In the spotlight: new business models

Business model transformation and outsourcing


Outsourcing and shared services can be seen as elements in a process of business model transformation. These days any organisation, regardless of the industry it operates in, has to scrutinise the way it creates value on an ongoing basis. In some cases companies are having to change at dizzying speed. The success of business model transformation often depends on how clearly management sets the goalposts and the degree to which the organisation can absorb change.

Markus Kammüller

Markus Kammüller

Partner, Firmwide Management

Dr Daniel Diemers

Dr Daniel Diemers

Partner, Strategy&

In February 2011, in three episodes of Jeopardy, an IBM computer called Watson managed to beat two human contestants who had previously won record prize money on the American quiz show. In Jeopardy, contestants are presented with answers in different categories, and the winner is the player who manages to formulate a suitable question for a given answer more quickly than the others.

Watson is a well-known example of new approaches in the field of artificial intelligence. In most cases they involve semantic search engines1 that can grasp the meaning of a question more or less instantaneously. This kind of artificial intelligence can be very useful in many different areas. For example experts hope that soon it will be possible to develop individual cancer therapies tailored precisely to specific patient characteristics. ‘Robo-advisors’ – applications giving investors computer-generated and computer-supported financial product recommendations – are already a reality.

Artificial intelligence is a dramatic illustration of the way assumptions that used to be taken for granted – for example about what constitutes economic activity, how knowledge is exchanged, or how humans communicate – can be radically undermined. In the future, machines will no longer substitute for human labour merely by automating simple routine tasks; increasingly they’ll be competing directly with modern knowledge workers2. Highly skilled employees will have to think about whether their current skills will still be in demand down the road, or whether they’re going to have to completely change the contribution they make to value creation.

Megatrends driving transformation

The idea of business model transformation emerged at the end of the 1990s. As elements of information technology combined with traditional workflows, existing approaches to doing business were increasingly called into question. Innovative managers sought and found new, different ways of running their business and making it more efficient and effective.

A business model can only ever be an approximation of the actual organisation of a company or its entire value chain. Essentially it consists of three components:

  • A value proposition describing the value or benefit the organisation creates for its customers and business partners
  • A value creation architecture describing the product or service the organisation offers and how it configures it
  • A revenue model describing what business transactions an organisation uses to earn money.

It’s not just digitisation driving the transformation of existing business models; other profound global factors are involved as well. These megatrends include a rapid process of urbanisation, comprehensive demographic change, a shift in the world’s political and economic centres from the West to Asia, and the increasing scarcity of resources. As a result of these megatrends, customer needs are evolving, potential is emerging for new, innovative business processes, and people’s willingness to pay for products and services is changing.

Far-sighted directors and executives have strategic monitoring and early warning systems in place that allow them to observe megatrends and assess whether their current business model will still be viable in its present form three to five years from now.

Far-sighted directors and executives have strategic monitoring and early warning systems in place that allow them to observe megatrends and assess whether their current business model will still be viable in its present form three to five years from now. If they conclude that transformation is necessary – which currently is the case in many industries – they can develop a new vision or target image of their future business model. This consists of more than just a vague description of what is to come. Above all it has to show whether the planned transformation is incremental or radical in nature, in other words whether it will involve continuous change or a revolutionary new beginning affecting at least a part of the organisation’s business.

Factors in successful transformation

This vision forms the basis for defining the transformation scope, clearly describing the tasks and extent of the planned transformation project and laying down what’s not going to be changed. Often, business model transformation projects founder because of exaggerated or imprecise expectations. It may be that management wants to change too much or fails to demarcate the project clearly. Besides defining the transformation scope, it’s also important to define measurable key performance indicators. And the measures that will be used to quantify the achievement of these objectives also have to be decided.

Once management has got the process of transformation going, it has to make sure it’s driven forward rapidly and systematically. In many cases profound changes in the organisation, processes and technologies require changes to entire departments or divisions. Rigorous change management at all levels increases the likelihood of a successful implementation. Despite the dominance of technology and digital transformation, the human factor also has to be taken into account. A good communications strategy can help convince many staff that business model transformation makes sense. Even so, experience shows that in reality a fundamental change is unlikely to be supported by everyone concerned. But without the support of as many of those involved in the delivery of the product or service as possible, the chances of a successful transformation are slim.

