Viewpoint: August 20, 2002  

Few managers today want to hear anything about restructuring the enterprise. All eyes are focused on quarterly results and relentlessly removing operating cost wherever possible to shore up the bottom line. Do it faster and cheaper, but forget about doing it differently. Restructuring represents a diversion, a remnant of the “change the world” excesses of the 90’s.

Despite all efforts to stabilize the ship, companies are continuing to restructure in fundamental ways. Business process outsourcing represents one of the few growth sectors in the midst of general economic slowdown. Business process outsourcing is an extension of the more familiar IT and application outsourcing. Rather than outsourcing just the IT platforms and applications, companies are outsourcing entire business processes in the form of contract manufacturing, third and fourth party logistics operations, call center operations, human resource management, etc. A recent article in CFO Magazine entitled “Everything Must Go: Business Process Outsourcing” highlights the growing interest in this practice. See also the article in InformationWeek “Business Process Outsourcing Grows.”

We are also beginning to hear a lot about “front-end/back-end” structures. Julian Birkinshaw, a professor at the London School of Business, wrote an interesting piece on this trend for the August 7, 2002 issue of the Financial Times called “How Long Division Can Add Up to Bigger Numbers”. Citing examples from IBM, Hewlett Packard and ABB, he points to the growing trend to structurally separate customer-facing business activities (e.g., sales, marketing and customer service) from supply side business activities (e.g., product development, manufacturing and logistics).

Birkinshaw asserts that these structural changes represent a promising response to growing competitive pressures and the deepening complexity of coordinating activities within the firm. At the same time, he suggests that these new structures are creating problems of their own – friction between the two groups of business operations and the complexity of operating these groups on a multinational scale.

The movement to “shared services” organizations represents a third form of structural change. In a prominent example of this, Procter & Gamble announced the formation of a Global Business Services organization in 1999 as part of a broader structural change initiative. Global Business Services sought to concentrate, standardize and rationalize common support services like accounting, human resource systems, order management and information technology. The GBS unit delivers these services across seven Global Business Units organized by product group. More recently, P & G announced its intention to outsource a substantial portion of the activities and people currently within Global Business Services.

There is clearly a broader pattern here, but it may be only a hint of what is to come. These structural initiatives – business process outsourcing, “front-end/back-end” structures and creation of shared services organizations – may be only partial solutions to the challenges faced by management. As such, they may be merely transitional states, highly unstable and requiring even further restructuring to resolve the growing friction and stress arising in day to day operations.

These initiatives all seek more organizational focus. They try to strip away activities that are peripheral and distracting. But perhaps they don’t go far enough in providing focus. For example, the “front-end/back-end” structures group together in the “back-end” such diverse activities as manufacturing and product development. A more productive approach may be to organize around the three fundamental business types outlined in my article (co-authored with Marc Singer) “Unbundling the Corporation” in Harvard Business Review.

Focus is essential as competition intensifies. But it isn’t enough. At the same time, organizations need to foster the capability for accelerated performance improvement and innovation, not just in products but also in business processes. Both business process outsourcing and “front-end/back-end” structures tend to rely on tightly coupled relationships, both within and across businesses. Structurally, management will need to develop much more loosely-coupled relationships, designing their operational units as modular entities with standardized interfaces to create much more flexible connections. In particular, we need to master the techniques of managing loosely coupled business processes as outlined in my “Orchestrating Loosely Coupled Business Processes” Working Paper (co-authored with John Seely Brown and Scott Durchslag).

At the end of the day, structural initiatives will only succeed if they are accompanied by fundamental mindset changes among senior management. The best structures will be very fragile indeed without these mindset changes. Management must shift from a mechanistic mindset to an evolutionary mindset. In this context, organizational structures are only the starting point. They can enhance the potential for rapid evolution, but they cannot dictate it. Organizational structure is a necessary and powerful tool, but it is not the answer. It merely creates the conditions to help us respond to an increasingly competitive environment.

But this is why the issue of structural change cannot be ignored. Optimizing performance within existing structures will inevitably reach diminishing returns. Management cannot simply focus on performing existing activities faster and cheaper. The real winners will be those who focus on creating the conditions for doing things differently and to innovate continuously along this dimension.


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