Management consulting

They usually try to keep these people together in a separate division, with the leader of the purchased company in charge. Acquirers need to send a message that there will be consistency and openness in the new environment, and resist the temptation to prescribe in detail how the new people must run their operations.

22.10 Networking arrangements

Networks are spreading globally as an effective tool and structure for fundamental transformation of organizations. Companies can significantly improve productivity by focusing on the things they do best. Networks usually focus on a combination of cost reduction and customer service orientation, as the foundation for improved competitiveness. At the centre of the network should be a flagship firm, which can contribute unique capabilities. These might include competence in managing the network as a whole, developing core technologies, improving distribution and supply chains, and many others.

Networks help companies adopt agile business practices, tune in to the changing and diverse needs of their customers, and rapidly transform their supply and distribution systems as well as their own production systems. By cooperating with other firms, even competitors, companies can improve their productivity and competitiveness through better access to innovations and new technology, venture capital and new markets at lower costs, while sharing risks and liabilities with network partners. They can have more efficient specialization around their core activities while learning about new management practices.

What has made networking so popular is the fact that today’s corporate partners are more and more interested in long-term strategic alliances where gains are made over many years. The formation of strategic networks means that power often resides in a group of companies acting together as partners. Information technology increases the opportunity to use cooperative strategies to reduce costs, enter new markets, and improve competitiveness. The most common types of cooperation range from exchange of information and experience to more complex and formal relationships such as consortia. In between there are supply/value-chain partnerships, licensing, strategic alliances and others.

An excellent illustration of developments in networking is the rapid spread of contract manufacturing among electronics firms. Contract manufacturers such as Flextronic, Solectron, Celestica, Jabil and hundreds of other small firms have taken about 11 per cent of the market for electronics hardware. The amount of contract manufacturing is growing by more than 20 per cent a year, which is more than twice as fast as the electronics industry as a whole. Another form of networking, dealing with knowledge management between firms, is network intelligence, which can enable executives and entrepreneurs to grasp many phenomena shaping the future of technology companies. As network

514

Consulting in company transformation

technologies have advanced, both the location and the mobility of network intelligence have changed dramatically.

Another form of networking is a network incubator, which provides mechanisms to foster partnerships among start-up teams and other successful Internet-oriented firms, thus facilitating the flow of knowledge and talent across companies and forging marketing and technology relationships between them. With the help of such an incubator, start-up companies can network to obtain resources and partner with each other quickly, allowing them to establish themselves in the marketplace ahead of competitors. These incubators provide fledging companies with preferential access to potential partners and advisers. Network incubators combine the best of two worlds – the scale and scope of large corporations and the entrepreneurial spirit of small venture-capital firms

– as well as providing unique networking benefits.

Virtual teamwork also represents an excellent form of networking. Communication technology now enables the balance of work to shift from stable functions tied to physical locations to electronically connected teams irrespective of location. This increases the ability of companies to gain access to specialized knowledge. Such a virtual model can bring savings as well: saving from reduced travel time, reduced office space, and avoidance of duplication of personnel can reach upward of 50 per cent of project costs. The model is also able to exploit different time zones and reduce product development time through the creation of a 24-hour workday spread across different locations.

22.11 Transforming organizational structures

As companies around the world continue to transform their strategies and structures to become more agile, the sources of competitive advantage are increasingly shifting away from traditional economic drivers such as large size, economies of scale, and proprietary technologies. Increasingly, companies are using continuous change, virtual and self-managed teams, networks and cellular organizations to revamp their strategies and ways of doing business. The fundamental objective of these shifts is to create a new type of organizational design that facilitates the rapid creation and sharing of new sources of knowledge throughout the firm.

One of the most important tasks for management consultants in advising on organization restructuring is to balance and align innovation, initiative, competence-building, flexibility and standardization. Growing decentralization and autonomy of administrative and business units have made organizational alignment or integration a critical management tool, which stimulates company learning and innovation. Harmonizing strategy and organization design is an ongoing challenge for senior managers and management consultants in all firms, but larger companies face additional challenges, in integrating numerous internal divisions.

515

Management consulting

The organizations of the past, most of which are still in existence, were not designed to cope with constant change. They were designed for permanent employment, high fixed costs, regular work, and narrow skills and task boundaries, and offered security in exchange for loyalty and commitment. New organizations need to be designed for flexible resources, changing demands, quick reaction to market behaviour, low fixed costs, focus on core competencies and capabilities, and emphasis on talent.

The most dramatic change for those used to conventional corporate structures is the fluidity of new-style organizations. The walls around and inside corporations are collapsing and the large enterprise is already breaking down. Physical assets are no longer so advantageous: it is information and intellectual assets that matter.

Grassroots innovation in companies requires appropriate structures to provide a smooth flow, exchange and implementation. As the computing and financial service industries have shown, vertical integration breaks down when innovation speeds up. The big telecommunications firms that will win back investor confidence soonest will be those with the courage to rip apart their monopolistic structures along functional layers, to swap size for speed, and to embrace rather than fear disruptive technologies. Dell is deliberately and decisively anti-hierarchical. It has no fancy corporate offices. In fact there are only four offices, for the chairman and vice-chairmen (two of them share one office); everybody else has a cubicle.

