The virtual organization.

You've got lots of partners, providing lots of services, privy to lots of previously propriety information. How do you make sure your organization survives and thrives - in whatever form it now takes?

Some futurists predict the "end of organizations." As Peter Drucker notes, this is one prediction that almost certainly won't come true. If anything, organizations will be needed more than ever precisely because we will encounter so much ambiguity, variation, and need for flexibility with respect to their mission values and strategy.

Almost a decade ago, Michael Porter called attention to the idea of creative competitive advantage. The notion of continuing to do what one does best may no longer be sufficient in a world of rapid change where technological innovation and international competition tend to change the ground rules. This begs the question, what will it take to stay ahead tomorrow? Beyond international competition, there is a growing cadre of small knowledge-based companies that are developing skills good enough to take on and even beat the big guys.

In The Organization of the Future, Michael Hammer, the former MIT professor who originated the concept of re-engineering, writes that "large businesses are no longer very different from small ones; to paraphrase Ernest Hemingway, they just have more people." Companies today must start being creative about what they will be good at tomorrow - including how they will be organized and how they might partner with other companies. This means exploring different ways of getting work done. It also means being clever at building communities of value. Sears Roebuck CEO Arthur Martinez realized that those within the retailing group that dealt with the customer were the firm's most critical link. He began a series of town hall-like meetings where these employees were encouraged to lead the necessary changes Sears had to make to serve its customers better. Martinez used these meetings to identify practices that don't help, and initiate practices that would simplify or improve service.

A competitive business today is one that focuses on its core strength, the essence that allows it to produce a more efficient pump, a faster computer, an advanced drug, or a service breakthrough. Concentrating on the core not only frees up resources, it allows management to perfect skills and deliver greater long-term value to customers. Such a company must come to terms with its core and non-core activities. Sometimes one company's non-core activity is another's core strength. Many firms have come to the painful recognition that they can no longer do everything well. This in turn has hastened the growth of strategic sourcing and alliances. When these partnership arrangements grow into a network of skills and capabilities, a company can truly be said to be "virtual."

Co-sponsored by Andersen Consulting, the following roundtable explores the next step in the evolution of business process design: the integration of a company's operations with those of other enterprises to create a better product or service, achieve a faster time-to-market, increase a higher order of customization, or whatever is needed to yield a competitive edge. During the discussion, a number of participants allowed that making this happen forces an organization to unlearn old skills and adopt new ones - a tricky feat as the old skills are what got the company ahead in the first place. Several participants expressed concern about the necessary cultural adjustments. How can decision making and information sharing be effectively streamlined to take advantage of being virtual? How should risks and rewards be apportioned relative to the value created? Most agreed that few firms today are "virtual" in an absolute sense, but most will, of necessity, have to master the disciplines better in the years ahead.

- J.P. Donlon

MINING THE CORE

Joellin Comerford (Andersen Consulting): A virtual corporation is a company that needs to do difficult, complex things and is not going to do all of them itself. Virtual is a word the technology community probably invented to mean that the sum is more than the parts.

Contracting for third-party services is as old as business. The difference today is that people are willing to do more of it, to do it more systematically, and to hold their suppliers to a level of performance that is cheaper and better than what they could have done themselves. You may be willing to give some of the things you need to do to an outsider, but you expect that outsider to do it better and cheaper - of course, that means you have to define both cheaper and better in a way that you can measure and feel comfortable about.

Successful companies today have a pretty good idea of what their core competencies are, and they play to their strengths and try to bolster their weaknesses. Being virtual is about finding allies who can help support those weaknesses. Typically, these are vendor-supplier relationships, the more time you spend thinking about what you want from them, the better off you're going to be.

In a recent study, we asked 350 CEOs of companies of different sizes and in different industries from all over the world what they saw as most threatening in the next 10 years. Two of the things most frequently mentioned were technology and globalization. Technology is an enabler today that can make little guys look like big guys. It makes an intelligent, capable work force essential, and it brings time and distance capability to a whole different level. And then the world is shrinking, and competition is no longer just the guy down the street. Between competition and technology, firms must be able to act quickly.

