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Virtual Organizations – Outsourcing and Off-shoring

8 September, 2015 - 17:07

A virtual organization is one that exists very much along the lines of the earlier example of two friends getting together with a very specific and limited objective; usually a single project. To an extent virtual organizations have always existed, but only with the advent of the internet have they really flourished. Virtual organizations are virtual in that they do not exist as organizations in the formal sense, but they do exist in the sense of having an on-line existence. In many cases commercial virtual organizations – or virtual enterprises – were the most visible examples of this trend in the 1990s. In these cases several already existing commercial organizations would collaborate on a specific project, often an exploratory one or one in which some new idea or product required development and testing. These early forms of virtual organization were largely established as loosely linked alliances; with little or no formal structure or hierarchy. In terms of division of labour, there was certainly a horizontal form, but little or no vertical form. The emphasis was on trust and collaboration, rather than command and control.

In the period since the 1990s many organizations have emerged that are part-virtual, part-actual; making use of models centred on a strategy of ‘out-sourcing’ or ‘off-shoring’. These organizations grow from existing, traditional forms, taking advantage of the significant developments in ICT that allow cheap, fast, and reliable forms of communication and monitoring. A company that previously manufactured something from start to finish in one location may now be dismantled so that some of the tasks are completed elsewhere – in a different state or even in a different continent. This may be done for a variety of reasons; perhaps the initial raw materials or components are more readily available, and cheaper, elsewhere: Or a particular task or process is done more efficiently and effectively by a specialist company. In many cases out-sourcing or off-shoring is seen as a way in which commercial organizations can reduce their labour costs, locating some or all of their core labour-intensive processes where the workforce is less expensive to employ and retain. Thus some aspects of the organization's activities become virtual, with links, collaborations and associations often being temporary or on an 'as needed' basis. For instance Wal-Mart, Nike and Dell have grown using a strategy of being 'highly decentralized' or 'highly distributed'; they exist physically and over time in the sense that they have headquarters, offices, depots and so on, but in other regards many of their operations are 'virtual'.

At one extreme outsourcing simply becomes a form of extension of a traditional organization. All the key aspects remain, but the core processes are undertaken in a slightly modified form. So the chain of activities and processes leading to the finished product are dispersed across the globe. Nike was one of the first companies to use this as a central part of their organizational operation, locating almost all of the production of their sports and leisure wear to countries outside the US. The actual number of people directly employed by Nike was always very small given the size and turnover of the company; with most of these employees being based in the United States.

Dell adopted a customer-directed business model, essentially reducing its inventory costs by assembling computers on demand, and only accepting components for delivery and payment when actually needed for assembly. This allowed the company to take payment for its finished products before they were actually assembled, so avoiding the costs of paying for the components in advance and then waiting for the orders. They were able to do this because they quickly saw the ways in which the internet could be used to re-engineer many of the core organizational and management processes. Thus they were able to achieve co-ordination of the entire process from manufacture to assembly to delivery. They could tie-in suppliers so that supplies were only delivered as needed. Moreover, since Dell only sold directly to customers, they were able to use this relationship to promote follow-on sales to their customer base.

The ways in which an organization such as Dell or Nike operates can be outlined using the concepts introduced earlier. In terms of the horizontal division of labour, the range of activities and processes involved occur along the same lines but can now be located where raw materials, labour costs, economies of scale, specialized skills or other factors can be optimized. The internet offers the rapid communication infrastructure for co-ordinating and controlling these activities. Companies that have pioneered and taken advantage of these potentials include Toyota and Wal-Mart. In recent times Wal-Mart and Nike, amongst others, have been heavily criticized for the ways in which they have implemented their particular forms of outsourcing. These criticisms include using child labour and other forms of non-unionized cheap labour particularly in third world countries, flouting environmental legislation, and selling at below-cost prices in order to drive other, smaller companies out of business. These criticisms and rebuttals from Nike, Wal-Mart and others are all well documented on various websites – Wikipedia is a good place to start if you wish to look into these issues in further detail.

In this chapter these arguments can be put to one side. Whatever the rights and wrongs of the ways in which these commercial companies have taken advantage of technological advances, they clearly demonstrate the potential for ICT to facilitate new forms of organization. This can be seen by a fairly simple reconsideration of Fayol’s five functions of management and how they have been affected by ICT;

  • Planning; this can now be undertaken on a more-or-less continuous basis. Increasingly organizations are focusing on far shorter-term planning for at least two reasons
    • the global context is changing so quickly that long-term planning will be at best only of limited value
  • communicating planning decisions can be done quickly and effectively, and so can any new plans or changes in direction. It should be noted, however, that this does not necessarily mean that planning is any more accurate or effective than it was previously – the concluding section of this chapter considers this in more detail.
  • Organizing; the ways in which tasks, people and groups need to be structured can now be established and then changed quickly and easily. As will be explained briefly below, organizations can now function as flexible networks, altering their patterns of communication and interaction to take best account of changing circumstances, priorities and opportunities.
  • Co-ordinating; The model of Just-in-Time production can now be extended to services as well as manufacturing activities, since ICT allows fast and efficient communication. The models used by Toyota, Wal-Mart and many other companies rely on co-ordination of a whole range of core and support activities dispersed across the globe. In recent years these models have themselves come in for intense criticism, and some of the pioneering organizations such as Wal-Mart and Dell have sought to make significant changes in the ways in which they organize and co-ordinate their core processes – see the concluding section.
  • Deciding; decision-making is often thought to rely on information to the extent that more information is likely to produce better – i.e. more accurate – decisions. This has led to a demand for real-time updating of many aspects of an organization’s activities. This does not always lead to better decisions.
  • Controlling; Based on the points about the other four functions, the ability to control widely dispersed but potentially well co-ordinated activities should be well established. ICT certainly allows this, although other – non-technical – issues can over-ride this.