A very important new rule is emerging: do not try to predict change precisely, but make the company structure flexible enough to respond to it. Consolidating or decreasing the number of divisions improves resource-sharing and creates sufficient critical mass to learn or build a new core competence. Divisions that benefit from such consolidation can be combined into a single larger unit. At the same time, many companies have reduced the size of their divisions to adjust to changing conditions without compromising their ability to learn and share knowledge throughout the system. By having smaller divisions or local networks, these firms can innovate faster.

In a network – a project or an alliance, for example – managers have to be everywhere. The network web is so fluid that managers cannot afford to remain in the centre: they have to move around to facilitate collaboration and energize the whole network. They need to encourage people who already know how to do their work. In a web everyone can be a manager: whoever draws things together becomes a de facto manager. For companies to thrive in today’s economy, management has to be put in its place – not at the top of the chart but within it, at the centre of a hub, or throughout a web.

It should be remembered that organizational design is just a framework to create favourable conditions for implementing company vision and strategy to meet customer needs and become competitive. What matters is whether the organization structure is sufficiently flexible and permeable to allow business processes, knowledge and experience to flow throughout the organization, regardless of where they originate.

516

Consulting in company transformation

22.12 Ownership restructuring

Recently many companies have enhanced shareholder value by restructuring their capital, ownership and assets.

Spin-offs occur when the entire ownership of a subsidiary is divested and shares in the newly formed company are distributed as dividends to shareholders.

Equity carve-outs are the sale by a public company of a portion of common stock of one of its subsidiaries through an initial public offering (IPO). Each carve-out subsidiary has its own board of directors, operating CEO, and financial statements, and its shares are quoted on one of the stock exchanges. The parent company, which usually retains a majority of the shares, continues to provide strategic direction and selected central resources. Equity carve-outs have assumed a prominent place in US equity activity, with an average of almost 50 carve-outs a year. Some analysts believe that carve-outs are the best way to unlock unrecognized values in public companies.

Leveraged buy-outs are the technique of buying the shares of a company and issuing bonds, sometimes referred to as junk bonds, to finance the purchase. This makes it easier for conglomerates to shed non-core assets.

Management buy-outs are another form of ownership restructuring in which some managers within the company buy all the outstanding shares because they believe they can considerably improve performance and enhance the value of the company. In employee buy-outs, the employees become the owners of the business. Another variation is a management buy-in, in which an external management team buys all the shares, dismisses the existing management team and creates a new private company. In some cases these opportunities arise when a business, whether independent or part of a larger group, is losing money and cannot be sold to another company.

Employee ownership has been offered in an increasing number of companies in the form of stock options, share purchase plans and profit-sharing to improve the motivation and commitment of employees.

22.13 Privatization

Privatization refers to instances of ownership restructuring, leading to total business and financial restructuring, where assets are transferred from government (central or local) to private owners. Although the main privatization moves were completed in the developed free market economies in the 1980s and in the former centrally planned economies in the 1990s, in many countries privatization still represents an opportunity and challenge to consultants. In preparing for privatization of state-owned and state-controlled organizations, and implementing the privatization process, most governmental institutions have to rely to a considerable extent on external expertise. This may concern

517

Management consulting

issues such as pre-privatization sector studies, privatization policies and procedures, enterprise restructuring, valuation, diagnostic and feasibility studies, management and staff training, searching for buyers, the creation of an effective market-economy infrastructure, corporate governance, legal issues, and so on.

Management consultants engaging in privatization projects should have a solid background in the sector and a track record showing that they are able to solve practical diagnostic, structural and strategic problems of companies. Management consulting firms with a good background in sector studies, business diagnosis, corporate strategy and restructuring are well placed to take the lead in advising clients on important privatization projects. They can help clients to identify and involve specialized advisers able to handle legal, financial, environmental and other aspects of particular projects.

In a typical assignment, the consultant may be called in to undertake the following tasks:

Technical and strategic assessment. These data would cover products and services; licences and technical know-how (marketability, competitive situation); technical layout and condition of business premises and facilities; productivity, management and human resources.

Evaluation of the strategic and financial situation. This will cover issues such as strengths and weaknesses of the company (markets, customer base, competitiveness, market share); threats and opportunities for the future privatized enterprise and the company’s ability to cope with external influences; actions to secure the company’s position in the local and/or international market; and financial performance (cash flow, profitability, financial structure, working capital, liquidity, quality of receivables and other assets, the company’s ability to finance itself). Owing to their generally extensive vertical and horizontal integration, many public-sector companies have to be split up or restructured to become manageable and attractive to investors. The consultant should analyse the company and as a first step suggest a horizontal separation, which might include the sale of non-essentials via various asset deals to different investors. As a second step the company may be separated into core business units, after which individual parts of the value-adding chain can be privatized separately in different asset deals. For any consultant, the most important focus of the strategic and technical assessment must be the viability, competitive advantage and development prospects of the company after privatization.

Valuation. Valuation plays a basic and vital role in the privatization process. A consultant may encounter a broad range of problems in conducting a valuation. Assumptions about future domestic and international trends (i.e. interest rates, exchange rates and inflation) in a rapidly changing market, as well as the legal and financial environment, must be dealt with. To ensure that investors become and remain interested, the valuation of the company has to be fair and reasonable and the consultant may be asked both to advise upon the method to be used and to assist in its application.

518