Economics in the On Demand World

Executive brief

by: George Kadifa

27Mar2006
Industry: Cross-industry

In the last few years, we have seen it all: terrorism, natural disasters, stock market
meltdowns, bankruptcies, scandals, and corporate lay-offs. And, in the background,
worries running high that costly oil could disrupt the global economy. Today’s CEOs
are navigating in rough water and must turn new external realities into opportunities
for their organization.

Information Technology (IT), the growth engine and productivity producer of the
1990s, is at the center of the change we face. A set of enabling and constraining
drivers will guide CEOs and CIOs as they focus IT investments on building
competitive differentiation, rather than maintaining existing systems. A new
organizational construct, the On Demand Business, is emerging to help us address
this change. Characteristics of the On Demand Business include abilities to:

• Flexibly respond and deliver to spot demand levels with no long-term

commitments,
• Dynamically grow or shrink based on the variability of demand for products
and services,
• Operate anytime, anywhere, under any condition,
• Dynamically minimize asset and labor content per unit of production,
• Provide real-time transparency of operations both for external and internal
visibility.

Economics in the On Demand World

This paper, despite the global uncertainties, comes at a time of growing optimism.
The United States continues to lead other developed countries in economic growth,
technological innovation, productivity, research and development, and the ability to
cultivate human talent. Despite serious problems such as swelling trade and fiscal
deficits, illegal immigration, inadequate health care, major income disparities and a
deeply divided electorate, the U.S. economy is healthy. Last year, the U.S. GNP
grew an estimated 4.4 percent, and this year the growth rate is expected to be 3.5
percent. Indicators seem to point towards economic stability and recovery. It is
essential to understand what has happened over the last few years, what we have
learned, what the new drivers of economic prosperity will be, and how best to
structure an enterprise for maximum performance.

What happened?
The past few years, we have seen it all: huge stock market fluctuations, costly oil,
bankruptcies, scandals, prosecutions, layoffs, terrorism in our homeland and abroad,
wars, natural disasters and nuclear rogue states. Such events were totally
unexpected. “Even before the hurricane hit, rising energy prices were having a
dampening effect on the economy” said Nariman Behravesh, chief economist of
Global Insight . Going back to the 1999-2001 period, we believed that the New
Economy would always produce growth and prosperity.

So what happened? To understand the extent of these changes, one has to take a
broader perspective.

The early 90's: Stability and growth

In the early 1990s, we entered an era with tremendous expectations for global
growth. Market economies won. And freedom won. The Soviet Union
and communism collapsed, and the threat of global nuclear holocaust disappeared
overnight. Instead, people were celebrating on the fractured Berlin Wall and dancing
to the music of Pink Floyd. Yes, there were some crises to face: Saddam’s adventure
in Kuwait Noriega’s revolt in Panama, Ceausescu’s misrule in Romania and
Milosovich’s massacres in Yugoslavia. But these crises were handled in a fast and
effective manner. A ‘New World Order’ was created. The United States ensured
world peace as the only super power.

Economically, Germany and Japan were in full expansion and ignited the world's
economy with growth prospects. The U.S. was coming back from a short recession
to lead the world in an unprecedented 10-year expansion. Other nations abandoned
“command and control” economic policies and adopted market-based economies as
the sole solution for growth and prosperity. Wealth creation was driven by IT.
Massive investments were made in this area, especially after Alan Greenspan
announced the unequivocal relationship between higher IT spending and higher
corporate productivity growth.

New technologies proliferated, changing the IT landscape permanently. Just a few

include: client-server computing, COTS, ERP, CRM, SCM, PLM, HTTP, HTML, XML,
Java, LAN, Ethernet, the Internet, and SOAP. Moore's Law kept producing more
computing power at less cost, and the multiplicative wealth of Metcalff's Law drove
the bandwidth investments in copper and fiber. The Y2K phenomenon caused even
more investments, and “ebusiness or out of business” became an axiom. A “techie”
from Seattle became the richest man on the planet and another “techie” from Illinois
emerged to challenge him by leveraging a new technology called the Internet. And
corporations were spending close to 50 percent of their capital investments solely on
information technology. The new economy emerged, but the new economy did not
last.

