- Jun 7, 2002
5C Strategies for Creating Convergent Organizations
The same technologies and approaches that have led to the rise of the hybrid consumer can help deliver on the vision of the convergent organization. Customization technology and approaches can help to tailor the organization differently for customers and employees in different parts of the organization, offering different filters on information. Community-building technologies and approaches can be used to bridge silos, drawing together virtual teams to address specific challenges in real-time in the organization or to create communities between the outside customers and inside employees. The technologies that provide customers with seamless, multi-channel solutions and timely responsiveness and value can be applied internally as guiding design principles. New competitive value equations and metrics can be developed, focusing on lifetime value of the customer and other measures in addition to short-term financial returns. Finally, automated choice tools for gathering information, decision making, and management give employees more information and support in responding to customers. These tools also offer customers increased access to the resources of the organization without using the precious resource of physical experts.
The following strategies illustrate ways that managers can apply the 5Cs internally to transform their organizations to meet the challenge of the examples are drawn from business-to-business organizations, but they illustrate principles of organizational design that can be applied to business-to-consumer organizations.
Create a Customizable, Modular Organization (First C)
Like mass customization of products, a "plug and play" organization developed from modular processes can be easily reconfigured to meet the shifting opportunities of new technology and changing demands of the hybrid consumer. A "digital fabric" can tailor the view of the organization to the individual while maintaining its existing structure.
In an environment in which the core technologies and organizational capabilities need to shift, the organization has to have the agility to be quickly reconfigured. Nokia is implementing an approach that Senior Vice-President of Strategy and Business Structure Mikko Kosonen calls the "plug and play" organization.4 Core processes across the organization are being systematized and modularized so that they can be rapidly reconfigured. The organization identifies "best of breed" solutions from outside partners and makes sure they are designed to fit together well with company systems through modular processes and web-based interfaces. "The fact that we can reuse modules provides us with tremendous cost, speed, and flexibility advantages," said Kosonen.
Every time we create a new module, it is in the library and can be used by everybody." In contrast, most processes that are built from the ground up, like integrated hardware and software systems, are not easily upgraded or transferred to other parts of the organization.
Leaders of business units still decide how these standard modules are put together, so they retain control over the strategic direction of their units without the time and expense of developing custom solutions from scratch. By assembling the organization from these building blocks, the Nokia group lowers its costs of implementing and supporting new technologies without significantly eroding functionality.
In the past, companies have always had to trade off agility with economies of scale in their organization in the same way they have had to choose between efficiency and customization in their manufacturing. The larger the organizations became, the harder they were to restructure.
Nokia's new technologies and processes offer ways to reduce these tradeoffs. The combination of modular design and technology that can bring these components together into a system creates an organization that can be customized on the fly. This type of flexibility is crucial in very uncertain and fast-changing businesses such as wireless communications. "We want to be the first company in the world to combine economies of scale with agility," Kosonen said.
This approach creates a very different role for IT. It is neither a passive tool for leaders of businesses nor an overarching architecture that imposes a uniform model across the organization. Instead IT works with the business leaders in developing technology and processes to support their business strategies. It extracts common elements of these processes and creates corporate-wide best practice components. IT ensures that these processes are modular and have a common interface that allows them to be joined with other processes. When it faces its next organizational design challenge, it can then pull these standard modules out and use them as a basis for developing a solution to the strategic challenge. In this way, the business strategy remains squarely with the business, but the organizational design to execute that strategy is shaped by IT and senior business leaders.
Digital Fabric: Bridging Silos without Breaking Them
Sometimes it is not necessary to actually reconfigure the physical organization, but rather to create a customized interface so the organization looks different to different employees, customers, and partners. Trintecha company that provides software and support to financial services organizations for handling credit card transactions in physical, online, and wireless transactionshas pioneered an approach CEO John McGuire calls the "digital fabric." Trintech has begun to create an organization that is neither a functional organization nor a matrix organization. Instead, like a customizable web browser, the organization looks different to different viewers. It is the same organization underneath, but different people see it differently.
