The new digital economy is bringing about a massive wave of decapitalization (when companies choose to divest rather then invest in plants and equipment) that is about to change business forever.
As more and more companies move to outsourcing, in some cases ending relationships even with their subsidiaries, suppliers are gaining increased flexibility to form ad hoc trading relationships with other companies to create unexpected new products and services.
The initial shock waves of decapitalization will register this week in the auto industry when an Internet start-up, called Model E, rolls out a service that allows consumers to customize cars by mixing and matching auto parts made by a diverse number of manufacturers.
This service appears to be the shape of things to come.
Dell Computer, the icon of the build-to-order model, is working with supply-chain infrastructure company i2 Technologies to create a Supplier Side Network that connects directly to Dell's supply chain. The next step, sources said, will be to market this model to customers by creating a branded reselling channel.
The channel will tightly connect a wide range of Dell's affinity partners such as Cisco Systems, Novell, and Oracle to create complete, customer-specific product solutions for its small to midsize business customers, according to sources.
Fremont, Calif.-based Model E will use a similar variant of the build-to-order business model in the $US3 trillion automotive market. In Phase 1, which will be offered to the public in the first quarter of 2001, Model E will launch an Internet site with an online automotive configurator for upscale consumers.
Using the configurator, customers will be able to modify such luxury cars as BMW M-class models or top-of-the-line Hondas and Porsches with options not available through dealers.
Model E also believes its all-inclusive leasing model -- about $US1,100 per month, including everything from car registration to insurance and maintenance -- will appeal to its audience.
In Phase 2 customers will have an increasing amount of customizing flexibility, with Phase 3 being a car that is built and branded by Model E. Then the company becomes a "zero asset" manufacturer, said Model E President and CEO William Li.
The company would not say when Phase 3 will be available.
Meanwhile, some specialty automakers are already feeling the benefits of outsourcing.
Panoz Auto Development, in Hoschton, Ga., an independent manufacturer of hand-built, high-performance sports cars, sees a clear difference in working with Visteon, formerly a Ford subsidiary and now independent.
"Visteon is giving us more choices now. They can create products that they couldn't in the past. And it is not quite as bureaucratic," said Joey Wallace, purchasing manager for the Panoz Esperante model, which starts at about $US80,000.
Combinations and recombinations of business relationships, with each company contributing what it does best to create something with new value, has both positive and negative repercussions on how successful businesses are winning the New Economy, according to Barry Libert, a partner at Chicago-based Andersen Consulting, as well as the director of MIT's New Economy Business Lab and the author of Cracking the Value Code.
"The great news is you can't tell the difference between what is outsourced or insourced," Libert said.
One economist goes further. "Outsourcing is the basis for all prosperity," said Ed Yardeni, chief economist at Deutsche Bank, in New York.
Outsourcing is nothing more than what economist Adam Smith called the division of labor, Yardeni added.
As outsourcing continues to grow, companies will be put in the position of constantly readjusting their partnerships, with the result that companies may be outsourcing one of their most valuable asset of all: their business relationships.
"Outsourcing destroys the core competency of building [permanent] relationships," Libert said.
Nevertheless, outsourcing is already becoming well-established in other industries. Niku Corp., in Redwood City, Calif., is an online marketplace that mixes and matches services from the leading professional service providers, such as Arthur Andersen, on behalf of its corporate customers. The result is that Niku, not the service provider, owns the relationship.
Ad hoc partnerships of fragmented businesses that are complementary, such as in financial services, is part of the outsourcing trend, according to Bob Crowley, president and CEO of Bowstreet Software, in Portsmouth, N.H.
Companies such as Merrill Lynch & Co, Wells Fargo & Co., Morgan Stanley Dean Witter & Co., and Citibank offer a consolidated financial services site for businesses, Crowley said.
Bowstreet supplies the infrastructure to allow companies to combine their products and services into a single offering.
"If I am buying heavy equipment on a b-to-b exchange, I can partner with General Electric to sell them insurance for that pallet," Crowley said.
But to be in front of the customer with your product first requires that you have "embedded these things into the workflow," Crowley said.
Where is it all headed? According to Libert, not where most people think.
"In the next decade it will be about outsourcing your assets," Libert said, who pointed to America Online's 24 million subscribers and its 130 million Instant Messaging users as a prime example of an asset that can be resold.
"If you own the customer [and] the buy side, everybody has to come knocking at your door. The only permanent relationship is with AOL," Libert said.
Companies are aggregating core competencies to offer a single solution.
* Dell Computer High-tech supplier-side network* Niku Professional services* Model E Auto manufacturing* Schwab OneSource Mutual fundsNaming disputeFord Motor this week slapped Model E's backer, Softbank Venture Capital, with a trademark-infringement lawsuit. The suit alleges that the Model E name is too similar to Ford's "history of producing vehicles and naming them using the word 'Model' followed by a letter," as in Ford's famous Model T, said a representative. Ford also said it uses the name Model E for an internal computer program for employees.
Model E has filed a motion to have the suit dismissed.