2001 to the present: Uncertainty brings challenges

As we experienced starting in 2001, massive changes happened politically,

economically, and technologically.

On the political front, global peace and stability have been shattered. After 9/11
we face the threat of terrorism from an unconventional foe hiding in caves and
entrenched in major cities in Western and Third-World countries. Such a foe is not
easily identifiable, has extremism and fanaticism as allies, and executes with
asymmetric threat methods. Although the war in Iraq was swiftly won, we are still
facing continued challenges in Iraq, and such challenges will continue for the
foreseeable future. North Korea’s nuclear weapons program is progressing in a
region of the world where several powers intersect in influence and
presence. America has embarked on a global war on terror, but several of our allies
are not supporting us and openly disagree with our strategy. Instead of the threat of
a global nuclear holocaust, we are faced with a constant, continuous, and invisible
threat to our daily lives. In 2005, we proceed at alert code Orange.

Second, our belief in market economies has been shaken. A $7 trillion meltdown in
the capital markets was followed by major scandals, significantly affecting the
integrity of our markets. The demise of Arthur Andersen, Enron, Tyco, and
WorldCom as well as the issues raised at Putnam, NYSE, and Parmalat have shaken
our confidence. While the Sarbanes-Oxley Act of 2002 is a necessary step to restore
our faith in corporate governance, much more still needs to be done.

Third, global growth has disappeared. Japan has been in deflation mode for several
years, and Germany's engine has stalled. The U.S. economy is growing again, but its
engine of growth remains the U.S. consumer. And this engine is threatened by huge
and growing deficits and an anemic growth in U.S. employment. Our fiscal budget
and trade deficits are at record highs and will have major long-term impacts. In the
short term, the U.S. dollar is at its lowest level compared to the Euro. Over the last
four years, we have lost more than three million jobs. So far, we have been slow to
rebound from these losses. Worse, there is concern that the current off-shoring trend
will cause many more job losses and create an even greater need for worker re-
training. This time, we are exporting white collar, high tech jobs, and we do not have
an attractive sector with significant labor needs to absorb these losses.

We are all looking for the next Japan and the next Germany, and the focus now is on
China and India. China has shown tremendous potential and growth performance.
Forbes this month indicates that China exports are expected to grow 26 percent and
imports to add 14 percent on a yearly basis. In the first half of 2005, China exports
grew 32.7 percent. Third quarter 2005, China’s GDP growth is estimated to reach
9.3 percent, a lower rate than the first half of the year. One of the main problems
being excessive production capacity. In 2004, it has surpassed France and Japan to
become the world’s third largest export trading nation after the U.S, and Germany.
But the realized growth numbers are not very large in absolute terms, especially
relative to the larger economies of the G7 countries. In 2004, the GDP of China was
$7.2 trillion, second only to the U.S. Although in per capita terms, the country is still
poor. Similarly, India’s GDP is about $650 billion, which is less than 70% of the GDP
of Spain. Although China and India are growing at faster rates than the G7 countries,
their immediate impact on the world economy can only be realized in the long term.
In the short term, their internal markets will have limited capability to rejuvenate the
world economy.

Fourth, technology is suffering from the Concorde syndrome. The massive

investments in IT enabled organizations and corporations to fly at the equivalent of
Mach 2. However, getting to such a level of performance also requires massive
organizational changes, new and re-engineered business processes, new market
creation, major shifts in existing markets, and employees receptive to changing their
skills, job functions, incentives, and responsibilities. All of that did not happen for
obvious reasons. Hence, the technology sector has seen massive rationalization and
downsizing. Large built-up capacity remains unused as witnessed by the glut in
telecommunications, applications software, and data center infrastructure. The
withdrawals of Sprint and Cable & Wireless from the web hosting business are just
the latest examples of the rationalization that is still being undertaken in IT. Worse,
the excesses of the 1990s have resulted in broad skepticism about the business
value of IT, as illustrated by an article in the Harvard Business Review1. Such a
backlash against IT is unhealthy.