Just as Windows was able to overlay a graphical user interface on DOS, and Web browsers were able to create a user-friendly interface for the Internet, the organization can create a customizable interface for users in different parts of the organization. The organization can be "configured" to be viewed by product line, by function, or by customer, without changing the underlying organization. Finally, the organization can be opened up to customers in ways that were never possible in the past. For example, customers can directly access their accounts, design new products or check on orders, so they are invited inside the organization. The matrix can be sorted in different ways to take whatever cut of the organization is needed.
Trintech is organizing interactions with each customer around an online "eRoom," as illustrated in Exhibit 103, a collaboration technology that allows sharing of documents and interaction, drawing relevant experts from different parts of the organization together in a single virtual location. This means, in essence, that every customer has a virtual micro company within the larger organization. Functional managers retain depth in specific areas, such as finance, marketing, or engineering, and retain their identification with these areas. They do not become generalists, but see the organization as a collection of specialists working together to create customer solutions. The leaders of product divisions see the organization as a set of product divisions that are managed for P&L by segment. The CEO and top managers see the organization as a set of key metrics on the revenue and order pipeline that can be dynamically sorted using data lenses, where they can click down for greater detail. The management team also manages by exception through operational red flags.
Exhibit 103 Trintech's Convergent Organization
The organization can still be structured by traditional functions such as finance and marketing, or by brands, but the customer or employee doesn't have to see the messy infrastructure. This allows the organization to bridge functional silos and product divisions without breaking them. "We need the traditional value of brands, and the P&L focus has to be honored," McGuire said. "You also can have functional depth and efficiency so you have best practices across all the brands. It is through the digital fabric that we are able to break down those silos yet maintain the discipline of functional depth." Mohanbir Sawhney describes such a customizable interface using the metaphor of a Palm Pilot, which has a HotSync button to automatically synchronize information with a computer. Instead of breaking down the walls to "homogenize" the organization, the company uses technology to "synchronize." The product lines and functions of the organization can be kept separate, but the information layer is drawn together to create integration.5
Organize Around Community (Second C)
In addition to customization, the second "C", communities, both physical and virtual, can reshape the boundaries of the firm to draw together customers and suppliers into value networks. These communities are built upon entrepreneurial values and flexible architectures.
The community-building power of the Internet that has transformed interactions with customers can also be used to change interactions within the company. New business paradigms, such as those based on delivering a total solution instead of stand-alone products, lead to a redefinition of the boundaries of the firm. Companies can build communities around knowledge, value-creating processes (such as new product development, demand creation, etc.) or around areas of interest that might cut across functional or business lines. Companies also can find value in linking the vibrant and valuable private communities of their intranets and extranets with the open communities of the Internet. Joining together the public and private communities can help to harness the social energy inside the firm and link it to social energy outside the firm, in ways that create value for the firm.
For example, AOL Time Warner realized its decentralized commercial printing was diffused across 500 vendors. Rather than moving to centralizing printing, which would have increased coordination costs and hampered the freedom of divisions, the company instead used printing software (Printcafe) and the Web to create what AOL's CFO Joseph Ripp called a "virtual community of printing."6 This strategy drew together members of the company's private community of employees and connected them to a more limited set of 50 printing suppliers outside the community. Employees still had a choice of different vendors to meet their specific needs, but the virtual consolidation extracted $150 million from the company's costs. "The Web gives you the opportunity to create communities across the company, to give people access to the cookie jar," Ripp said.
Similarly, Trintech's connections with customers and ideas within the organization have transformed its approach to developing new products and businesses. Customers and employees are wired together by something Trintech CEO John McGuire calls an "idea vault." Trintech has created a systematic process for capturing new ideas from customers, employees, and competitors and channeling them into new business initiatives. The system takes suggestions gleaned from customers, and ideas created independently by employees, and channels them to an "idea council." The idea council screens and filters the ideas and moves promising ideas forward. The ideas are also tracked in an idea pipeline that is similar to a sales pipeline. The company then has a systematic method for screening and developing new ideas. It also can recognize and reward the employees who create them.