We're in the outsourcing business. We do financial management, logistics, and human resources and we have found that most companies are actually hiring us to cut through resistance to change - to facilitate a big transformational change. For example, J.P. Morgan came to us and said, "Our technology is very important to our business, and we're not getting it right. We don't have the right skills, we're not doing the right R&D, and we're not pushing the envelope with the user and business communities. We want you to come in and help us change." DuPont, another world-class firm with a long history of excellence, also asked us to come in and work with them on technology. Essentially, they're saying, "Help us handle change better."

These are big companies that need to be nimble. These are companies that wake up in the morning and say, "I'm in retail. I'm cellular. I'm laying ground networks. I'm capital intensive. I'm service intensive. It's about the customer. It's about delivering service." You wake up on a Monday morning to find that they have a new mantra.

So we're all challenged. We at Andersen are challenged. The study told us that executives see these arrangements, whether joint ventures or outsourcing, not as an admission of defeat as much as a way to get things done better and cheaper. And we're straggling with how to make that work. But we think that the companies who get that right will have an advantage.

Another interesting thing CEOs told us is that the biggest challenge is clear communications - building a community of value across two organizations that have different views of success and helping them change their people's views of what it means to be successful.

J. Carter Beese, Jr. (Alex. Brown International): One of the attributes of a virtual organization is that the hierarchy of the supply lines, or the bureaucracy, lessens as people focus on their core competencies and out-source the others. For instance, in the past, the concept of a headquarters in financial services was important. Today it has little importance. The other clear attribute of a virtual organization is the concept of the back office. It's gone. It's information technology (IT). I agree that there is a real role for consulting organizations to come in and help change that perception within the company - that what was once a back office are now frontline professionals.

There are a number of pressures driving this trend toward virtual organization, and one that has been articulated is the shrinking of product cycles. H-P spent four years bringing their laser jet to the market in the 1980s, and today it would be half that time. And there are other cost pressures, not only global competitiveness, but new competitors because of things like the Internet. Today, Barnes & Noble has a direct new competitor, a virtual book store chain called Amazon.com, which went public this week. It's clear that the bricks and mortar - and this is particularly relevant to financial institutions - of traditional organizations are being replaced by laptops, and cell phones. And employees are spread out over the country and the world.

At Alex. Brown, we divide this definition of a virtual organization into three categories. One is the category of the continued outsourcing trend that's clearly in place, but has further to go in terms of evolution as people focus around the core competencies. The second is the restructuring of the traditional corporation, and the third is these virtual organizations that are being created at the other end of the spectrum.

Outsourcing is a word with a nebulous definition that is used too freely and too often, just like the term virtual organization. We focus on outsourcing that has to do with people as opposed to other types of capital management or technology development. And these are high growth businesses - event services, flexible staffing, document management, direct marketing - people-intensive things that can be outsourced.

In terms of restructuring the traditional corporation, there are firms like Lockheed, which is forming a project-by-project approach within its company by actually pulling together the project team and then disbanding it at the end of the project. That's a traditional corporation moving towards more of a virtual corporation.

While I can't say that we've come to a better definition of virtual organizations, I think we can define some of their attributes. They work by Internet, cell phones, and laptops. They work by e-mail. If I could use just one word to sum it all up, they are much flatter than what we experienced in the hierarchical, traditional organization of the past.

To be globally competitive, you need to have the organization's full expertise accessible in real time, to have the types of client databases, client services, and expertise available literally instantaneously over data information systems. There's a critical mass that has to be changed, and a major investment that has to be in place to achieve that.

C. Douglas Miller (Norell Corp.): We have talked about core and non-core as determining what you outsource. But what's core and non-core - and whether to outsource it or not - is becoming less clear. What has to stay inside a company are the things around which there's some inherent knowledge in the organization that makes that function work.

The virtual organization is a bundle of competencies, some internal, some external, arrived at through relationships with other people and pulled together to deliver a value. So I'm not sure that this core and non-core distinction is holding up any longer. More people are finding that things they always felt were core can be done by someone else - and maybe cheaper, better, and faster - if there's no inherent knowledge within the corporation.

John H. Foster (NovaCare Inc.): We outsource the rehabilitation department in nursing homes, and that's somewhere between five and 10 people out of an employee population of about 200. In a well-ran facility, those five to 10 people generate about 25 percent of the facility's cash flow, so it's extremely important. People ask, "Gee, that's core; why did they let go of it?"

