and China, some design in Taiwan, some customer support in India and the Philippines, and possibly some engineering in Russia and the U.S.” These are the so-called micromultinationals, and they are the wave of the future.
Today, your first management job out of business school could be melding the specialties of a knowledge team that is one-third in India, one-third in China, and a sixth each in Palo Alto and Boston. That takes a very special kind of skill, and it is going to be much in demand in the flat world.
Rule #5: In a flat world, the best companies stay healthy by getting regular chest X-rays and then selling the results to their clients.
p. 357 Because niche businesses can get turned into vanilla commodity businesses faster than ever in a flat world, the best companies today really do get chest X-rays regularly—to constantly identify and strengthen their niches and outsource the stuff that is not very differentiating. What do I mean by chest X-rays? Let me introduce Laurie Tropiano, IBM’s vice president for business consulting services, who is what I would call a corporate radiologist. What Tropiano and her team at IBM do is basically X-ray your company and break down every component of your business and then put it up on a wall-size screen so you can study your corporate skeleton. Every department, every function, is broken out and put in a box and identified as to whether it is a cost for the company or a source of income, or a little of both, and whether it is a unique core competency of the company or some vanilla function that anyone else could do—possibly cheaper and better.
“A typical company has forty to fifty components,” Tropiano explained to me one day at IBM, as she displayed a corporate skeleton up on her screen, “so what we do is identify and isolate these forty to fifty components and then sit down and ask [the company], ‘How much money are you spending in each component? Where are you best in class? Where are you differentiated? What are the totally nondifferentiated components of your business? Where do you think you have capabilities but are not sure you are ever going to be great there because you’d have to put more money in than you want?’ ”
When you are done, said Tropiano, you basically have an X-ray of the company, identifying four or five “hot spots.” One or two might be core competencies; others might be skills that the company wasn’t fully aware that it even had and that should be built up. Other hot spots on the X-ray, though, might be components where five different departments are duplicating the same functions or services that others outside the company could do better and more cheaply and so should be outsourced—provided there is still a savings to be made once all the costs and disruptions of outsourcing are taken into account.
“So you go look at this [X-ray] and say, ‘I have these areas here that are going to be really hot and core,’ ” says Tropiano, “and then let go of the things that you can outsource, and free up those funds and focus on the p. 358 projects that could one day be part of your core competency. For the average company, you are doing well if 25 percent is core competency and strategic and really differentiating, and the rest you may continue to do and try to improve or you may outsource.”
I first got interested in this phenomenon when an Internet business news headline caught my eye: “HP bags $150 million India bank contract.” The story on Computerworld.com (February 25, 2004) quoted a statement by HP saying that it had inked a ten-year outsourcing contract with the Bank of India in Mumbai. The $150 million contract was the largest ever won by HP Services in the Asia-Pacific region, according to Natarajan Sundaram, head of marketing for HP Services India. The deal called for HP to implement and manage a core banking system across 750 Bank of India branches. “This is the first time we at HP are looking at the outsourcing of the core banking function in the Asia-Pacific region,” said Sundaram. Several multinational companies competed for the contract, including IBM. Under the contract, HP would take charge of data warehousing and document-imaging technology, telebanking, Internet banking, and automated teller machines for the whole bank chain.
Other stories explained that the Bank of India had been facing increasing competition from both public- and private-sector banks and multinational corporations. It realized that it needed to adopt Web-based banking, standardize and upgrade its computer systems, lower its transaction costs, and generally become more customer-friendly. So it did what any other multinational would do—it gave itself a chest X-ray and decided to outsource all the functions it did not believe were part of its core competency or that it simply did not have the internal skills to do at the highest level.
Still, when the Bank of India decides to outsource its back room to an American-owned computer company, well, that just seemed too weird for words. “Run that by me again,” I said, rubbing my eyes. “HP, the folks I call when my printer breaks, won the outsourcing contract for managing the back room of India’s 750-branch state-owned bank? What in the world does Hewlett-Packard know about running the backroom systems of an Indian bank?”
p. 359 Out of curiosity, I decided to visit the HP headquarters in Palo Alto to find out. There, I met Maureen Conway, HP’s vice president for emerging market solutions, and put the above question directly to her.
“How did we think we could take our internal capabilities and make them good for other people?” she answered rhetorically. In brief, she explained, HP is constantly hosting customer visits, where its corporate clients come to its headquarters and see the innovations that HP has brought to managing its own information systems. Many of those customers go away intrigued at how this big company has adapted itself to the flat world. How, they ask, did HP, which once had eighty-seven different supply chains—each managed vertically and independently, with its own hierarchy of managers and back-office support—compress them into just five supply chains that manage $50 billion in business, and in which functions like accounting, billing, and human resources are handled through a companywide system? What computers and business processes did HP install to consolidate all this efficiently? HP, which does business in 178 countries, used to handle all its accounts payable and receivable for each individual country in that country. It was totally chopped up. Just in the last couple of years, HP created three transaction-processing hubs—in Bangalore, Barcelona, and Guadalajara—with uniform standards and special work flow software that allowed HP offices in all 178 countries to process all billing functions through these three hubs.
Seeing the reaction of its customers to its own internal operations, HP said one day, “Hey, why don’t we commercialize this?” Said Conway, “That became the nucleus of our business process outsourcing service . . . We were doing our own chest X-rays and discovered we had assets that other people cared about, and that is a business.”
In other words, the flattening of the world was both the disease and the cure for the Bank of India. It clearly could not keep up with its competitors in the flattening banking environment of India, and, at the same time, it was able to get a chest X-ray and then outsource to HP all those things that it no longer made sense to do itself. And HP, having done its own chest X-ray, discovered that it was carrying a whole new consulting business inside its breast. Sure, most of the work for the Bank of India will p. 360 be done by HP employees in India
or Bank of India employees who will actually join HP. But some of the profits will find their way back to the mother ship in Palo Alto, which will be supporting the whole operation through its global knowledge supply chain.
Most of HP’s revenues today come from outside the United States. But the core HP knowledge and infrastructure teams who can put together the processes that win those contracts—like running the back room of the Bank of India—are still in the United States.
“The ability to dream is here, more than in other parts of the world,” said Conway. “The nucleus of creativity is here, not because people are smarter—it is the environment, the freedom of thought. The dream machine is still here.”
Rule #6: The best companies outsource to win, not to shrink. They outsource to innovate faster and more cheaply in order to grow larger, gain market share, and hire more and different specialists—not to save money by firing more people.
Dov Seidman runs LRN, a business that provides online legal, compliance, and ethics education to employees of global companies and helps executives and board members manage corporate governance responsibilities. We were having lunch in the fall of 2004 when Seidman casually mentioned that he had recently signed an outsourcing contract with the Indian consulting firm MindTree.
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