On top form

Underlying the traditional organisational structure, which forms the organisation today, lies the shapes which will determine its success in the future.

Nearly a century of economic thinking underpins the understanding that interaction costs determine the way in which companies organise themselves. The changes happening in industries are based on the changing nature and possibilities of interactions, and reducing the cost of interactions.

Part of the problem is that no matter how radical the re-shaping of the organisation`s processes, it is still competing with new competitors who are shaping their organisations in new ways from the ground up.

Interactions occur each time companies and individuals have to exchange something (products, information, services, etc). Clearly a transaction may and probably will consist of many interactions, which have an associated impact in both time and money. Indeed, this is one of the primary drivers of electronic business. This phenomenon is forcing a broad systemic reduction of interaction costs throughout the global business environment.

With the benefit of years of business process design and the drive to organise around core competencies, companies have in many cases identified three major core processes (or businesses): customer relationship management, product innovation and infrastructure management. For better or worse, these core processes today co-exist within the same organisational structure. (Although it looks to me that in many ways the outsourcing trend is acknowledging that at least for IT infrastructure, there are external companies better organised to deal with this.)

These processes roughly translate to out-innovating the competition, customer service excellence and operational efficiency as competitive advantage elements. Furthermore, popular belief has it that the organisation has to be superb at all three. This is a real challenge to smash all three of these into one company. The issue is that everything is different inside these three processes (or businesses). Each has a very different role to play and is staffed by very different people and they have to think and behave very differently. Think about the simple topic of culture and the difference of mindset required to deliver superb customer intimacy, and the mindset required to attract and energise the talent required in product innovation.

There are some real conflicts. These can be managed up to a point and business re-engineering has in many ways achieved huge advantages for companies. Part of the problem, however, is that no matter how radical the re-shaping of the organisation`s processes, it is still competing with new competitors who are shaping their organisations in new ways from the ground up.

You can see where I am going with this. The Internet players are shaping themselves for the new world. These electronic businesses are driving the lowest possible interaction costs and of course specialisation supports that idea. It is quite easy to see the Internet players in the context of infrastructure specialisation and even product innovation. However, almost counter-intuitively, the Internet players are gaining significant advantage in the relationship management business through their ability to gather and access information about the customer. This puts significant pressure on the traditional business to think about its area of specialisation.

The idea of structuring around these core processes is becoming visible even in traditional industries. Let`s consider the reshaping of something as traditional and pervasive as the credit card industry. Affinity groups are using the cards as the mechanism for customer relationship marketing, other companies are focusing on product innovation and bringing to market new card products, and a range of infrastructure companies are focusing on processing huge volumes of credit card transactions. To see the trend clearly one has to look at the shape of the international market.

So do we think about the future along the lines of integration or specialisation? Trends are becoming more visible and the pressure is intensifying. In our own industry we are on the receiving end of the outsourcing trend. Outsourcers build their business on the principles of operational efficiency (this is all about infrastructure) and economies of scale. This takes one view of infrastructure. Think about all the other infrastructural elements which make up a company and consider what this means. So the kind of shape emerging for infrastructure management would appear to be large organisations offering these benefits.

Customer relationship management hinges on the availability of information. This again becomes an issue of size. There are businesses that are ideally positioned to acquire and store information. The more information they have about a customer, the more they are in a position to know that customer. Typically these companies gear themselves to manage and improve the customer facing processes (in electronic business terms the Web portals would be a good example, so would Amazon.com as anyone who has used the service will know how great it is at knowing and serving you).

So size seems to be important. The very fact that someone has that customer information and you don`t, may force some form of outsourcing of customer relationship management. There are some other aspects that may affect this picture. In my view customers also respond to organisational culture and style, hence the strong emergence of communities. I am not sure what this will ultimately mean around the debate of size.

Lastly then, is the topic of innovation. Innovation is very different. It is based on the collaboration of smart individuals in environments that are conducive to innovation. This more than anything lends itself to smaller entities. The issue here is speed and agility.

Shaping organisations for the future is a big topic. Much is currently being discussed and written about it, and it is crucially important that we don`t act hastily on something this important. I feel intuitively and in the context of our business and its world that there is something important going on out there and that as usual, the challenge is how to move quickly to take advantage of this.

PS. A good book on this topic is Net Worth by John Hagel III and Marc Singer