We stumbled on the opportunity and actually educated the industry about another aspect of profitability that the old bed-and-board, eat-and-sleep-and-die environment of the nursing home had not taken into consideration. The outsourcing opportunity for us was to deliver a new view of the customer's business to the customer. In time, the function became important to the customer, if core competency is only measured in terms of profit contribution, which may or may not always be how to measure it. At this point, the industry is more comfortable having these few, highly skilled employees in the hands of a large-scale organization with an advanced experience curve.

Miller: That's an excellent example that the only thing that has to remain inside is inherent knowledge the organization can deliver better than someone else. There's nothing inside that nursing home chain that says they can deliver rehabilitation therapy better. Their core competency is managing the delivery of a multiplicity of services to a patient in that environment in an effective way. But they don't have to deliver that specific service themselves.

Jim W. Thompson (Vallen Corp.): The core competency wasn't the rehabilitation, but providing that service and finding the best people to do that. So you redefined that industry by bringing a better solution.

Alan D. Weinberger (The ASCII Group, Inc.): The difficult thing in outsourcing - whether it's a law firm or an accounting finn or an IT situation - is who are you getting? And are they really the best people to get? In IT, for example, you really need the best minds, and they're not necessarily in Silicon Valley, but could be smaller integrators or computer consultants that know the latest technology and see where it's going.

David E. A. Carson (People's Bank): My question is, do the outsiders know anything more than what they did for the last client? With the rapidity of change, for the most part - unless you're able to leapfrog over the traditional kind of outsourcing people - you're in yesterday's technology and not tomorrow's.

Beese: This country has done a wonderful job of embracing technology in the last decade, and the productivity gains in the U.S. versus the rest of the world have been impressive. But I think when CEOs mention concern about technology they refer to the costs involved, how the ante is getting upped, and whether they have the ability to make the same degree of technology investments as their competitors. There are financial institutions spending $1 billion-plus a year on technology. We just merged with a firm that has an $800 million a year technology budget. That's one solution. [Laughter] Our companies have complementary core competencies that needed to be combined, and both sides saw a need to have the other core competency as part of their arsenal. There is a clear rationale.

A merger in today's financial services environment is easier in that there's a commonality of culture, of laptops and cell phones and decentralized operations and teams of people around the globe. It gives more commonality than when we were rooted in the concept of headquarters, back offices, and bricks and mortar.

Foster: There is so much consolidation going on in the health care services business that the question is who to outsource with, how reliable are they, and how long will the relationship last? The need for help is causing everyone to want to outsource, but how do you become an important, longstanding outsourcer? Our experience is that, one, it takes a long time. And, two, there is the question of culture and relationships.

We've found that relationships within our organization are very important because we have 17,000 people dispersed in 2,000 locations - none of which we own - in 43 states, serving 35,000 patients a day. And the question is, what are they all doing? Especially since each one could put me in jail each day. [Laughter]

But I'm still here. We've found that after developing the technology to connect and communicate dispersed personnel, the challenge is to develop the operating culture that allows for its utilization. Our culture is the only thing - except for our name - that connects all of these people in all of these units. It's the only constant in an environment of both technology change and industry change. It's building on that constant that's so important.

We treat culture as any other operating variable. We train for it, drive it, develop it, teach it, and reiterate it. We reward it. And we have a recognition system built around it. We feel you have to have that as a basis.

Comerford: I agree. We take over work forces, 500 people at a time, and one thing that we have to do quickly is give them our value set, which is very different from the one that they've come from. Our value set is that you get a paycheck because you made a contribution to a client, and that is not the mindset of many internal IT departments or accounting departments.

You tell them about that value set and you reward them and make leaders of the people who embody it. We've found that many internal cost departments have been undermanaged. They've been given no direction, no set of performance measures against which they'll be rewarded. This is particularly true in IT. We took over IT departments where people had never had an annual review and there was no clear understanding of what they needed to do for their business user. Their career paths were murky. So they come to the revenue side of the house and get clear mandates about how to succeed.

John W. Guffey, Jr. (Coltec Industries Inc.): Did I understand you to say that you go into a department and take over 500 employees and change the culture?

