Out Of The Corporate Soup

Is the virtual company becoming the norm? The question can be taken a step further. In all kinds of industries, companies are forming alliances often informal for all kinds of purposes. Within companies it is not unknown for equity to be created in specific projects for the benefit of the teams working on them.

Is outsourcing part of a wider movement, in which companies including virtual ones are breaking down into a kind of corporate soup?

Not necessarily. A great deal depends on the nature of the industry and the corporation itself. But let us step back to consider the views of the enthusiasts such as Richard Smith, head of outsourcing at Price Waterhouse, the accountancy firm.

 

The limits to outsourcing, Smith says, are set by the readiness of management to be radical. The starting point is to decide what is your core activity. Everything else in the organisation can then be defined as support.

The question is how to minimise the cost of that support, subject to the usual caveats, such as quality and the risk of things going wrong. In particular, it must be decided whether support functions, from payroll to purchasing, are peculiar to the organisation or generic. If the latter, they are better handled by a specialist.

In Smiths view, this is clearly the next step in the evolution of corporations. Take a company such as Unilever. Several decades ago Unilever aimed to capture all the value along its supply chain. It owned palm plantations in Africa, a shipping fleet to bring the oil to Europe, mills and factories to turn it into soap and margarine, and retail chains to sell it.

It gradually became obvious that the company did not have expertise in all those industries. Out went the plantations, the fleet, the mills and the shops, leaving only the core activities of product manufacturing and brand management.

Today, Smith says, the same process is being applied across internal functions rather than industries. A good example is human resources.

Some parts of human resources, such as career development, cannot be trusted to outsiders. They represent, as Smith puts it, part of the soul of the company. But, says his Price Waterhouse colleague Alan Little, take an aspect of human resources such as disciplinary problems. In practice, it turns out that 85 per cent of the solutions to these problems apply equally across industries and companies.

He draws an analogy with call centres. Experience shows, apparently, that only 15 per cent of telephone queries to the average company cannot be handled by frontline staff. It follows, Little says, that the other 85 per cent are better handled by a specialist, rather than by a sprinkling of average performers around the organisation.

The question then is how far you can boil down the definition of your core activity. Smith cites one of his clients, BP, as a radical example.

At one time, Smith says, BP worked on the premise that its expertise lay in finding oil. It is now asking whether its real specialisation might be striking agreements with host governments. In that case, even its geologists might turn out to be mere commodities.

BP denies that it is thinking along such extreme lines. But it has done some radical things in its time, such as the outsourcing to Arthur Andersen of the accounting activity for its North Sea operations about five years ago.

However, there is a paradox. BP does not only find oil and lift it. It ships it in its own tankers, refines it and sells it in its own retail outlets. It even runs vast complexes to convert the byproducts into chemicals. The company which is cited as radical in its processes turns out to be profoundly old-fashioned in its business portfolio like the Unilever of 20 years ago.

There is a further paradox. The idea that companies are dissolving into corporate soup is rather at odds with the fact that all those outsourced functions are being taken over by a handful of operators: by Arthur Anderson, EDS and Price Waterhouse itself. These are becoming corporate giants in their turn a new breed of full-service conglomerate.

There is an obvious conclusion. Companies may become hard to recognise as they swap business functions around. But they show remarkable durability as the preferred model for doing business.

Perhaps this should not surprise us. Companies are not merely the sum of their functions. They are also legal and social entities. There may be an element of time lag here, since legal frameworks are slow to evolve. But there is more to it than that.

The virtual company, after all, is scarcely a novelty. Many textile and shoe companies have worked that way for years. They design products and market them, but have long since stopped making them. The same applies to project engineers, shopping mall developers and all those who make a living organising the work of others.

Conversely, the BP example is a reminder that in some industries, the virtual model does not remotely apply. In others, it applies to a strictly limited extent. The carmakers still assemble cars, although many of them have long since outsourced their components.

In other words, it all depends. The outsourcing movement is alive and well. But so is the corporation, virtual or not.