How To Measure What You Can't Touch
John D. Rockefeller, founder of Standard Oil and one of the wealthiest men in history, built his vast fortune (nearly $320 billion, adjusted for inflation in 2007) on the principle of controlling as much of the means of production as possible. At one point, Standard Oil controlled nearly 90 percent of the petroleum and gasoline produced and consumed in the United States. Standard Oil also controlled the oil fields, supply chains, refineries, and distribution and retail processes, which gave it tremendous command over gasoline consumers.
Standard Oil was among a number of U.S. corporations of the late 19th Century that sought to control all means of production to control costs and market share. The Sherman Antitrust Act of 1890 laid the legal framework for breaking up monopolistic practices, but the practice of a holistic enterprise that did as much of its production as possible under the law remained the mainstay until the late 20th Century.
Whether it was called an enterprise, corporation or company, it was often thought of as a physical entity. People would report to work at prescribed times and perform routine tasks. Enterprises would locate their facilities in population centers to capitalize upon the labor pool. And the company itself would own much, if not all, of the manufacturing process and supply chain as possible under the law.
The titans of capitalism - famous names including Rockefeller, J.P. Morgan, Jean Paul Getty, Cornelius Vanderbilt and Andrew Carnegie - amassed their wealth through monopolistic practices and the tight control of their workforces. But the concept of the extended (collaborative) enterprise was beginning to form. Management theorists were advancing such ideas as collaborative leadership, worker empowerment, self-managed teams, and corporate social responsibility. These are the attributes of many extended organizations.
If Rockefeller or Getty laid eyes on a contemporary enterprise, they likely would recognize many of the organizational designations, but would view the virtualization and outsourcing aspects as alien. The modern enterprise has embraced the notion that giving up control to third parties that have domain expertise and execution capacity is a means to control cost, minimize risk exposure and accelerate revenue growth.
An extended enterprise is defined as an organization that creates value beyond the reach of its total control. Governance is the means by which the organization realizes that value. The extended enterprise concept picked up steam in the 1990s as global markets took form, and outsourcing and partnerships became acceptable responses. Today, however, the nature of an “extended” enterprise has evolved into something unimaginable.
Cisco Systems created the “I Prize,” a competition for new business ideas, and it drew more than 1,600 entrants from nearly 90 countries. Suggestions came in the fields of wireless, automotive, health care and energy. The winner gets a chance to join Cisco to develop a business around the idea – collecting a $250,000 signing bonus and up to $10 million in funding. Cisco does this despite spending $4.5 billion annually on research and development, and acquiring a new idea-rich company every three weeks. Cisco is looking for its next billion-dollar business.
Seven-Eleven Japan’s supply chain isn’t built to create fast or cheap deliveries, but rather to respond to changes in demand. It tracks in real time sales and the gender and age of customers. Its systems alert suppliers to changes in demand between stores. Deliveries are scheduled within a 10-minute margin, and employees reconfigure shelves at least three times a day. Suppliers consolidate shipments into the same trucks, and the company uses motorcycles, boats and even helicopters to distribute goods.
The extended enterprise is no longer a theory; it’s a reality today and happening on a global basis in nearly every industry. Executives and managers practice corporate virtualization almost unconsciously, but the idea of having people not tied to the company acting as agents of the company and the company having little leverage over the various facets of production still makes many managers uneasy. How do you measure performance in a virtual enterprise? How do you impose accountability? Where are the benchmarks for a virtual enterprise when there’s recognition that no two organizations will have the same structure, need or execution strategy?
Applying metrics and benchmarking a virtual enterprise is an arduous task. Measuring the performance and applying accountability to a virtual operation rarely comes from cookie-cutter templates. Each extended organization is unique and operates within a unique ecosystem. Metrics, therefore, must be tailored to the specific business models, operating conditions and market dynamics of the virtual enterprise. It’s precisely the reason technology is little more than a commodity, since the governance of an extended enterprise is a business process and has little to do with the technology infrastructure.
The time when corporations could dictate terms to partners and customers has passed; tell a customer to pound sand and they’ll likely end up in a competitor’s camp. The same goes for suppliers and partners. Loyalty is earned on a continual basis, and performance is rooted in mutually agreed upon factors and expectations. In the new paradigm, governance itself is a melding of management and diplomacy between parties that are not quiet equal but share varying levels of dependence and benefit from the intertwined relationship. This is why the term “governance” sometimes seems arcane - too harsh and proscriptive for a fluid and ever-evolving enterprise. Just look at the words we use for it: value web, network, and ecosystem.
Technology, of course, makes the extended enterprise possible. And technology makes it necessary: the new markets, the globalization of business, the lower thresholds to entry for competitors, the speed of everything, the novelties in business models and products – all of these are the devilish work of technology. And the key to getting a grip on it is managing technology wisely -- within your four walls and outside across the extended enterprise.
Transformation, personal relationships, common vision, collaboration and trust are the radical ideas that are the underpinning of governance in the age of the virtual extended enterprise. Such intangibles are rarely attained easily, but a continual process toward these characteristics and goals will bring a virtual enterprise many steps closer toward true virtual governance.
Faisal Hoque (www.faisalhoque.com) is the founder and CEO of BTM Corporation (www.btmcorporation.com). A former senior executive at GE and other multi-nationals, Faisal is an internationally known entrepreneur and thought leader. He has written five management books, established a non-profit institute, The BTM Institute, and become a leading authority on the issue of effective interaction between business and technology. © 2010 Faisal Hoque