Comerford: Well, when we say outsourcing, we work with some or all of those same people but on a different basis. They're not part of their department any more; they're part of the Andersen Consulting contract unit.

Guffey: How can you possibly propose to go into a company and take over a pocket of their employees and change the culture? DuPont didn't get to where they are by accident. And I don't know that you could change DuPont if you're only dealing with 500 employees.

Comerford: I couldn't agree more. In fact, part of our model is to absorb the best of that company's culture and change our practices as a business based on their input. At J.P. Morgan, they had a series of issues that they felt we did not address for their people and for their business user, so we changed our business model. We have to do that, or we won't survive. These are big, strong companies that have a lot to teach us. Our model is to bring in some professional standards and absorb the best of what they've got, and hopefully together we can do something better.

IN SEARCH OF CULTURE

Miller: Earlier on, Joellin brought up the question about what you should out-source - about core versus non-core. Some people would argue that technology and systems may be so core that they shouldn't be outsourced in entirety. I don't know whether that's right or wrong, but I don't think outsourcing should be confused, from the CEO standpoint, with abdication.

The CEO has to stay involved and ensure that the intended outcome is well defined and that the outsourcer totally understands that. If that's all outlined at the outset, then the cultural issue can be managed because the expected outcome is pretty clear to the people in the outsourced organization as well. What the outsourcer then brings is better measurement of the progress toward that objective.

G. Allen Mebane (Unifi, Inc.): The CEO has to have a vision. There's no way that you're going to be in front of your competitors if you do exactly what they did. He's got to impart the drive within that organization and to create superior technology over what is available at that particular point. If the CEO wants to sit back and be a caretaker, that's exactly what you'll get. People need to have an idea of where the CEO wants them to go. It's up to them to get there in a lot of cases, but at least they know where you want to lead them.

You also have to start small and build. And at the same time you have to build the people that can work with the system. Money is way down the line of what makes someone stay with a company. People like to win. That's what it's all about. It's the technology vision of the CEO, and it's the drive of the culture of the company.

Thompson: It takes time to change from the traditional to the virtual. As outsourcers, we try to take their strengths anti our strengths anti blend the two organizations with the core values that we all create in our businesses. We've tried to do cross functional team things to break down barriers. Hopefully, we create a better value for the customer and ourselves.

Fred N. Pratt, Jr. (Boston Financial): My vision of a virtual company is one where companies come together - whether you call it partnerships, alliances, or outsourcing - where there's a mutual advantage, but can also separate when it's to their mutual advantage to separate. As we form new businesses, because of the speed at which things move today, we can't afford to invest in the competencies internally, so we join with other organizations and cut the lead time substantially.

We're taking our major business and essentially putting it into a joint venture with a major financial institution that has an entirely different approach, but where putting our competencies together will make us both stronger. I'm not under the illusion that any one of these arrangements is going to last on and on into the future. I think that would lead to bad results. It has to be much more fluid in people's minds than simply a contract that goes on.

J.P. Donlon (CE): Is being virtual no more than being the sum, or a bundle, of a certain set of core competencies that could be broken, made, or remade at will?

Comerford: I don't know if you can do it at will. It's a little harder than that. But I think outsourcing is meant to be leverage. In the same way that you would like to extend your network from a point of view of technology, we have clients that hire us to help them extend their resources.

For example, Ryder is going into the third-party logistics business. It's not their first core competency, but they believe that people will need the logistics expertise that has made them successful, and that they can supply that service. One of the things they're hiring us to do is provide some leverage behind that vision.

Jeffrey Parker (Yamaichi International): Core businesses change. You're renting tracks and along the way develop a knowledge base in logistics. Or you're the fifth-largest credit card company and your database becomes valuable. Who that card-holder is and how they spend money is now an industry with two successful companies that manipulate that data.

Arnie Pollard (CE): That presents a challenge. How do you make a deal to outsource something important knowing that before the horizon is reached, the elements of the deal will have changed?