Corporations will manage IT as another line of business. They will not invest in IT for
technology’s sake anymore. With 80% of IT budgets still being consumed by ongoing
maintenance of current systems, there will be serious focus on unlocking such
resources and re-deploying them for building new systems that drive business.
Corporations will have to carefully balance resources and priorities. If they err too
much on just managing IT as a cost center, they will miss adopting and deploying
several enabling technologies critical for their business success. However, they will
need to be careful about how best to invest and where to get the resources to
generate clear and unequivocal business returns. One constant will be the direction
of IT budgets: they will continue to shrink as a percentage of company revenues.

What are the new drivers?

Over the last four years, the events that happened have produced a totally new
business environment with daunting challenges as well as new and untapped
opportunities. In planning the corporation’s priorities, direction, and structure, CEOs
are faced with a set of Constraining Drivers, predominantly external in nature, that
are counterbalanced by a set of Enabling Drivers, that provide new opportunities for
increased performance. The conflicting pressures applied by these two sets of drivers
will transform the structure of the corporation, as we know it today, towards an On
Demand Business. The On Demand Business will also revolutionize supply chains
within and across industries and transform economies.

As covered above, the Constraining Drivers for today’s enterprise result from the
current security and economic volatility, the new requirements for more
transparency as outlined by Sarbanes-Oxley, and an economic climate where low
growth, low inflation, and low employment levels will prevail throughout this decade.

The constraining drivers

Unpredictable threats

The main reason volatility will remain prevalent is that we are facing asymmetrical
threats that we cannot conclusively resolve. This is not the Cold War when we knew
who the enemy was and what to do about it through clear doctrines. Today, our foes
are individuals, bands, movements, or rogue states. They are unpredictable and
difficult to track. They have access to means of destruction that can cause major
damages to our societies and economies. In August, TechNewsWorld reports that
there is a wealth of information out there for “hackers”. “The arrest recently of
alleged Zotob writer Farid Essebar, 18, has shed some light on the thriving
underground culture.” “Experts believe that Essebar may have created as many as
20 variants of the bot worm that infected Windows systems. He, and others, learn
their tricks the same way everyone else does: through a network of informational
Web sites, magazines, conventions and advice from peers.” Increasing fears of
hacker attacks have caused security appliance and software sales to rise to $1 billion
for the first half of this year, according to Data News. The new threats we are facing
are unpredictable, and they can cause high levels of damage with low levels of skills
and resources. We are still learning how to counter such threats effectively and
conclusively.

Increased regulatory controls

The requirement for corporate transparency is a direct response to the recent

corporate and investment scandals. Investors need to have their confidence
restored. Hence, corporations have to provide the public with more operational and
financial information in a real-time manner. And they have to implement enhanced
governance structures to improve management and board supervision. Sabanes-
Oxley (SOX) is helping to bring confidence back to investors. However, the
objectives and implications of SOX are still misunderstood. In a survey of senior
executives of publicly traded companies conducted by BSI Global Research, 42% of
respondents considered SOX a well-meaning attempt that will impose unnecessary
cost.

We need to recognize that the implementation of the SOX controls opens a

tremendous opportunity to improve corporate performance, both in visibility and
agility. Instead of considering SOX as a cost of doing business and conforming to
regulations, the requirements and resulting tools can be used to greatly improve
corporate operations and visibility across functions, geographies, customers,
partners, and suppliers. SOX will have major implications on corporations -- much
larger than anyone is predicting today. It will force companies to make more
information visible to more people, integrate cross-functional reporting into a
coherent framework, and improve the management of corporate assets. It will
provide fast response not just to regulation reporting, but also to any kind of
corporate change, such as new product introductions, on-going operational
improvements, new customer and supplier management, as well as M&A integration.

Low growth and low inflation

The low growth and low inflation projections will compel organizations to improve the
bottom line, since the opportunity to raise the top line will be limited. The massive
business process re-engineering (BPR) projects undertaken in the 1990s produced
positive results that streamlined supply chains, increased corporate productivity,
flattened organizational hierarchies, and improved customer service. In a low-
revenue growth period, corporations will look at new ways to increase performance,
primarily focused internally instead of externally. Off-shoring and outsourcing are
two mechanisms that have replaced BPR. They have a larger impact with a high
risk/reward structure. Although off-shoring and outsourcing have had some success,
they have generated a significant backlash in terms of job loss and job exports.
Instead, we are seeing a much larger opportunity for the corporation, which will
produce a 10-fold performance improvement through its transformation to On
Demand Business.