Use Lighthouse Customers to Point the Way
In a world that is rapidly changing, companies can use their interactions with customer communities to keep ahead of change. In the 1990s, at a time when online business was just taking off, McGuire found his way from Dublin into the office of a tiny start-up named Netscape in California. He met with Marc Andreessen, who was just starting the revolution that would transform the computing industry and business world forever. How did McGuire find his way from Europe into a small company on other side of the world? Trintech had identified a set of "lighthouse customers" who were at the forefront of adopting new technologies. It worked closely with these customers to understand and monitor these emerging technologies.
One of these lighthouse customers, a bank called Swedish Post in Sweden, was carefully monitoring IP (Internet protocol) technology. Swedish Post mentioned they had bought a few servers from a company called Netscape. McGuire immediately called the head of Netscape Europe and got him on the phone at 8 p.m. that evening. The European executive patched McGuire into Netscape's San Mateo headquarters. Within a few days, McGuire was in California hammering out a deal for collaborating with Netscape. Within a week, he and a representative from Netscape were making a joint presentation to the Swedish bank. "If you are close to your customers and listen to your customers and see what they want, you will find what you need to do," McGuire said.
"We saw the emergence of the Internet as a means of global connectivity," McGuire said. "What we were trying to do was to use the Internet as a means of connectivity so all consumers could access their accounts anywhere in the world. We looked at projections of transactions over the Internet. Global airline reservations systems were doing electronic commerce to sell airline tickets, beds in hotels and travel packages. All of their networks were proprietary networks. The Internet represented a huge growth opportunity and Trintech was going to capitalize on it."
Create a Convergent Culture: Put the Organization on Wheels
Like customer communities, internal communities are held together by a set of social interactions and shared values. To meet the challenge of the hybrid consumer, companies need organizational cultures that can combine the executional excellence of the best traditional organization with the entrepreneurial energy and creativity of technology startups. These organizations are not one or the other, but rather "ambidextrous."7 These organizations keep a stable set of organizational values and culture, but conduct ongoing experiments with new approaches to the business. As these experiments are proven successful, they are then absorbed into the culture of the broader organization. This is a delicate balance, but is what is required to create a convergent organization.
The physical organization of the community can reinforce its virtual interactions and values. For example, at the headquarters of SEI Investments, all of the desks and file cabinets in the organization are on wheels and all the telephone and computer connections come down from huge cables suspended from the ceiling (the next generation will be wireless). Employees can literally create self-organizing teams and reconfigure their groups in new patterns by moving their desks. This is a physical metaphor for an organization designed for change in response to new opportunities and changes in its markets. It is a clear sign to new and existing employees that the organization wants to attract people who are comfortable with change and entrepreneurship. Prospective employees who are not comfortable with this type of creative environment, also signaled by the modern art throughout the offices, quickly self-select out. Everyone also has the same desk and no one has a secretary, including Founding Chairman and CEO Al West, who answers his own phone and sits on the open floor with everyone else. This creates an environment of flat and open communication. The company has been very successful, achieving 30 to 40 percent annual growth. SEI was named one of the top companies on Business Week's 2001 ranking of Standard & Poor's MidCap 400 index and earned a spot on Wall Street Journal's "honor roll" for the highest shareholder returns, with five-year average annual returns of 73.6%.
In addition to workplace design and culture, company actions also set the tone for the values of the community. For example, General Electric stresses values such as annihilating bureaucracy, digitization, relishing change, and creating a "boundaryless" organization. These are values that encourage people to work creatively and break down organizational barriers across the organization. GE has made commitment to weed out what it calls "Type IV" managers,8those who deliver results, but at the expense of the company's values. This is a demonstration of its willingness to sacrificing short-term earnings to protect the long-term culture.9
Build Convergent Channels (Third C)
Combine physical and virtual interactions with customers strategically in ways that meet the relational and information needs of customers, reduce internal costs and offer insights into the future of markets.