The American management theorist and Harvard professor John Kotter formulated the following recommendations:

  • Establish a sense of urgency.
  • Create the guiding coalition.
  • Develop a vision and strategy.
  • Communicate the change vision.
  • Empower broad-based action.
  • Generate short-term wins.
  • Consolidate gains and produce more change.
  • Anchor new approaches in the culture.

New capabilities thanks to outsourcing and offshoring

Even if service processes are farmed out to outside companies or other countries in the wake of business model transformation, it doesn’t mean they’re out of sight and out of mind. Initially, outsourcing3 or offshoring4 merely means breaking up and rearranging the existing value chain. Now the economic situation in many industries is such that it won’t be long before it’s not about having all the value-creating elements of the process under your own control, but about managing shared service areas efficiently and systematically. This requires new skills and capabilities. Those responsible who remain at the company doing the outsourcing have to learn how to run a quality check at a shared service centre or set up and monitor service level agreements. They also have to know what escalation mechanisms to use to bring about continuous improvements and innovations in the services they’re using.

If the transfer of services to an outside company also involves transferring staff, in most cases they will also have to acquire new skills and qualifications. Most often, training is likely to be needed to enhance people’s ability to deal with high-performance IT systems and teach them how to organise rationalised processes. Attractive career opportunities can open up for staff moving to a shared service centre. From now on they won’t be providing marginalised services within a single organisation; they’ll be working in a unit or company whose core business is delivering services on behalf of multiple internal or external customers.

Outsourcing and offshoring rarely fail to have an impact on the staff who previously provided services internally. Those affected inevitably face big personal changes. This makes it all the more important for companies to come up with socially compatible solutions, communicate them transparently, and always make sure a process really has to be outsourced, automated or eliminated. By behaving this way, companies can do a lot to improve their long-term chances of success.

We’re at your service!

Markus Kammüller

Markus Kammüller

Partner, Firmwide Management

+41 58 792 19 00

Dr Daniel Diemers

Dr Daniel Diemers

Partner, Strategy&

+41 43 268 21 21

Summary

The internet and increasingly powerful computing are fundamentally shifting the balance of power in the business world. Microbusinesses with bright ideas and smart approaches are attacking large companies in their established markets, threatening their very existence. In some cases the big fish defend themselves by simply buying up the innovative attackers, sometimes at prices running into the tens or hundreds of millions.

A whole host of jobs and professions that until recently were seen as an indispensable part of a modern society are set to disappear. There are signs that in future, many knowledge-based jobs in many places will be replaced by intelligent machines.

Other megatrends besides digital transformation are prompting a large number of companies to reassess the utility of their existing offerings to customers. They’re also being forced to look at the way they’ve traditionally delivered products and services and generated revenues. All companies, whatever their line of work, are having to continually review their business model and adapt it if necessary. Business model transformation is now no longer an exception; it’s business as usual, the new normal.

Many people find the pace at which transformation processes take place in today’s business world to be utterly dizzying. Swiss sociologist Peter Gross saw this coming back in the 1990s, aptly describing the phenomenon as the ‘multi-option society’. Perhaps it’s the breakneck speed of change that has led to the popularity of movements such as ‘slow food’ and ‘slow living’.

Managers and organisations can train the way they deal with rapid, permanent change by looking at the factors that make for successful transformation. Above all this means avoiding change for change’s sake, defining the scope of transformation properly, making sure the project generates quick wins, and getting the staff involved on board.

  1. Semantic search engines: Semantic search engines are computer programs that understand the intent and meaning of a question put in natural language to then find the relevant passages and facts (also texts in natural language) in a database.
  2. Knowledge workers: People who work with information, ideas and specialist knowledge.
  3. Outsourcing: Outsourcing involves contracting out business processes to an external partner who delivers the outsourced services in accordance with agreed service levels and costs. The term ‘outsourcing’ merely refers to the fact that services are delivered by a partner outside the organisation, regardless of whether the process takes place within the same country or from one country to another.
  4. Offshoring: Offshoring is the process of relocating tasks to another country where costs are lower. It can involve farming out functions to an internal unit or to an external partner (outsourcing).