The enabling drivers

There are several new and promising Enabling Drivers that can be leveraged to great
advantage and that enable the On Demand Business. They include:

• Globalization of knowledge work

 • Emergence of network-based service providers
• Leveraging current IT systems
• Portable, self-service computing
• Use of the Internet as the global technology infrastructure

Such drivers are new, significant, and relatively easy to implement. They deliver
enough payback to produce an inflection point in performance through the On
Demand Business.

Globalization of knowledge

The globalization of knowledge work is well underway. Remote call centers, business
process outsourcing, and offshoring are manifestations of a trend to place knowledge
work at the most optimal point on the planet. Driving this are a relatively cheap
global communications infrastructure, the spread of English as the de facto business
language worldwide, the availability of skilled and low-wage talent in a variety of
countries, and the maturity of the majority of the core business processes inside an
organization. The globalization of white-collar work is progressing much like the
globalization of blue-collar work 25 years ago. However, such movement has wider
implications since it touches about two-thirds of the U.S. workforce, and there is no
“new thing” that people can directly point to that can absorb the short-term job
losses resulting from such a shift.

Such challenges will weigh heavily on the speed of progress of this movement,
however, the benefits being generated by such globalization are substantial. The
New York Times quoting a study just published by the McKinsey Global Institute,
indicates both Germany and France have suffered, compared with the U.S., by trying
to put up walls against outsourcing and offshoring. “A new competitive dynamic is
emerging: early movers in offshoring improve their cost position and boost their
market share, creating new jobs in the process.”

Network-based service providers

The emergence of network-based service providers is a second enabling driver that

can create economies of skill, scope, and scale. Also known as XSPs, these providers
deliver services that perform specific organizational functions, business processes,
software functionalities, or hardware assets in a utility-like consumption model.
Corporations buy what they want, when they want it, for how long they need it, and
have a predictable cost in using such services. This is not outsourcing. This is
leveraging someone else’s capabilities for your own advantage, while maintaining
control and visibility. So, if you want a new HR organization, you engage Exult. If
you want a new payroll process, you subscribe to ADP. And if you just want the IT
infrastructure fully operational for your HR function, you can hire IBM or AT&T.

Corporations obtain economies of skill by being able to access the best expertise in
specific areas, be it R&D talent, software development resources, deep process
expertise or just low-cost labor capacity. They should be able to access the best
talent that exists anywhere, and such skills can be obtained indirectly through
service providers. Economies of skill will significantly increase the revenue per
employee. Use of Internet technology is a primary reason why the Cisco workforce is
the most productive in the networking industry as measured by revenue per
employee. Among the technologies that have helped Cisco boost productivity and cut
costs are wireless LANs, IP virtual private networks (VPNs), multimedia e-learning,
IP telephony, e-sales, e-support, and workforce optimization applications. This metric
should reach $1 million in revenues per employee, and several corporations, such as
Cisco Systems, are already close to this number.

Economies of scope are generated through a total focus on core competence. In the
extreme case, corporations can be built by totally leveraging other providers, from
selling to manufacturing to administration. If you have a new product idea, build the
core competence around the product or idea and utilize providers for distribution
channels, marketing communications, manufacturing, logistics, and all administrative
functions. Economies of scope will de-leverage the enterprise and significantly
increase the equity-to-debt ratio, the return-on-assets ratio, and the market-value-
to-book-value ratio. More important, the enterprise will gain major operational
agility, since it will eliminate much of its fixed cost structure and be able to tune its
structure to expand or shrink based on market demand. This is the opposite of an
LBO strategy, where debt is expanded on balance sheets to better control cash cow
companies. Economies of scope enhance any corporation regardless of its life cycle
and success prospects and without the need for financial engineering.

