The Services Revolution
"[C]arriers are working hard to sell a new brand of global transportation ...," World Trade magazine reports. "Associated Container Transport/Pace Line claims to have coined the term 'partnershipping.' ... (T)he word means assembling all of the parties—carrier, shipper, freight forwarder, port, terminal operator, inland carrier—to determine the most economical method of moving cargo. ... Aggressive lines are looking to act as the traffic department for their shippers. ..."
Mull over shippers' desires to be full-scale members of your firm, and then consider the following headings from two extraordinary articles on technology in service industries in the Sloan Management Review (Winter 1990): "Services dominate the value chain," "the intellectual holding company," "service technologies smash overheads through outsourcing," "learning to love the hollow corporation," "avoiding vertical integration" and "manufacturing industries become service networks."
"Service technologies are not just revolutionizing internal organizational configurations," Dartmouth's Brian Quinn, Penny Paquette, and Thomas Doorley write. "They are restructuring whole industries'—and nations'—competitive postures." The role of manufacturing per se is shrinking: "Most companies primarily produce a chain of services and integrate these into a form most useful to certain customers. ... As manufacturing becomes ... automated, the major value added to a product increasingly moves away from the part where raw materials are converted into useful form ... and toward (factors such as) the ... perceived quality ... that service activities provide. ..." Apple Computer is a prime example of the new paradigm, which the authors label "intellectual holding company." With just three factories and extensive subcontracting, the firm averages $370,000 in sales per employee, compared to $139,000 for IBM; plant and equipment run 18 percent of sales, compared to 63 percent for IBM.
As service activities gain strategic importance, they come in for more critical scrutiny. Purchasing manufacturing components from outsiders is an established tradition. But now Quinn et al. insist that pursuit of the best provider of any task is essential: "One needs to ask, activity by activity, 'Are we really competing with the world's best here? If not, can intelligent outsourcing improve our long-term position?' Competitive analyses of service activities should ... benchmark each service against 'best in class' performance among all service providers ... in the United States and abroad." Smart companies are turning more and more to the likes of ADP Services (data processing) and ServiceMaster (maintenance) for turnkey contracting of essential services.
It adds up to "learning to love the hollow corporation." But with so much outsourced, what's left of the firm? Progressive chiefs will become "managers of intellectual systems." They must learn to focus their efforts on "dominating those services crucial to (executing their) strategy." MCI chooses to do no manufacturing, for example, but is clear about how it adds value. To provide unique services for customers, the firm's engineers scour the globe for technical innovations to incorporate in MCI's network.
The new technologies allow low-cost provision—and simultaneous customization—of service. Domino's Pizza uses NCR's "mini-tower" computer system to do payroll, ordering, cash flow, etc., at the point of sale (the franchisee's shop). By automating these time-consuming chores, employees have more time to personalize customer service. Likewise, advanced information technology at Merrill-Lynch permits the firm's brokerage offices "to function in a coordinated fashion with the full power of a major financial enterprise, yet allows (them) to manage their own small units independently. ... The result is to provide (customers) the most extensive possible responsiveness and customization. ..." The resultant organization resembles a "spider's web," the authors suggest.
There is "no inherent reason that [such] organizations cannot be made 'infinitely flat'—in other words, with innumerable outposts guided by one central ... computer-controlled inquiry system. In designing service company systems, instead of thinking about traditional 'spans of control,' our study suggests that the terms 'spans of effective cooperation' [or] 'communication spans' ... may have more meaning. ... [I]ntermediate levels of interpretation [must] be avoided like the
plague." At FederalExpress, for one, that translates into a staff-to-sales ratio that's one-fifth the industry average; the firm's computer systems give front-line employees direct access to data, eliminating the need for most middle management.
Implementation of these dramatic ideas is no cake walk, as Gregory Hackett makes clear in another article in this important issue of the Sloan Management Review. In "Investment in Technology—the Service Sector Sinkhole?", he contends that "adding high-powered automation to an obsolete operating environment ... is counterproductive. ..." To unleash the power of the new technologies, revolutionary reconception of the entire organizational system—tasks, people, relations with outsiders—is mandatory. Winners will understand that. Losers will not.
(C) 1990 TPG Communications.
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