Comerford: We go in with a defined set of circumstances for termination. I know that's a funny place to start a marriage, with a prenuptial, but we need to spend time crafting control for the client. We actually work through termination under a whole variety of scenarios, with our objective that it only works as long as it works for both sides. And when it doesn't, you have to have business-like ways to shake hands and get on with it. We tell clients that great change takes hard work and a long time. If you decide in 18 months it was silly, we'll shake hands and leave, but you wasted time, effort, and money going down the wrong path.

Carson: In our business, there's more talk than action. I found it fascinating that the giant banks of New York thought the way to provide PC banking was to do it through Quicken. We partnered with a little software company that created a platform for us, because we knew that 95 percent of the people are not interested in budget packages. They just want a nice, simple banking program to pay bills, get balances, and transfer funds. So the competency is to understand what the customer wanted. The customer didn't want Quicken.

Weinberger: So your core knowledge is your customer. You know your customer better than anybody else.

Foster: The future is about intellect rather than position. As I try to prepare my organization for the year 2000, I take away from this discussion the importance of developing the intellectual fabric, as opposed to the positional fabric.

Pratt: The intellect is certainly part of the fabric of all our organizations. But what I spend time thinking about and trying to act on is broader than simply the intellect; it's the whole issue of culture. What does the culture have to be like 10 years from now, or 20 years from now? What are the steps that we need to begin to take today to make sure that we make that transition?

Thompson: There's a new worker coming into the workplace that's going to want to make that shift occur. They're going to want to work for companies that have outside-the-box thinking and try to be virtual and flexible in the way they do things.

Richard Vissers (CTS Corp.): I think CEOs today are more flexible than they have been in the past. The best combination is to have the old and the young work together, because obviously the young have tremendous ability for change because they have not been stung that much, so they are not afraid of change. But the old can help them make those changes without getting too many braises before they get to the top.

Miller: I think a lot of people today would be happier with an outsourcing company than with a traditional company because they'll go from being support to being revenue generating. What is an issue is that people in the client company, particularly senior management, don't value that new kind of environment. The younger generation is more flexible. But they're often led by a generation of transitional managers, who still value the traditional environment, where power comes through position as opposed to knowledge. The resistance to the outsourcing scenario is in that layer of management, who find those give-ups difficult to face.

Most CEOs made the intellectual commitment to this new paradigm some time ago. They now have to bring about cultural change and dealing with resistance. And they're finding that difficult. But I'm optimistic. I see more and more organizations starting to realize this is a serious thing. People at the top are committed to this, so I had better get in line, or I'm not going to be there when the whistle blows.

A Who's Who Roundtable Participants

J. Carter Beese, Jr. is chairman of Baltimore, MD-based Alex. Brown International, an affiliate of Alex. Brown & Sons, an investment banking institution with $12.5 billion in assets.

David E.A. Caraan is president and CEO of Bridgeport, CT-based People's Bank, a thrift institution with $7 billion in assets offering consumer and commercial financial services.

Joellin Comerford is worldwide managing partner of Andersen Consulting's Business Process Management organization. Andersen Consulting is a $5.3 billion global management and technology consulting firm.

John H. Foster iS chairman of King of Prussia, PA-based NovaCare, Inc., a $1 billion national provider of physical rehabilitation and employee services.

John W. Guffey, Jr. is chairman, president, and CEO of Charlotte, NC-based Coltec Industries Inc, a $1.2 billion manufacturer of engineered aerospace and industrial products.

G. Allen Mebane is chairman of Greensboro, NC-based Unifi, Inc., a $1.7 billion yarn manufacturer.

C. Douglas Miller is president and CEO of Norrell Corp., a $1 billion strategic work force management company based in Atlanta.

Jeffrey Parker is chief administrative officer of New York City-based Yamaichi International (America), Inc., a brokerage and investment bank with $14 billion in assets.

Fred N. Pratt, Jr. is chairman and CEO of Boston-based Boston Financial, a diversified real estate investment firm with $5.6 billion in assets.

Jim W. Thompson is president and CEO of Vallen Corp., a $250 million safety equipment and supplies manufacturer based in Houston.

Richard Vissers is president and CEO of Orlando, FL-based CTS Corp., a maker and seller of travel software.

Alan D. Weinberger is chairman and CEO of Bethesda, MD-based The ASCII Group, Inc., an international chain of computer resellers providing computer products and services with $5.5 billion in sales system-wide.