Economies of scale are obtained by leveraging the larger scale of service providers.
An enterprise of any size, even a Fortune 100 company, will always find another
enterprise that will have higher operational scale in certain areas or functions and
will gain from utilizing such scale. As an example, Flextronics has manufacturing
scale larger than any electronics manufacturer, although Flextronics has just $15.9
billion in annual revenues and is not a Fortune 100 company – not yet.

Leveraging existing IT systems

A third enabling driver is existing IT systems. During the 1990s, more than $3 trillion
was invested in IT, excluding the dotcoms. An inconclusive debate has been raging
about the business returns realized from such investments. Regardless of such
debate, enterprises today have a sophisticated IT infrastructure to leverage and fully
utilize. Practically every enterprise has now moved its IT infrastructure from a
closed, mainframe, or client-server architecture to web-based systems where
customers, employees, and suppliers can access their software applications
seamlessly. Consolidation, rationalization, and upgrades have occurred throughout
the last three years, making such IT infrastructure modern and available for
supporting more automation of functions and processes. Instead of maintaining a
strict focus on cost reduction for IT, the leading companies have started to look at
their portfolio of systems to unlock value by lowering the ongoing maintenance
expenses of current systems and utilizing the freed resources to deploy new systems
that can show tangible and short-term benefits. The business user community is
requesting new applications in analytics, partner connectivity, further automation of
core functions, and revenue-supporting systems. IT is starting to free fixed resources
from ongoing maintenance tasks to maximize user benefits. This is resulting in a
major increase in throughput for the IT organization along with higher staff
utilization and lower asset requirements

The rise of portable, self-service computing

The fourth enabling driver is portable, self-service computing. The convergence of

the technologies of portable computing and web services is allowing a new dimension
of deploying and utilizing business functionality, without the need for human
interaction. Portable devices such as PDAs and laptops have increased their
computing, bandwidth, and connectivity capabilities as well as expanded their
functionalities, hence allowing e-mail and Internet access anywhere. In addition, web
services are providing a new set of business functionalities available in a self-service
mode at any time. This convergence is offering new opportunities.

In the same way as consumer banking has been revolutionized by the ATM machines
and on-line banking, all aspects of interacting with an enterprise will be driven
through self-service and will be available any time, anywhere, and under any
condition. Laptops and PDAs are the perfect portable platforms to accomplish more
functions than the ATM or home computing models. And Web services are moving
beyond integration platforms to fully automated business functions. This leads to a
new gamut of capabilities available to people. Employees can execute the majority of
their HR functions in a fully automated manner. Sales people can manage leads,
contacts, forecasts, and orders without staff support. Prospects can peruse company
web sites, check availability and pricing of products and services, place orders, get
delivery commitments, and obtain the ordered goods without talking to a single
human being. Customers can enter requests automatically, track progress, get status
updates, and obtain response statistics without placing one phone call to a call
center. Suppliers can have full visibility of customer operational requirements, input
pricing, and bid information online. Suppliers also get immediate notifications of
awards or orders without engaging the procurement department. These activities will
be available 7x24, accessed from any location, and at your service under any
circumstance, even extreme security conditions.

The On Demand Enterprise: Attributes and Performance Achievement

Based on these enabling and constraining drivers, the corporation as we know it will
be transformed in the coming years into a much more productive institution. A new
organizational construct is beginning to take shape. It is unclear if massive
restructuring and consolidations will happen, or if such changes can be managed in a
gradual and low-impact manner. But, when the smoke clears, a new form of
enterprise will dominate, the On Demand Business.

An On Demand Business will, through the integration of business processes:

• flexibly respond and deliver to spot demand levels with no long-term

commitments,
• dynamically grow or shrink based on the variability of demand for products
and services,
• operate anytime, anywhere, under any condition and be resilient to any
disturbance,
• dramatically minimize asset and labor content per unit of production,
• provide real-time transparency of operations both for external and internal
visibility.