Just as hybrid consumers are combining different channels in their searching and purchasing processes, companies also need to explore ways to combine physical and virtual channels. For example, Trintech has created a customer interface that combines physical and virtual interaction in a way that creates value for the customer and reduces cost for the company. In the old days, Trintech would send out a technical sales rep and a sales engineer. These twoinseparable like "Laurel and Hardy"would fly into town and meet with clients together. This meant two salespeople had to be transported around the world, put up in hotels and flown back home to create a proposal based on the meeting. This was a process that generally took two weeks, after the proposal was drafted and run through engineering, legal, and other reviews.
The new model combines the physical and virtual, sending the sales rep out to shake the hand of the client and patching in the engineering rep virtually, either on the videoconferencing screen at one of Trintech's local offices or even on the laptop of the sales rep (through NetMeeting). The engineering rep, known as a "product evangelist," can handle calls in this way with sales reps in Europe, North America, and Asia, all from his home base in California. The same rep can handle more calls, and clients have access to the product evangelists with the deepest knowledge. After discussing the technical concerns with the client, the product evangelist logs off and the sales rep takes the client out to the pub.
To further leverage the strengths of the engineering reps, they are very well supported. In the background, assistants listen in on the call and sketch out a solution that they turn into a formal proposal. Meanwhile, a fresh team of assistants come into the room to provide support for the product evangelist's next call. Where Trintech would have needed 30 engineering reps to support 30 sales reps, it now has just three key evangelists, one in each of its product areas. Even with the added support staff positions, the arrangement saves Trintech an estimated 60 percent over the old Laurel and Hardy model. At the same time, it means that every customer has a much more experienced engineering rep at the meeting. "There is one expensive person who is really deep in knowledge," McGuire said.
The process is also much faster. The proposal itself goes into the client eRoom, where legal, engineering, and product managers come into the room and populate the document, working off predefined templates. The salesperson comes in with a pricing matrix and the proposal is kicked back to the product evangelist for a final review. Then it is sent electronically to the sales rep, who can print it out and deliver it to the client, very often the next morning.
There are some new positions that are needed to make this process work smoothly. Trintech has created the position of "program manager," who is responsible for managing the eRooms and making sure that proposals and other projects are acted on in a timely manner. This manager, dubbed "captain clipboard," responsible for pinging people to make sure they are delivering on time. Since the process is diffused and needs to be completed rapidly, this coordinating function is crucial to make sure all these virtually connected parties are brought together.
Separation vs. Integration
As discussed in Chapter 5, another key channel decision for organizations is the degree of separation or integration of its online and offline businesses.10 Greater separation can facilitate entrepreneurship while greater integration can improve control, synergies, and efficiencies. In developing their online businesses, companies can create separate units, engage in joint ventures, develop internal ventures or establish fully integrated online operations. Often companies will initially set up their online businesses as independent units to give them room for their entrepreneurial energies to run and then integrate the businesses into the organization when their potential has been demonstrated and they have worked through their early stages of growth.
The level of integration also creates tradeoffs for consumers. They may benefit from the innovation and fresh approaches of a separate online business but be disappointed when they are treated like different customers across different channels. Companies also lose the opportunity to market across channels if they have poor integration. As discussed above, however, integrated interfaces and databases can help to draw together the online and offline, even if the actual organizations remain separate.
Redefine Competitive Value through People and Technology (Fourth C)
As the value equation changes for customers, companies correspondingly need to redesign their internal value equation. More flexible environments mean companies need to rethink the value proposition they offer to their employees. Technological offerings such as web services can redefine the way value is carved up and delivered through new technologies.
Convergent Careers: Forge New Relationships with Employees
With the erosion of corporate loyalty and long-term employment, companies also need to rethink the value proposition they offer to employees. The relationship with employees in the organization is far more fluid today. Employees are finding jobs and companies are finding employees electronically through job sites.
