By Glover T. Ferguson Outlook Journal, October 2003
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PDF Help We’ve already heard the news that traditional, hierarchical
organizations have given way to more networked organizations. But I think there
is a more interesting, though perhaps not widely understood, trend
emerging—namely, that the entire economy is in the process of separating into
horizontal, interdependent layers, with intense competition among businesses
within each layer.
Today, we still have a vertically organized market in which
companies may be structured internally as hierarchies, networks or whatever
hybrid you care to dream up. But when they go to market, they argue that the
sum of their working parts offers higher value than the value offered by their
competitors—that their core offer is better, and that the synergies wrung from
their component parts are superior.
This could be, for example, a utility company that mines
coal, generates gas and electricity, carries both forms of energy across its
transmission infrastructure, and delivers energy to homes and businesses. Or it
could be a financial services company that offers banking, investment services,
insurance and credit cards, and does its own card processing, risk management
and retailing.
But I believe that in the very near future, technology and
globalization will insist on a radically different arrangement. Multiple
competing companies will emerge to break down the structure of the vertical
organization and offer its components separately. The connections that are
currently marketed as highly synergistic parts of a whole will be replaced by
interdependent relationships across separate companies. In an update of our
previous example, this could be an energy industry in which fuels are sold to
generation companies that sell electricity to transmission companies that sell
to retail power companies to sell to businesses and consumers.
Everyone Wins
Instead of a few
integrated owners of several functions, we will now have several owners of
individual functions, each of which will have fewer things to think about. If
this flattening is done well, each business element will have a sharply defined
set of competencies that these new owners can focus on and use to deliver
greater value with higher efficiency.
Executives at the companies created by this specialization
will awaken each morning knowing that the continued existence of their
companies can no longer be taken for granted, and that they must fight for
their place in a competitive marketplace. Their reward for this new discomfort
will be the opportunity to harvest directly the fruit of their innovation and
growth instead of having their hard work stirred into a diluted mixture of
earnings and objectives.
The marketplace will clearly benefit from the application of
capitalism and competition to more and more components of the overall economy.
But what is so bad about the current arrangement? There are
two arguments for keeping several different elements of a business within a
single structure: synergies of cost and synergies of value. According to the
cost argument, intracompany transaction costs are lower than intercompany
costs; therefore, it would be unattractive to restructure into horizontal
slices. But the relentless expansion of information technology over the past
decade has dramatically reduced how much it costs one company to interact with
another. The Internet has provided a smooth road to our partners’ enterprises,
and the Web has provided windows and doors through which our transactions pass
efficiently.
With roads and portals in place, the next concern is the
expense of connecting proprietary systems and applications at different
companies, since they are often based on contradictory standards—if standards
exist at all. But the same intense competitive pressure that has required many
companies to abandon many custom approaches in favor of packaged solutions has
forced the publication of and adherence to standards.
Where standards are inadequate or when there is a variety of
them to choose from, we find that the unrelenting exercise of Moore’s Law has
given us enough computing, storage and bandwidth muscle to economically
overpower incompatibilities. Technology has brought us smoothly bored holes and
a combination of standard round pegs (plus hammers for the occasional square
ones).
It may be obvious that the evolution of technology will
continue to erode the cost differential between intra- and interenterprise
transactions. It’s less obvious how the synergies of value are under attack by
the same forces…but they are. Suppose I’m your local banker and you have had a
major life event (say, a new baby). You can easily imagine how this information
also tells me that your insurance needs have just changed—as have, perhaps,
your financial planning objectives. This kind of synergy comes from what has
traditionally been proprietary knowledge.
Vanishing Synergies
But because of
standards like XML and its web services siblings, what used to be proprietary
knowledge will ultimately reside with a trusted third party. I will be able to
select which insurance company and bank I trust to have access to the glad
tidings about my new child; I will thereby optimize their services to me while
maintaining my independence as a consumer. Meanwhile, with the emergence of
pervasive wireless and wireline communications, combined with tagging, tracking
and sensor technologies and XML-based representational standards, we can put
reality itself online. The resultant common pool of data will largely eliminate
the value synergies of the integrated firm.
There are a number of important implications in all this.
Take the issue of choosing a vendor. You need to consider the benefits of
one-stop shopping pretty carefully. In the long run, the deck is stacked
against this approach, and you may be better served by separate vendors or by a
vendor that treats and organizes each function as its own business.
As for your own company, I suppose it would be pretty
obvious and retro to suggest that you identify and focus on your core business.
But if you currently support a rich mixture of functions, the choices may not
be obvious: Is it design or manufacturing, risk management or customer service,
exploration or production? Are there real synergies in treating wireline and
wireless communications as a single business, or are they best treated as
separate businesses?
For noncore activities, you need to continuously review your
outsourcing options. All of the economic and technological forces described
above are in full play, and therefore the economics of outsourcing are
changing—at an increasing pace. If it’s noncore but uneconomical to outsource
today, you’d better check back tomorrow—and the next day.
If you provide multiple connected functions to customers
today, you should continue to market the current benefits of one-stop shopping.
At the same time, you should begin to separate them into individually
marketable functions, each of which can aspire to be best of breed, to pursue
its own investment strategy and to drive for scale.
Once again, trust is going to be the world’s most powerful
currency. With each function you spin out, you increase your interdependence
with the receiving company.
So the world is going flat. Think flat, think scale. Think
best of breed, be best of breed. Choose your partners wisely, and garner and
vigorously protect the trust that your partners bestow on you.
 Glover Ferguson retired as Accenture's chief scientist in 2005. Back to
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