First, an On Demand Business needs to fulfill demand with orders that are small in
size and short in time duration, that is, small lot sizes. Today, companies resist
making large commitments spanning multiple years. Instead, they commit for the
minimum required to run their operations. But they also want suppliers who can offer
them the same advantageous terms as they would for large, multi-year
commitments. They see the environment as very dynamic and very uncertain. For
them, it is far more prudent to operate within these small commitment levels. Also,
in a low inflation climate, there is an expectation that prices will not increase. Hence,
locking current pricing over larger periods of time has limited value. If corporations
start changing their product/service offerings to adapt to such new demands, then
any demand inertia will be broken and new activities will pick up. This can eliminate
some of the stagnation that still exists in the marketplace.

Second, an On Demand Business should be able to adapt to 30% up or down swings

in demand with no required structural changes. Its fixed-cost structure should be
resized to the minimum required to fulfill the above dynamics. An extreme focus on
core competence is required. Anything else should be built using other service
providers. The On Demand Business will be a very specialized entity, excelling in its
competencies only and using the excellence of other organizations to run non-core
parts of its business. Partners need to achieve On Demand Business, responding in a
dynamic fashion, enabling them to deliver to low demand levels with short time
commitments.

Third, an On Demand Business must always be stable and available to its customers
and suppliers, any time, any day, and under any conditions. At the same time,
it should show permanence, resilience and stability in an uncertain world. Its
customers, suppliers, and partners should be able to transact with it when they want
to and on their own terms - assuming a stable environment. This will be
accomplished by automating many of its processes and offering an "ATM-like" model
to its partners.

Fourth, an On Demand Business should do much more with much less. The business
should target every employee to produce more than $1 million in annual revenues.
Gross margins should surpass 70%. Asset depreciation expenses should be
minimized year after year to eventually reach negligible levels in the cost structure.

Fifth, an On Demand Busines should have operational and financial metrics available
in real-time to track organizational performance. These metrics should be able to drill
down to the unit level of work or asset, that is, at the employee level, the customer
level, the deal level, the asset level, and the supplier level.

We have no choice
There will be plenty of debate regarding the adoption of the On Demand Enterprise.
Much of it will focus on the need and timing for such a change. However, in the near
future, imagine yourself competing with an On Demand Business. You can
anticipate a rival that is operationally and financially much stronger and one who can
offer a superior value proposition to your customer base. You have no choice but to
plan your change -- immediately.

As we have seen in recent years, the demand shocks the Telcos and the airlines have
experienced have shown the fragility of their corporate structures. Whether it was
through unnecessarily high investments or after 9/11, Telcos and airlines are perfect
examples of enterprises that need massive restructuring to survive the current world
order (or lack of it). These are organizations with a heavy asset base and high fixed
costs. To react to a demand shock will require them to reduce out their fixed-cost
and asset base and to move towards a variable low-asset cost model. This is very
difficult, so going into bankruptcy has been their only path to survival. For example,
imagine how the airline and telco industries would have responded to the shocks that
they experienced if they were On Demand Enterprises. They would have had the
potential to absorb such challenges and thrive by beating their fossilized competitors.

Methodology
How do we achieve the capabilities for an On Demand Business? The methods,
approaches, processes, and systems to make this work are not commonly available
today. IBM has successfully developed various solutions, techniques and strategies to
help clients develop capabilities for On Demand Business.

This methodology is based on a framework of ongoing improvements and needs to

be applied at least once every fiscal year. It is composed of the following five
components: scope, production, projects, analytics, and incentives. These five
components are used to transform a current organization into an On Demand
Enterprise. Scope consists of a continuous process of identifying areas of work as
candidates for generating the highest levels of business contributions with the lowest
levels of risk. Projects cover the gamut from large complicated programs such as
new product introductions, new systems implementations, and new business
expansions, to short-term activities such as additional reporting development, new
incentives package introduction, and the addition of new suppliers. Ongoing
production covers all repetitive and process-based work.

This is not just confined to manufacturing or operational processes but also to

administrative processes in areas such as finance, HR, IT, and procurement.
Analytics is the work involved in analyzing, interpreting, and supporting decisions for
the continuous improvement of the performance of the enterprise. And incentives
focus on best motivating management and the workforce to execute the change to
an On Demand Enterprise.