The new technology creates opportunities to change relationships with employees along the entire spectrum, from recruiting to employment to post-employment. Many companies are using their own corporate web sites more effectively in recruiting. For example, Cisco reportedly tracks the questions of visitors and when they start asking highly technical questions about products, showing a high level of knowledge, the company shows them employment advertising. Cisco also holds contests on issues such as optical network engineering, providing the company with another source of contacts for potential employees with expertise in these areas. Other companies are creating alumni lists, where they connect former employees with other current and former employees, but also gather current employment information at the same time. Companies are also keeping in touch with applicants who are not hired, sending them e-mail every six months asking them to "update their resumes."11 Just as it has empowered consumers, the Internet is also placing more power in the hands of workers. Sites such as salarysource.com give employees access to salary surveys. Other sites such as vault.com offer profiles of the company and candid chatrooms with current employees of companies, who give inside reports on everything from dress code to job interview questions to working environment. The employer no longer controls this flow of information. Companies such as reference.com and refer.com allow people to post references in their personal networks and receive a reward if the person they refer is hired.
The new environment is changing the way companies find and relate to employees. Employee referrals and the Internet account for 70 percent of hiring at Motorola's broadband division.12As workers are finding greater opportunities and perhaps even loyalty to external job markets such as Monster.com, companies are forging their own internal job markets to keep employees within their companies. All of this is changing the relationship of the company with its employees and creating far more interactive relationships using both physical and virtual channels.
Candice Carpenter, founder of iVillage, said that given the more fluid nature of employment, companies need to focus on helping employees understand and build their baseline work personality. There are tests that can provide useful insights on current capabilities and companies can also help employees chart their own career paths. One approach Carpenter used is "aspiration-centered mentoring." Employees were asked to identify the job they would like to hold in five or six years and then identify someone already in that job and interview them. The employees then developed a list of skills they had to develop to achieve this goal and could then focus their work at the company on acquiring those skills.13 Companies also have to recognize that the core values of today's workers, who are also today's hybrid consumers, are changing. Companies need to address a shift from the traditional Protestant work ethic to the new "hacker ethic."14The old work ethic was focused on discipline, building a career and earning money as a reward, while the new ethic is based on passion and freedom, peer recognition and money as an enabler of freedom.
Finally, many of these employees will not be formal employees per se. Nokia's Kosonen expects that the future growth of the company will come without expanding the size of its organization. Instead, he envisions an organization with about the same number of core employees but a much larger network of independent "employees" who are outside the formal organization, through alliances and outsourcing.
The value equation for technology traditionally required large initial investments in internal systems with long and uncertain payoffs. This is changing as smaller technological components can be outsourced into "web services." These web services are the next step in the diffusion of technology from large legacy systems to client servers to web-based systems. Web services create greater flexibility in serving customers across channels.
Obviously, technology is a critical enabler or facilitator of convergence. It is the heart of the changes that have created the centaur. From the company perspective, however, the difficulty is that traditional legacy systems often have trouble talking with one another and have even more problems communicating with new consumer interfaces. As managers try to untie this Gordian knot, web services offer a creative solution to cut through it.15They offer a common, Internet-based, technological platform for information technology services. There are an increasing number of companies that are adopting this approach, such as PeopleSoft or Microsoft with its ".Net" strategy. There also are new companies such as 12 Entrepreneuring that are building their strategies around these developments.
Develop Organizational Choice Tools and Performance Measures (Fifth C)
Powerful internal tools can empower employees to make better decisions and keep up with empowered consumers who have more tools at their disposal.
As discussed in Chapter 7, better decisions tools have reduced the information asymmetries between companies and consumers. As consumers gain access to more powerful tools for gathering information, making decisions and managing their lives, companies need to expand the internal tools in the hands of employees so they can continue to add value. For example, if customers have access to basic investment tools, brokers need to have these tools and even more sophisticated tools so they can continue to add value. As consumers have direct access to information, physicians need access to the same information and more powerful information and decision support systems.
These internal tools include tools for gathering better information, such as increasingly sophisticated data mining technologies. Other tools help managers make better decisions, including decision support systems, just-in-time learning systems and simulations. Finally, employees need tools to manage the business more effectively across different channels.
For example, companies are developing sophisticated tools for multichannel marketing that help employees develop marketing strategies across different channels. If you buy a purse online at NeimanMarcus.com, you might be offered a coupon for a matching pair of shoes. As wireless technology develops, these multichannel tools could be sent to the cell phone or wireless appliance of a customer in a physical store.16These multi-channel strategies are built upon increasingly sophisticated and integrated databases that provide the company with coherent customer information across different channels. A variety of companies, including IBM, Microsoft, Siebel and Oracle are offering database software to help integrate customer information across channels.
