Thomas Friedman - The World is Flat

Because niche businesses can get turned into vanilla commodity businesses faster than ever in a flat world, the best companies today really do get chest X-rays regularly-to constantly identify and strengthen their niches and outsource the stuff that is not very differentiating. What do I mean by chest X-rays? Let me introduce Laurie Tropiano, IBM's vice president for business consulting services, who is what I would call a corporate radiologist. What Tropiano and her team at IBM do is basically X-ray your company and break down every component of your business and then put it up on a wall-size screen so you can study your corporate skeleton. Every department, every function, is broken out and put in a box and identified as to whether it is a cost for the company or a source of income, or a little of both, and whether it is a unique core competency of the company or some vanilla function that anyone else could do— possibly cheaper and better.

“A typical company has forty to fifty components,” Tropiano explained to me one day at IBM, as she displayed a corporate skeleton up on her screen, “so what we do is identify and isolate these forty to fifty components and then sit down and ask [the company], 'How much money are you spending in each component? Where are you best in class? Where are you differentiated? What are the totally nondifferenti-ated components of your business? Where do you think you have capabilities but are not sure you are ever going to be great there because you'd have to put more money in than you want?'”

When you are done, said Tropiano, you basically have an X-ray of the company, identifying four or five “hot spots.” One or two might be core competencies; others might be skills that the company wasn't fully aware that it even had and that should be built up. Other hot spots on the X-ray, though, might be components where five different departments are duplicating the same functions or services that others outside the company could do better and more cheaply and so should be outsourced-provided there is still a savings to be made once all the costs and disruptions of outsourcing are taken into account.

“So you go look at this [X-ray] and say, 'I have these areas here that are going to be really hot and core,'” says Tropiano, “and then let go of the things that you can outsource, and free up those funds and focus on the projects that could one day be part of your core competency. For the average company, you are doing well if 25 percent is core competency and strategic and really differentiating, and the rest you may continue to do and try to improve or you may outsource.”

I first got interested in this phenomenon when an Internet business news headline caught my eye: “HP bags $150 million India bank contract.” The story on Computerworld.com (February 25, 2004) quoted a statement by HP saying that it had inked a ten-year outsourcing contract with the Bank of India in Mumbai. The $150 million contract was the largest ever won by HP Services in the Asia-Pacific region, according to Natarajan Sundaram, head of marketing for HP Services India. The deal called for HP to implement and manage a core banking system across 750 Bank of India branches. “This is the first time we at HP are looking at the outsourcing of the core banking function in the Asia-Pacific region,” said Sundaram. Several multinational companies competed for the contract, including IBM. Under the contract, HP would take charge of data warehousing and document-imaging technology, telebanking, Internet banking, and automated teller machines for the whole bank chain.

Other stories explained that the Bank of India had been facing increasing competition from both public— and private-sector banks and multinational corporations. It realized that it needed to adopt Web-based banking, standardize and upgrade its computer systems, lower its transaction costs, and generally become more customer-friendly. So it did what any other multinational would do-it gave itself a chest X-ray and decided to outsource all the funtions it did not believe were part of its core competency or that it simply did not have the internal skills to do at the highest level.

Still, when the Bank of India decides to outsource its back room to an American-owned computer company, well, that just seemed too weird for words. “Run that by me again,” I said, rubbing my eyes. “HP, the folks I call when my printer breaks, won the outsourcing contract for managing the back room of India's 750-branch state-owned bank? What in the world does Hewlett-Packard know about running the backroom systems of an Indian bank?”

Out of curiosity, I decided to visit the HP headquarters in Palo Alto to find out. There, I met Maureen Conway, HP's vice president for emerging market solutions, and put the above question directly to her.

“How did we think we could take our internal capabilities and make them good for other people?” she answered rhetorically. In brief, she explained, HP is constantly hosting customer visits, where its corporate clients come to its headquarters and see the innovations that HP has brought to managing its own information systems. Many of those customers go away intrigued at how this big company has adapted itself to the flat world. How, they ask, did HP, which once had eighty-seven different supply chains-each managed vertically and independently, with its own hierarchy of managers and back-office support-compress them into just five supply chains that manage $50 billion in business, and in which functions like accounting, billing, and human resources are handled through a companywide system? What computers and business processes did HP install to consolidate all this efficiently? HP, which does business in 178 countries, used to handle all its accounts payable and receivable for each individual country in that country. It was totally chopped up. Just in the last couple of years, HP created three transaction-processing hubs-in Bangalore, Barcelona, and Guadalajara-with uniform standards and special work flow software that allowed HP offices in all 178 countries to process all billing functions through these three hubs.

Seeing the reaction of its customers to its own internal operations, HP said one day, “Hey, why don't we commercialize this?” Said Conway, “That became the nucleus of our business process outsourcing service... We were doing our own chest X-rays and discovered we had assets that other people cared about, and that is a business.”

In other words, the flattening of the world was both the disease and the cure for the Bank of India. It clearly could not keep up with its competitors in the flattening banking environment of India, and, at the same time, it was able to get a chest X-ray and then outsource to HP all those things that it no longer made sense to do itself. And HP, having done its own chest X-ray, discovered that it was carrying a whole new consulting business inside its breast. Sure, most of the work for the Bank of India will be done by HP employees in India or Bank of India employees who will actually join HP. But some of the profits will find their way back to the mother ship in Palo Alto, which will be supporting the whole operation through its global knowledge supply chain.

Most of HP's revenues today come from outside the United States. But the core HP knowledge and infrastructure teams who can put together the processes that win those contracts-like running the back room of the Bank of India-are still in the United States.

“The ability to dream is here, more than in other parts of the world,” said Conway. “The nucleus of creativity is here, not because people are smarter-it is the environment, the freedom of thought. The dream machine is still here.”

Rule #6: The best companies outsource to win, not to shrink. They outsource to innovate faster and more cheaply in order to grow larger, gain market share, and hire more and different specialists-not to save money by firing more people.