There are a few conflicting trends currently happening in Corporatia. These are not exactly new trends: they have been at work for quite a long time. Yet they are starting to re-shape the face of the working world in many aspects: the behaviour of consumers, the international labour division, international trade flows etc.
The point at stake here is the attitude towards risk in general, and the way Risk – capital R – is now becoming the obvious, most traded commodity. Companies, as a very complex and intertwined system of promises – promise towards the employees, towards the customers, towards the suppliers. The simple fact one issues an invoice and agrees to / has sufficient faith in the fact said invoice will be honored later, is an example of how the system works.
And it works well indeed. Yet, all actors of the system are now putting pressure on one another in order to decrease their own risks. This pressure usually takes the shape of a discount on the mother of all commodities, money: in order to lower my risks, I want you to lower your prices, always. Or the other way around: “look, less risks with me as my prices are lower!” So far nothing new under the sun.
What is interesting, though, is that in order to decrease risks taken by shareholders – that is, often and quite naturally, risks for the CEO to have to step down under the pressure of said shareholders – companies tend to focus on barbarian things such as their “core business”, e.g. usually markets in which they are in the top three competitors, thus divesting and selling away assets that are not considered as “strategic” (a beauty of the S-word: “often used to justify something that can’t be backed by a sound cash-flow analysis”, one of my professors used to say. Ah, wisdom!)
The trend could not stop there: companies are now selling departments or functions they do not feel they are getting enough value out of. Motto: “someone can manage it better!”
The trendy label for this is “outsourcing”: of IT, of Finance, of HR… What is sold to outsourcing firms is often the transactional side of back-office functions in a purely financial logic: let us exchange a department that costs X% of the turn over (say, payroll or accounting) against an outsourcing contract that will cost Y% of the turn over. Guess what: Y < X, I am sure that one took you by surprise.
While the company transfers all responsibility on said functions, exchanging partial control on some of its resources against a service level agreement (fully inclusive of penalties, fees, roles & responsibilities, bilateral governance…), it exchanges the operational risk to the outsourcer against a certain financial stability (“I give you the risk against a flat fee: if you don’t deliver, you compensate”). If the deal is badly negotiated as it is often the case, the selling firm partially loses its agility. I will say it differently: if I can exchange control + a cost of $10 every month against lesser control + a cost of $5, but the possibility to invest my new $5 in something I think will get me more returns, I as a 21st century corporation go for it any day of the week.
The bottom line here is that the ability to deliver is no longer the goal: the capacity to decrease the – financial – risk is, which accounts for the increasing influence financial markets wield on firms and shows how companies have become a financial investment vehicle, far from the label of corporate citizens or purveyors to the needs of Earthlings that some observers are trying to tag them as. Corporate citizen vs. Investment vehicle: a tough contradiction to solve, so long live the Vox Populi whose pressure kept danger at bay so far… most of the time! But that is another discussion.
That exchange of risk + control against financial visibility has so far made the day of India, Morocco, Mexico, all countries that fully benefit from the outsourcing trend and good for them. Ricardo (as in “David Ricardo”, the British economist, I was not going to take a Mexican example there) had seen it all along: countries are climbing their way to wealth thanks to specialization. At the same time, what the consuming trends require is that corporations take responsibility and full control over the risks that they pass on to their customers.
Risk? Buy a coffee at a certain fast food chain whose mascot used to be a red-haired clown (where is Ronald now by the way?) The water has to be drinkable or sue the water utility company! The whole thing must not cause any harm. Makes complete sense.
That was before. It now must alsobe served at a harmless temperature in case you were to trip and fall with it, or better, pour it on your skin as soon as it is delivered to you, or have the espresso machine maker pay! The cup has to be good to nature in case you were to throw it away next to the bin, so have the cup manufacturer pay! You should not be able to gag on the straw, either so… Next, the available sugar will probably have to be harmless to diabetics. And do not get me started on the hamburgers, the meat and all that jazz…
But I am getting off topic, here. My point really, is that this outlet that serves what is said to be edible tidbits is at the end of the value chain really. As such, it has to cope with all the risks that were generated by the whole chain and stands responsible for them before mankind, should anything feel like turning a unit of said mankind into a corpse for instance, and even though the hamburger retailer does not own the whole chain. Yet with the buy-and-sell of operating functions, back-office departments etc, we are creating more and more complex value chains, that is more and more complex risks with less and less power over them.
Of course controls exist all along this value chain to protect one another, but the zero-risk concept is alien to this world. So the company which runs the outlet will most likely want to hedge its risks, get them financially covered. We had delivery terms and conditions. We had a quality blueprint. We are probably on our way to be enslaved under the rule of the god of Service Level Agreements, without having a clear picture whether or not this exchange actually generates value since the cost of operating with outsourced resources or governing the whole joint system are hardly ever accurately taken into account.
Think of the old Agency Effect: now that, for example, front office and operations belong to one firm and back office to another, do you seriously think they have the same agenda? Who can tell what is the cost of that?
What is the conclusion then? Well… we live in a world in which the word is “affordable risk”, a concept firms translate immediately into “how can I reduce it?” Corporations decrease their operational risk in exchange of extra cash, or rather exchange operational control against cash control.
The question is: how much cash can that be… How are called people who compute the financial value of a risk and therefore the penalty to be paid should the risk occur? Yep. These probably have a great future ahead of them. It sometimes feels like “Foundation”, Asimov’s book. If there is a god of Service Level Agreements, He certainly has an army of servants. So Hail to them, the Actuaries!