In addition to integration, companies are developing tools for faster information gathering to support decisions. Real-time information can change the way the organization responds to change and also gives managers the information they need to make quicker and better decisions. Cisco Systems is legendary for its ability to close its books on an hour's notice with a "virtual close." Unlike traditional accounting systems that take weeks or months, this system can close out books in real time and give final numbers within a few days. This gives managers real-time information with which to guide the business and required a major redesign of the whole business processes. For example, the company's automation of expense accounting allows it to handle all the expense processing for a 38,000 employee organization with just two employeesand pay expenses within two days. (Of course, better tools don't automatically lead to better decisions. Cisco managers had real-time numbers about where they had been, but when the economy sank into a downturn, Cisco was slow to recognize it and ended up writing off $2.5 billion in excess inventory in early 2001.17 It could be that they measured the wrong things, the virtual close provided the right information but managers ignored it, or the company did not have the flexibility in its supply chain to respond quickly enough.) Trintech takes its metrics one step further. It populates its metrics with all the projects that are in the pipeline, tracking the revenue based on whether projects are in proposal, contracts are signed, or work is under way. Since its information is connected down to the contracts in the field, McGuire can see every move in the pipeline, giving him a window on where the business is headed. He tracks revenue and potential revenue by type of revenue and utilization rate, undelivered revenue and budgeted revenue, and days outstanding on receivables. He can also sort the information by product division.
Different managers in the organization have different windows on the data, showing the current snapshot on their part of the world. Managers can then click down for more detail on any part of the picture. "Because we are working off the same database of numbers, we can create data lenses, summary reports that can be constructed and then zoom down to various spots of data," McGuire said. "We can then manage by exception as opposed to detail." To build different views of data, companies are creating customizable corporate portals. Companies such as Plumtree and Datachannel offer employees a "dashboard" with relevant information in an interface tailored to their own needs. Instead of being forced to extract meaning from standardized reports, the reports are tailored to the needs of the viewer.
Companies can use the same technologies they use to interact with customers to interact with their employees. These systems, such as Siebel's Employee Relationship Management software (ERM) can put more real-time information and powerful tools in the hands of employees. These systems also can offer powerful online training tools to provide employees with just-in-time learning to help them better serve customers.
The choice of measures is also important. Although dot-com metrics clearly missed the importance of profitability, the reflexive cry to return to purely backward-looking metrics is also not appropriate. The convergent organization needs to combine traditional backward-looking metrics focused on ROI with more forward-looking measures for value creation. Current accounting metrics and organizational separations tend to make it difficult to focus on the potential hybrid consumer. Metrics focus on transactions while companies are increasingly focused on building relationships through communities or customerization.
Companies are finding new ways to measure the value they create. The rise of tools such as the Balanced Scorecard provides broader insights by integrating more "soft" measures such as customer satisfaction or what Siebel Systems called "relationship capital" into the model. Companies need to develop broader and deeper measures to assess lifetime value of customers across different channels. These measures should offer an integrated pictures of the actual costs of serving customers and potential value they contribute, both online and offline.
Create the Right Level of Transparency
Another aspect of online metrics is transparency. At Trintech, everyone can see what is happening, which parts of the organization are contributing to revenue and profit and which are lagging. They can also see the status of different R&D projects. This means that sales reps won't be sandbagged by product developers who are running behind but don't tell the sales rep. Likewise, engineering won't be surprised by a sales promise that they can't deliver. It also means that any person in the company can see how they are performing relative to peers.
"It creates a culture of trust and transparency," McGuire said. "Trust is not retribution. We are not out to hang you if you are late, but there are cascading consequences of being late. The sooner you know, the better you are able to manage the expectations of the customer." On the other hand, companies may be reluctant to create full transparency for customers. They do not want customers to necessarily be able to peer into their organization and see their internal structure and pricing. As they shape their tools and metrics, companies need to determine how much transparency they want to create.