Smaller Bites

Strategically flexible companies will use outsourcing to try out and adopt new business models more frequently, and in smaller bites. They may use outsourcing for transformation when their company has no better option, but they will also use it for innovation all the time. If transformational outsourcing makes a one-time radical improvement, we might call this approach fluid sourcing.

How would this work? Transformational outsourcing fills the gap between M&A activity and alliances in the CEO toolbox for strategic combinations (see Exhibit 12.3). It holds some advantages over both. Unlike an acquisition, executives need not buy a whole side of beef to get the tenderloin. They can secure precisely the operating capabilities and assets they need to execute their strategy—and ensure that the people with the know-how are leading them. In addition, because of the special structure involved in outsourcing, they are far more likely to actually achieve their objectives than with either an acquisition or a strategic alliance. So let’s acknowledge that transformational outsourcing has earned a place in the CEO toolbox.

Exhibit 12.3: Outsourcing sits between alliances and acquisitions in the CEO’s strategic toolbox.

All of these techniques for revamping an organization’s portfolio of capabilities share a common assumption—one that limits them. They equate one organizational unit with one way of working. In short, they assume that business models are constructed out of organizational building blocks. These must be well integrated to operate coherently, and they must be aligned with enterprise strategy, but they remain single-function operating modules.

This assumption fails to recognize the natural and inherent flexibility of people in organizations. Instead of seeing only the organizational structure, with its rules, roles, and boundaries, we should be looking first at the intrinsically variable capabilities of people working in groups and leverage their abilities to master multiple business model mind-sets.

Let me use an organic example. When researchers first started studying genetics, they believed that each gene produced one protein. In the early 1950s, however, as they began to crack the genetic code, they found a much more fluid process. Proteins are produced by variable and overlapping portions of the DNA structure. So each part of the genomic program has multiple roles to play. Sometimes a bit of genetic material works in combination with its neighbors on the left; sometimes it works with its neighbors on the right. (I’m oversimplifying here, but the concept is generally correct.) Each of these collaborations produces entirely different proteins. And furthermore, the impact of a protein in the body can change based on other proteins nearby. It’s almost as if they work in teams. The mechanism is chemical, not mechanical, which makes an enormous difference in how it works and what it can do. I am suggesting that organizations can take advantage of the same kind of difference in speed, flexibility, cost, and innovation when they operate fluidly, not mechanically.

When executives need to implement change, most rely on their favorite lever, organizational structure. They spin off separate business units to pursue new product or service opportunities. Look at all the e-commerce subsidiaries that were created in the late 1990s. They also crash existing organizations into one another to try to get ‘‘synergy’’ from their collective capabilities. For example, a few years back, the textile business of a major chemical company tried to improve its focus from selling products to addressing customer needs by merging three separate fibers business units into a single, market-focused organization.

A few nimble companies have found another way. They change business models more fluidly without changing organizational structure, the way a good band switches from Bach to Back Street Boys with a tap of the leader’s baton. How? They abandon the flawed assumption that one organizational unit has one way of working. Instead, they build on the principle that people working in groups can develop an extensive repertoire of working models, not through structures, but through mind-sets.