Catalyzing Change

Many of the companies catalyzing change are outsourcing to shed processes and operations that no longer give them a competitive distinction. BP is the poster child for this approach. But again, companies’ choices have been restricted by the narrow range of services that have been available in the past. Progressive executives will push this opportunity more deeply into the operations of their companies. Instead of waiting for a debilitating shake-out or by distracting top management with a series of large-scale mergers to wring out excess capacity, companies will turn to outsourcing to reshape themselves before they have a stroke. And they will outsource their assets to an industry insider—a company that knows how to operate these assets better than anyone else.

We can anticipate seeing insurance companies outsource routine underwriting. They already lean in this direction with risk-sharing and rein- surance. Companies with high fixed-cost operations, like those in steel and aluminum, and oil and chemical companies can consolidate commodity manufacturing in this way. Chemical companies have been known to share operating assets like this: One insider tells a story of two competitors making customer deliveries from the nearest tanker, regardless of which company’s product the tanker carried.

Banks also have precedent for using this approach. State Street’s non- bank banking strategy illustrates this perfectly. Instead of competing head-to-head with other commercial banks for the next loan or corporate fixed-asset deal, State Street took a different tack in the mid-1970s. Tap- ping the opportunity created by the 1974 Employment Retirement Income Security Act, it parlayed its strength in technology and back-office services to a very profitable position in financial services processing.^[7]

Telecommunications companies can use the same approach to improve the profitability of their networks. Through outsourcing, they can retire old capacity and improve the cost structure, and the entire industry will benefit. Cable & Wireless already stepped forward to outsource its voice network to Nortel. In 2000, C&W and Nortel signed a $1.4 billion deal through which Nortel would take responsibility for C&W’s old voice operation while it also constructed its new voice-over-IP network.^[8]

^[7]See www.hoovers.com.

^[8]See www.nortelnetworks.com/corporate/news/newsreleases/2000c/10 _02_0000632_square.html.