You know business is in trouble when it starts suing its customers. Bad sign. What has led to this terrible state, and what does it mean for the future of business?

Let’s take a look at some of the recent trends:

  1. After the heady days of ‘Continuous Innovation’ and ‘If it ain’t broke, break it’ in the 1990s, business has made an about-face, shutting down innovation and becoming infrastructure-averse. This occurred mainly because customers either wouldn’t, or couldn’t afford to, shell out more and more money each year for overpriced brand-name junk, causing return on investment (ROI) in many industries to level off or fall, causing shareholder unhappiness that the double-digit increases in profit needed to justify the absurd share prices of the day were not forthcoming. If you can’t increase the ‘R’ in ROI, you gotta cut the ‘I’. The integrated business model (Figure 1 above) had to change.
  2. So began the race to the bottom, the attempt to prop up profits by cutting costs, anywhere and everywhere. That means manufacturing offshore, outsourcing, converting employee jobs to temporary ‘contracts’ with no benefits or obligations to the employer, “offshoring” (exporting jobs to third world countries), and cutting heads, since the major costs in most organizations, next to sacrosanct executive salaries, are line staff wages. The only ‘competitive advantage’ that counted any more was the lowest fixed cost. Of course, along with the lower cost came, inevitably, shoddier products and less service.
  3. With the recession came a drop in share prices, and rather than invest in new ideas and technologies, businesses who had any cash to spare spent it acquiring competitors, so that the few remaining players in each industry could more or less set prices where they wanted. A lot of lobbying to eliminate regulation, especially regulation over concentration of ownership, occurred to allow this to happen. This is euphamistically called ‘consolidation’.
  4. As customers began to protest against poor value for money, poor service, lack of competition, and price-fixing, big business responded by suing customers. Suddenly, exploiting new technologies to acquire exorbitantly-priced merchandise at reasonable cost was labelled ‘theft’, and corporations were suing for the right to lie to their customers about their products and how they were made. A corporation vs. consumer war was on.
  5. Business executives began complaining, only half in jest, that their businesses would be fine if it weren’t for the customers. The nuisance, cost and risk of having to deal with unfriendly customers was addressed by outsourcing help-desk functions and other ‘non-core’ functions of the business, to outside organizations. Let them look after the damn customers.

As a result of these changes, instead of the integrated business model in Figure 1, large corporate empires are starting to look more and more like the model in Figure 2. They are virtually ‘dis-integrating’. The main customer-facing functions are outsourced to marketing and sales agencies, independent logistics companies (FedEx etc.) pick up the product from the manufacturer and deliver it to the customer (end-consumer or retail store), and outsourced ‘help’ desks (often in inexpensive third world countries) deal with the customer from there. And companies are finding it’s cheaper and less risky to buy patents from independent R&D companies (often one-man operations) than developing their own, and use generous new intellectual property laws (that only they can afford to protect) to prevent competitors from introducing even vaguely similar products.

Even manufacturing is often outsourced to plants in third-world countries. Why bother actually owning manufacturing plants when with your purchasing power you have all the benefits of ownership and none of the risks? If the overseas plant uses slave labour, or pollutes the land, “well, we just buy from them, it’s not our responsibility and we have no say in their operations”. And since the employees of these ‘virtual subsidiaries’ aren’t the company’s, they are immune to charges of ‘offshoring’. Even better, if the product reaches the end of its life cycle, you don’t need to deal with layoffs or site disposal — that’s the manufacturing contractor’s problem. You can see the appeal.

What is left of the large corporation though? A small management team and an army of lawyers who contract all of the risky functions of the company to outside organizations. Assets that are all intellectual — patents, trademarks, contracts, etc. Essentially no front-line employees, no liabilities, and no risks. And no direct contact with those pesky customers. The corporation has buffered itself against everything. In the all-important ROI, it has minimized its ‘I’, and guaranteed that, while the ‘R’ might not be as high as it was in the high-flying dot-com days, it’s now virtually risk-free.

You can’t blame the management of large corporations for doing this. The way corporate, employment, tort and intellectual property law has evolved, and as long as the single overriding objective of corporations is maximizing investor profit, they’re almost pushed into it. The wardens are just running the institution the way they’re told to.

