Business in the Cloud - What Every Business Needs to Know About Cloud Computing

E1C01 08/20/2010 1:6:55 Page 1 1 C H A P T E R The Evolution and Future of AL Corporate Business Structures RI I TE MA n 1991, Ronald Coase won the Nobel Prize in economics after a lifetime of influence that began with the 1937 publication of his renowned paper entitled ‘‘The Nature of the Firm.’’ In this paper, D Coase asked (and then answered) the lofty question of why corpora- tions form in a free market economy. Coase’s point was simple: If TE there really are free and efficient markets, then a corporation can get any service it wants from a free market of independent contrac- GH tors. Despite this free market, however, he cited the range of addi- tional costs related to searching for, contracting, coordinating, and eventually paying for these services. And he showed how these costs RI ultimately made it more expensive to secure services in the open market versus bringing them in-house. PY Coase went on to say you could measure the size of a firm by the number of contractual relations it creates, and by the number man- aged internally versus externally. As a result of the added expense CO related to external relationships, he showed how companies could then bring more and more of their contractual relationships inside in order to gain efficiencies and lower their transaction costs. This approach is what drove the creation of big, vertically integrated cor- porations in the twentieth century. That was the world according to Coase in 1937. Today, a company is still motivated to bring more and more of its transactions in-house, but only until the cost savings gained are offset by other costs. Those other costs come in the form of 1 E1C01 08/20/2010 1:6:55 Page 2 2 The Evolution and Future of Corporate Business Structures management information overload and the resulting inefficiencies in decision making and allocation of assets. Many companies are now bumping up against those limits. In particular, with the spread of the wireless Internet, mobile computing and business application services delivered over the Internet, it is becoming easier and less expensive to manage external contractual relationships and transactions. Instead of be- ing optimized for internally focused inside-out communications, companies are being transformed and reoptimized for outside-in communications. The classic hierarchical organization structure of twentieth cen- tury companies is being redesigned and this gives rise to the net- work organization structure of the virtual enterprise. In the virtual enterprise the activities performed internally are those that directly add value to the company’s products and which its customers pay it for doing. Irving Wladawsky-Berger is a former co-chair of the President’s Information Technology Advisory Committee under Presidents Clinton and Bush, a visiting lecturer at MIT’s Sloan School of Management, a strategic advisor to Fortune 100 companies, and a former IBM senior executive. He describes today’s environment like this: Since we can now use technology, the Internet and open stan- dards to begin to automate, standardize and integrate business processes, those transaction costs described by Ronald Coase are dropping precipitously. Consequently, the whole nature of the firm, and what it means to run an efficient business, is going through very extensive changes. These are not easy changes. Not only is there a great deal of innovation required to auto- mate and integrate business processes, but perhaps more im- portant, there are even greater changes in culture required to transform Industrial Age business models to something more appropriate to our Internet era.1 By having common standards for common transactions like pur- chase orders, order processing, billing, accounts payable, and so on, firms gain tremendous flexibility and they can change and adapt easily as situations evolve. Weaving technology into these transac- tions, and combining them with common service delivery standards, E1C01 08/20/2010 1:6:55 Page 3 Example of a New Corporate Organization Structure 3 improves a company’s ability to deal with a wider ecosystem of ser- vice providers. This enables companies to shift their culture and their processes so they have access to the talent and services as the need arises. This redefines the basic culture of the firm. This notion of learn- ing how to collaborate has become a key driver of wealth creation. Firms learn to live in their marketplace or they lose touch with their customers and cannot follow them as needs and desires change. With industrial technology the object is efficiency and low cost, with service technology the object is customer satisfaction in whatever form that may take for the markets being served. Example of a New Corporate Organization Structure The days of the traditional pyramid-shaped corporate hierarchy as a viable business model are coming to an end. The past 20 years have produced some winners and some losers, and some of the biggest losers are companies that built themselves into huge conglomerates that were supposed to be too big to fail. Instead they are proving the truth of the saying, ‘‘The bigger they are, the harder they fall.’’ It’s not that companies can’t be big and grow revenue to many billions of dollars. It’s that they have to swear off that fatal tendency to organize themselves as hierarchical pyramids where most people are powerless drones who just follow orders while the important de- cisions are made by a small group of powerful executives at the top of the pyramid. Given the pace of change, companies need some- thing more agile and responsive. As shown in Figure 1.1, an inevita- ble consequence of organizations using the pyramid-shaped hierarchy is that there is a decision-making bottleneck at the top of the organization. No small group of executives, regardless of their smarts, hard work, or sophisticated computer systems, can make all those decisions in a timely or competent manner. People at the top of corporate hierarchies are overwhelmed by the sheer volume of decisions they have to make; they are too far away from the scene of the action to really understand what’s hap- pening; and by the time decisions are made the actions are usually too little and too late. Companies suffer the consequences of this performance by staggering from one bad decision to another like punch-drunk boxers who can’t understand what’s happening and can’t understand why they keep getting hit. E1C01 08/20/2010 1:6:55 Page 4 4 The Evolution and Future of Corporate Business Structures DA BIG CHEESE! Information Orders VP of VP of THIS THAT MANAGER MANAGER MANAGER A B C PAWN 1 PAWN 2 PAWN 3 PAWN 4 PAWN 5 PAWN 6 Centrally controlled hierarchies move SLOWLY because only a few people know what the strategy is and everybody else waits for permission to act. Figure 1.1 Traditional Organization Structure Cisco Systems got hit hard in the collapse of the dot-com bubble in 2002 when their stock went from around $77 a share to around $11. But they took that opportunity to learn some lessons that many other companies are only now starting to consider.