Virtual Organization

The Virtual Organization - Management by IT

Outsourcing

Gone are the days of Henry Ford's River Rouge plant, which achieved complete vertical integration. "In came iron ore and rubber, out came automobiles. Ford made his own steel, tires, and parts, then assembled them into cars." No longer is it the case that one company maintains the resources and skill set to do everything needed to output its finished product. "The use of external support is increasing. Companies are moving towards having a network of hardware, software, service and training advisers that they rely on." These relationships rely heavily upon an efficient exchange of information. Each of the steps in the outsourcing doctrines is information levied against contracted services.

1.) "to form a relationship with a few service providers to keep aware of overall market trends"

2.) "to examine which services are provided"

3.) "To allow the IT managers to compare the products available"

4.) "to analyze the match of supplier offerings and business needs"

When deciding whether or not to outsource, it must be decided what the set of core strategic activities are and how to best use the limited resources available. "The benefit of outsourcing is that the technique allows the company to focus resources on strategic activities of the firm and to capture economies of scale in non-core activities." This decision making process is one of simple economy. Cost and benefit of each process remaining in-house are weighed. "The same calculation that determines whether an organization makes or buys inputs. Does the extra value that the organization obtains from performing its own marketing or information processing exceed the extra bureaucratic costs of managing such functions? If the answer is yes, the organization develops its own function. If it is no, the organization outsources the activity." An Information Technologies framework or network of communications between contracted services is essential to the fulfillment of that contract to the satisfaction of both parties. "Outsourcing within networks, such as the one established by Nike, is another example of how outsourcing helps hold down the bureaucratic costs of managing exchanges inside an organization."

Core Competencies

The focus is upon being the most competitive company possible by being the best possible company at every stage of production. "The strength of its core competencies is a product of the specialized resources and coordination abilities that it possesses and other organizations lack." There is a self-perpetuating cycle called "The Value Creation Cycle" which demonstrates how a successful company continues to be a successful company when this excellence is achieved. "Ample resources, a well thought-out strategy and distinctive competencies give an organization a competitive advantage which facilitates the acquisition of still more resources."

The trend, because of high competition and a global market, is that there will continue to be a divergence from the vertical orientation of Ford's original organizational structure. "In the future, they say, manufacturers will focus on one, maybe two or three core competencies, all else will be outsourced." The benefit derived from an increased focus can be seen in the manufacturing example. "Manufacturing processes are easily standardized", "R & D and marketing costs can be very high.", "Speed of innovation and time-to-market are critical."

There are several problems with this trend that can be combated through the proper implementation of Information Services. Sharing of information between supplier and buyer can dispel "Fear of losing intellectual capital, expertise." A shared technological standard and information standard will alleviate "Difficulty understanding and documenting capabilities of contract manufacturers" as well as "Trouble with technology and/or knowledge transfer". The speed of communications and availability of up to the minute progress reports can allow for "Necessity of managing risk exposure" and reduce the impact of "Unforeseeable problems (such as parts shortages)"

In short, those things that IT does best, allowing speedy, accurate and pertinent transfer of information is what makes the virtual organization work. "The key to successful vertical integration is to enable all companies involved, each of which is performing only certain processes, to work together as smoothly as they would if they were all one enterprise." This allows for the entire production process to operate as efficiently