Unbundling? Maybe
16/12/11 02:07
A McKinsey Classic from years ago .....
Unbundling would take place because of fundamentally different economic, competitive and cultural challenges in these three kinds of business activities. In traditional, vertically integrated businesses, these activities are called ‘processes’. A significant amount of time and MAUs (Management Attention Units) are spent maintaining alignment. As companies get larger, the compromises needed to make the processes work degrades the overall performance of the company.
Working across corporate boundaries is exceptionally difficult and maximally annoying. For example:
The customer wanted usage-based email services. This meant that what they paid depended on service level (e.g. A helicopter hovering overhead to offer hands-on help would cost more than a herd of recent graduates in lounge chairs at the end of an almost infinitely long voicemail menu.) They also wanted the new provider to provide consulting services to plan and implement the transition from the existing in-house system.
The potential provider, an IT services company, had both an outsourcing and a consulting business. Because each business has unique metrics and mandates, a problem, eh a challenge is inevitable. The outsourcing group will want to bundle the transition fees into overall agreement to be recovered over the life of the contract. This approach means that the customer will not have to pay upfront. A consulting manager agreeing to this approach because “it is best for the company” will, of course, be sacked for missing the revenue/consultant metric. His successor, enjoying revenue without consultants will be a ‘genius’ - until the contract expires. (And then he will be sacked.)
Although both consulting and outsourcing utilize people to solve technical problems on behalf of the customer, it is devilishly difficult to get them to work together. An analogy might illuminate the issue:
The customer has a herd of cows and he wants someone to take care of them. The potential provider has two groups that can help: the Dairy Division (Outsourcing) and the Beef Business Unit (Consulting). It’s pretty clear that the two groups will not agree on the best way to handle bovine interaction.
If the customer wants financing, hardware, software and services, the interaction will be even more complicated. A structure that provides a good margin for the company (as a whole) will most likely be rejected because it doesn’t meet the revenue targets for one business, the cash flow targets for another, the margin requirements for a third. At the same time, At the same time, Executive Management will want an approach that offers substantial CYA features. Thus, the issue cited in the article is real. Accordingly, companies have made some moves in the predicted directions.
However, other companies have success in spite of the challenge. Apple owns the customer relationship (not only for its hardware, but for the customers that purchase content from iTunes), they certainly innovate (and provide a mechanism that allows others to innovate by creating Apps or other content) and they run their own infrastructure.
I conclude that an “optimal organization structure” doesn’t guarantee success. (Yahoo was cited as a good example in the article.) Likewise, a sub-optimal structure doesn’t inevitably lead to failure. Success depends on people who have a clear objective and who are empowered to achieve it.
https://www.mckinseyquarterly.com/Strategy/Strategic_Thinking/Unbundling_the_corporation_1069
.... provided an interesting view about the future: The Unbundled Corporation. Corporations have been outsourcing basic activities for years. Many computer companies, for example, have outsourced tasks:
(e.g. manufacturing, design) previously thought to be core competencies. Retail locations have even outsourced customer contact.
The article suggested a more fundamental unbundling of business corporations into three categories.
- Customer Relationship
- Product Innovation
- Infrastructure
Unbundling would take place because of fundamentally different economic, competitive and cultural challenges in these three kinds of business activities. In traditional, vertically integrated businesses, these activities are called ‘processes’. A significant amount of time and MAUs (Management Attention Units) are spent maintaining alignment. As companies get larger, the compromises needed to make the processes work degrades the overall performance of the company.
Working across corporate boundaries is exceptionally difficult and maximally annoying. For example:
The customer wanted usage-based email services. This meant that what they paid depended on service level (e.g. A helicopter hovering overhead to offer hands-on help would cost more than a herd of recent graduates in lounge chairs at the end of an almost infinitely long voicemail menu.) They also wanted the new provider to provide consulting services to plan and implement the transition from the existing in-house system.
The potential provider, an IT services company, had both an outsourcing and a consulting business. Because each business has unique metrics and mandates, a problem, eh a challenge is inevitable. The outsourcing group will want to bundle the transition fees into overall agreement to be recovered over the life of the contract. This approach means that the customer will not have to pay upfront. A consulting manager agreeing to this approach because “it is best for the company” will, of course, be sacked for missing the revenue/consultant metric. His successor, enjoying revenue without consultants will be a ‘genius’ - until the contract expires. (And then he will be sacked.)
Although both consulting and outsourcing utilize people to solve technical problems on behalf of the customer, it is devilishly difficult to get them to work together. An analogy might illuminate the issue:
The customer has a herd of cows and he wants someone to take care of them. The potential provider has two groups that can help: the Dairy Division (Outsourcing) and the Beef Business Unit (Consulting). It’s pretty clear that the two groups will not agree on the best way to handle bovine interaction.
If the customer wants financing, hardware, software and services, the interaction will be even more complicated. A structure that provides a good margin for the company (as a whole) will most likely be rejected because it doesn’t meet the revenue targets for one business, the cash flow targets for another, the margin requirements for a third. At the same time, At the same time, Executive Management will want an approach that offers substantial CYA features. Thus, the issue cited in the article is real. Accordingly, companies have made some moves in the predicted directions.
However, other companies have success in spite of the challenge. Apple owns the customer relationship (not only for its hardware, but for the customers that purchase content from iTunes), they certainly innovate (and provide a mechanism that allows others to innovate by creating Apps or other content) and they run their own infrastructure.
I conclude that an “optimal organization structure” doesn’t guarantee success. (Yahoo was cited as a good example in the article.) Likewise, a sub-optimal structure doesn’t inevitably lead to failure. Success depends on people who have a clear objective and who are empowered to achieve it.
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