Building your Firm from the Outside-in
In 1937, the British economist Ronald Coase (who recently died at the age of 102) wrote ‘The Nature of the Firm’, which is now widely viewed as a seminal article. Coase argued that the reason large firms exist is that their internal transaction costs – for people, planning, producing, etc – are lower than they would be if the firm acquired similar services from external individuals or firms. He went on to suggest that companies should become ever-larger until this ceases to be the case.
Figure 1 – The business centre of gravity is shifting
More than 75 years later, Coase’s work has never been more relevant. Information technology is now fundamentally altering business transaction economics. External transaction costs – whether for people, services, innovation or computing resources – are falling rapidly, while internal costs – such as fixed asset rigidity, cultural inertia and resource obsolescence – are rising. As a consequence, the balance between internal and external dynamics is shifting. As shown in the figure, the most important new business forces are taking shape outside the walls of the firm.
Responding effectively to these changes requires a shift in mindset from inside-out to outside-in. In this report, we will define what we mean by outside-in, and show how today’s outside-in dynamics are transforming business competition and Enterprise IT alike. Our goal is to provide a holistic and thought-provoking perspective on what we believe the outside-in firm of the future will look like, how it differs from traditional inside-out dynamics, and the many new opportunities and challenges this implies.
In the first half of the paper, we will look at outside-in dynamics from a customer, innovation and competitive perspective; in the second half, we will show how these dynamics will transform the traditional Enterprise IT function. At the end of this report, there is a customer self-assessment exercise so that companies can see how far they have come on the long journey to becoming outside-in.
Figure 2 – Outside-in affects virtually every part of the firm
The contrast between traditional inside-out and emerging outside-in firms is a sharp one. The practices in the left-hand column in the figure above define the global business practices of the 20th century, and they are not going away. Apple demonstrates every day that internal vision and execution can still lead to extraordinary success. But as explained below, outside-in dynamics are becoming the key drivers of 21st-century business competition:
- Customer-centricity. Customers are demanding an engaging, app-like User Experience (UX) tailored to their needs, behaviour and ability to co-create value.
- Community content. Customer ratings and reviews are now the most influential part of the buying process in many product and service industries. Similarly, community expertise is becoming essential to customer training, support and education.
- Real-time analytics. Many of the most powerful new analytical and Big Data applications will be based on the external information sources and the pattern recognition capabilities of Google, Twitter, Bitly and other more specialized players.
- Ecosystem innovation. Breakthrough innovations increasingly begin outside the walls of the firm – through customers, suppliers, partners, crowd-sourcing and rapidly improving internet of things technologies.
- Open collaboration. As software pervades every industry sector, the open meme is spreading into entirely new environments. Exciting open source, open science and open data movements are emerging in manufacturing, financial services, healthcare, education and government.
- Cloud-based IT. Arguably, the defining feature of cloud computing is the shift away from owning/operating dedicated IT systems towards scalable utility/rental services.
- Digital leadership. Companies can’t directly control the outside world. Rather, they must learn to steer their external ecosystems toward their firm’s ends.
We often use the two-headed image of the ancient Roman god Janus to express the need for firms to see equally clearly into their past and future, as well as into their internal and external worlds.