But the model in Figure 2 has an achilles heel, and new technology, especially networking technology and the world of ends, gives us a powerful, perhaps even inevitable, means to attack it. In a world of ends, where the network is everything and all the knowledge resides in the network at these ends, there is no longer any need for a middle-man, especially one as costly as the executive in today’s large corporation. The organizations around the outside in Figure 2 merely need to realize this, and start contracting with each other directly. Some smart entrepreneurs are already doing this, connecting these hard-working, risk-taking, mostly small and independent and resilient specialized businesses one-to-one, and providing technology that enables them to deal directly with consumers with no need for the agency of (and the large cut taken by) the large corporation.

The baby, having thrown all the toys out of the crib, suddenly finds he has nothing left to do. What remains is the business ‘world of ends’ in Figure 3, no different from Figure 2 except that it has ‘imploded’, with the removal of the no-longer-necessary large corporation getting in the way of true, open, networked commerce. This is a world of entrepreneurs, perhaps even New Collaborative Enterprises, agile and responsive to customers, specialized but working as a network, no middle-man required.

Lawyers and seven-figure executives need not apply.

On the weekend I met with two very bright thinkers on Innovation and Knowledge Management, Jon Husband of Wirearchy and Mike McInerney of Resonance Consulting and Helix Collaboration Commerce. We spent some time talking about Social Networking Software and Personal Productivity Improvement, and ended up talking about how A World of Ends might apply to business. This article is the result, and I thank Jon and Mike for the inspiration.
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  1. mrG says:

    I follow and endorse this plan all the way with one small exception: You don’t explain the grey dot in the middle of the last diagram, the co-ordinating hub. This was the stumbling block we encountered in our collaboration with Industry Canada to do what you describe for a network of edu-tainment companies. Each subtask was well defined and covered, but we lacked the co-ordination/alert infrastructure (and member skills) to effect a fast response when faced with a call from the logistics or service company.Where it does appear to work, and work very well, is when the grey dot is trust, and each box is mapped to just one company. This means a business web that is a fixed association of independent businesses who use each other as their vendor of preference for that service. If LC gets a call, there is only one R&D to call (in that category of product), and similarly a small set of manufacturing and service options. Our Industry Canada plan tried to go too big, wanting to link companies with overlapping services, dozens of them, and what happened instead was the Logistics was unable to respond in time. The other error we made was in trying to borrow Logistics from each member instead, as you put here, set them up as an independent entity with a core need to be the logistics — I called these people “outsource middle management” although I also distinguished between the project co-ordinators, planners, architects as one group, and the pre-sales, prospectors as another group (they seem very different entities to me).

  2. Doug Alder says:

    Interesting Dabe – as you may know I come recently from a telecom background and I’ve written extensively (though not of late) about this stuff. If you aren’t familiar with David Isen and his paper “The Rise of the Stupid Network” I highly recommend it. It is probably available off his website If you don’t know it, stupid, in tha above title, refers to the need for the intelligence of networks to occur at the network edge. This is what TCP/IP does it obviates the need for intelligent telecom networks like ATM and Frame Relay where all the control (intelligence) of the network resides in the telco’s control.

  3. Stu Savory says:

    Very well written, and so true.You are definitely the thinking mans’ blog. I must come here more often.Stu

  4. Life Tenant says:

    As I note in my responsive blog post (see trackback for URL), Dave’s thoughts are insightful as regards advances in what you could call organizational technology. And he’s right on with his critique of (some) contemporary management’s adversarial relationship with its own customers. But I question his notion that the corporation isolated by outsourcing takes no risks — it is often still the entity that assembles and distributes much or most of the capital employed in the overall enterprise, and ultimately bears significant risk in hopes of reaping significant return on investment. It is a separate question whether management itself has managed to shrug off too much risk due to defects in executive job markets, etc. And there’s always the perennial problem of bankruptcy as a means for escaping losses, but that’s as much a problem with the contractors (assuming they operate in a legal system that has bankruptcy) as for the management/litigation corporation.

  5. Dave Pollard says:

    Gary: The grey box could be ‘trust’; it could also be Social Networking Applications.Subdude: I get your point. It seems to me that as long as there a customers, there will be some risks. But outsourcing does buffer the risks. If the product suddenly stop selling, you stick the outsourced manufacturer with the unsold inventory. It’s a lot like the ‘consignment’ model used in printed matter in retailing, and even more like the Wal-Mart model, where Wal-Mart essentially takes ownership of nothing — they just lease shelf space and all the risk of unsold product is with the manufacturer.

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