The methodology concentrates on understanding the output levels of an enterprise,

on identifying the resources (assets and labor) required to deliver such outputs, and
on utilizing techniques of automation, self-service, knowledge re-use, asset
optimization and workforce global deployment to reach the five organizational
attributes of the On Demand Enterprise. It also captures a set of metrics that should
demonstrate the 10-fold improvement in corporate performance.

Transformation
If we fast-forward to the end of this decade, and corporations achieve On Demand
Business, the landscape of the economy will change dramatically, especially along
the management of supply chains. What we will see is the 90-degree rotation of
supply chains from a vertical to a horizontal structure.

From vertical to horizontal

The supply chains as we know them today are usually centered around vertical
industries and consists of several groups of companies organized around “tiers” and
building products from raw materials all the way to final assembly to the consumers.
A classic supply chain is what we see in the automotive industry where OEMs are on
one end of the supply chain designing, assembling, and delivering automotive
products to the end consumers through dealer networks. Typical OEMs are General
Motors, Ford, DaimlerChrysler, and Toyota. Behind the OEMs are three tiers of
providers. Tier 1 providers deliver assembled systems to the OEMs, such as engines,
interiors, electronics, and axles. Tier 2 providers are typically suppliers to the Tier 1s
and provide components. Finally, Tier 3 providers start with raw materials to deliver
sub-components to the Tier 2s.

Similar supply chain models are found in product industries such as semiconductors,
oil & gas, aerospace, chemicals, and electronics, as well as in services industries
such as telecommunications, health care, and transportation.

A corporation participates in one of these supply chains by delivering value through

its own value chain. This is the set of activities and deliverables that produce its final
product or service. It consists of processes such as sales and marketing,
manufacturing, logistics, product development, and administration (such as finance,
HR, or procurement). When a corporation transforms into an On Demand Business,
every process in its value chain is a candidate for being serviced by an external
service provider. As we have seen before, such service can be at an organizational
layer, a process layer, a system layer, or an infrastructure layer. The service
providers can service every tier in a vertical industry supply chain, as well as other
industry supply chains. These service providers are ‘horizontal” in nature but can be
built as On Demand Businesses, have their own supply chains, and offer economies
of skills, scope, and scale. The On Demand Business will manage these horizontal
supply chain providers in a way similar to how they now manage their vertical supply
chain partners.

Creating new opportunities

The next opportunity for employees in traditional enterprises is to ride this 90-degree
rotational movement from vertical to horizontal service provider supply chains. The
careers of a lot of employees who are in “context” functions will become “core”
within a service provider organization. For example, the role of the Chief Information
Officer (CIO) in a corporation has always been under pressure. Although we live in
an Information Age, it is very difficult to find a CIO who rose to become the CEO of
his/her company. A CIO’s career seems to be limited, unless the core business of
his/her corporation is providing IT products or services. This 90-degree rotation
presents a perfect opportunity for the CIO to move to a service provider and to lead
such an enterprise as its most senior executive. The same career opportunities exist
not just at the CIO level, but also for all members of the IT organization in any
enterprise. Similar opportunities are available for other functions in a corporation’s
value chain, such as manufacturing, HR, or procurement. The next “new thing” for
the employees under outsourcing or offshore pressure is building an On
Demand Business and to grow into the new businesses that will thrive in this new
economy.

Eternal optimism
Despite the current economic optimism characterized by the Dow exceeding 10,000
and Nasdaq topping 2,000, the political and economic events we have recently
experienced have challenged fundamental assumptions of our political, economic,
and social structures. These events will permanently affect the ongoing tasks of
designing, improving, and managing enterprises. A new set of challenges has
resulted, but new enabling opportunities can be leveraged with the potential to
produce a 10-fold improvement in performance. The On Demand Business is the new
structure to adopt to achieve such gains. It will have a profound impact on
competitors with their own tiers in vertical industry supply chains. It will also cause a
massive transformation of supply chains by creating new horizontal chains of service
providers that offer economies of skills, scope, and scale. Such transformation is the
next “new thing” that will create jobs, and create economic value to enable the U.S.
to continue to lead the world economy.

1. "IT Does Not Matter", Nicholas G. Carr, Harvard Business Review, May 2003.