Loosening Up: How Process Networks Unlock the Power of Specialization; Cutting-Edge Companies Are Swapping Their Tightly Coupled Processes for Loosely Coupled Ones-Making Themselves Not Only More Flexible but Also More Profitable

In the quest for higher performance, what company can ignore the benefits of partnering with business specialists and of outsourcing noncore activities to focused providers? The virtues of business collaboration are clear: innovation and efficiency. Most companies seem to think that the right way to structure outsourcing is equally clear: tightly managing, across corporate boundaries, the process of producing and delivering products or services. Yet most companies also admit that such arrangements involve trade-offs. Tightly coupled processes are often inflexible. Problems with key suppliers--for instance, a plant fire that forces unanticipated delays in the shipping of products--can be crippling. We believe that executives settling for these trade-offs have made a mistake. Companies at the cutting edge of process management handle critical cross-company processes as though they were networks rather than production lines. For core operating processes such as the management of supply chains and customer relationships and the development and commercialization of products, these cutting-edge companies have swapped their tightly coupled processes for loosely coupled ones, thereby gaining much-needed flexibility and improving their performance in the bargain. Companies have started to unbundle their corporate structures, but few of them have unbundled the processes that span disaggregated enterprises. Most companies cling to a managerial preference for controlling their activities tightly even if they now contract for-rather than directly own-those activities. But by tightly managing the work of specialists, such companies limit the value that innovative thinking might yield. Managing their processes more loosely would permit them to unlock the full value of specialization for themselves and their partners and to gain flexibility's more strategic value, including the ability not only to make operational changes quickly but also to sculpt customer offerings. Consider how these goals are achieved at Li & Fung, a Hong Kong--based trading company. Li & Fung makes no products of its own. Rather, it "orchestrates" the production of goods by others, drawing on a vast global network of highly focused providers to arrange for private-label manufacturing, primarily on behalf of US and European clothiers. For a specific product or client, Li & Fung assembles a customized set of specialized providers to handle everything from product development to the sourcing of raw materials, production planning and management, and, eventually, shipping. If glitches pop up at any stage of the intricate process along the network, the company can quickly shift an activity from one provider to another. Such flexibility promotes high-output performance. Rather than squeeze supply chain costs by tightly integrating activities, Li & Fung gains efficiencies through the specialization of suppliers. The performance of the company has been extraordinary for its sector: Li & Fung's return on equity has exceeded 30 percent a year since the mid-1990s; 2001 revenues amounted to just over $1 million per employee. Loosely coupled processes are the building blocks of networked companies. (1) We call businesses such as Li & Fung "process orchestrators" because we believe that the key to achievement in this field is the way companies manage processes, not how they structure and monitor outsourcing contracts or implement new Internet technologies in their supply chains. Few companies will ever become pure orchestrators, for to do so they would have to change the nature of their businesses dramatically. Mind-sets must also shift dramatically if companies are to master process networks. None-theless, nearly every company can benefit from learning the skills of orchestrators or from converting one or two tightly coupled processes into loosely coupled ones. …