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Corporate virtualization - 100 years in the making

Guy Strafford
Sep 17, 2013 8:55:00 AM

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Guy-New

2013 marks 100 years since Henry Ford was faced with the dilemma of producing his latest invention, the Model T Ford, on a large scale - in an efficient, low cost way. His answer was to invent the first mass production assembly line. In doing so, Henry Ford revolutionized the world of manufacturing. Over the past 100 years, following this monumental milestone, business has changed beyond recognition.

We have witnessed three other major revolutions which have transformed the way business is done - namely technology, and the rise of the internet and the interconnectedness of global communities; globalization, along with significant improvements in logistics and trade and currency liberalization; and specialization, where for most areas it is now frequently better, cheaper and faster to use a supplier than attempt to make or deliver a service in house.

Compare any business with its previous incarnation of 100 years ago, and you will not recognise it as the same business. In the case of car manufacturers, no longer do they have their own rubber plantations, steel works, power plants and so on as was the case in Henry Ford's time. In fact, the typical car manufacturer today is not a manufacturer at all - they are assemblers. The engines come from one manufacturer, the chassis another, the tires a third, and so on.

This does not imply that everyone has been replaced by a robot.  Far from it. What has happened is that a significant portion of human capital now resides within external suppliers and providers. And this is the case in car manufacturing, as it is across all industries. And it applies not only to human capital, or even only to core areas of the business - it applies across a business, even in non-core areas, such as management consultants, marketing agencies, logistics companies, facilities management companies, printers, IT providers. And so this list goes on. 

Today (according to our latest global research into the spending habits of 2,000 companies), the average business across the globe spends only 12.5% of annual revenues on labor costs. In contrast, 70% of revenues are spent with third-parties - i.e. suppliers. More importantly, this is a trend that is happening across industry sectors (download the full research study here to see the complete breakdown).

This trend that has pushed costs external, known as 'corporate virtualization', is a global phenomenon, and has happened across all industry sectors. Corporate virtualization is the 21st century equivalent of Henry Ford's solution of moving from hand-made tools to an assembly line.

The implications of this trend range from challenges in motivating your extended enterprise, to greater supply chain complexity, to a change in how risks need to be managed, right up to how to drive shareholder value.

Henry Ford once said "a business, in my way of thinking, is not a machine. It is a collection of people who are brought together to do work..."

This quote holds true as much today as it did back in the 19th century - with one small update. A business in the 21st Century is a collection of 'people and suppliers'.

Our experience of working alongside a wide range of business leaders finds that many are struggling to take full advantage of this change in what makes up 'a company'. This means there is a tangible and significant advantage for those who start to look for ways of reshaping their approach to third-party providers and suppliers.

We live in exciting times, and I can only wonder what a 'business' will look like in another 100 years...

As usual, I welcome your comments and thoughts (please use the box below) or contact me directly here.

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