Externalization: Changing the shape of business

If you thought the communications revolution happened in the last century, think again. A seismic shift is under way that’s likely to reshape the world of business. That shift is called externalization, which virtually every company today is involved in.

If you thought the communications revolution happened in the last century, think again. A seismic shift is under way that’s likely to reshape the world of business.

That shift is called externalization, which virtually every company today is involved in.

Externalization basically refers to sharing resources (business and technical) with partners, suppliers, channels and customers. Specifically, by streamlining business-to-business processes and reducing the effective latency of business-to-business communications, externalization dramatically is changing business dynamics in ways that are only beginning to become apparent.

Some history: Back in the ’90s, organizations that wanted to share data with business partners, suppliers and customers needed a custom-built network (leased lines, frame relay or ATM) augmented with special-purpose applications such as electronic data interchange software. Such networks provided security, reliability and transactional integrity – meaning that system-to-system transactions were possible across the network.

This meant that business-to-business supply chains were limited to companies that could justify the expense of owning and operating such networks – a fairly elite bunch of players, including big banks and massive manufacturers such as General Motors. The rest of us made do with faxes and FedEx.

IP – and specifically, the Internet – changed all that. For the first time, even the smallest organizations were connected to the network. The problem was (and to a certain extent, continues to be) that reliability, security and performance of the connection can be questionable. That’s changing. Technologies such as Multi-protocol Label Switching provide network-layer quality of service, while Secure Socket Layer and IPSec-based VPNs ensure privacy. Finally, emerging technologies such as XML and SOAP can begin to provide integrity at the transaction level.

The upshot is that someday in the not-too-distant future, we can expect a network that’s as secure and reliable as the private networks of yore – but as ubiquitous as the Internet.

When such a network arrives, the implications will be profound and far-reaching. Specifically, it will increase the speed at which business can be conducted, lower the effective cost and diminish the importance of geography.

This doesn’t sound too exciting, but consider that business size is important today primarily because it signifies capital accumulation. Capital provides a major competitive differentiator because very often the easiest way to get something done quickly is to throw money at it. Quite simply, the reason your corner hardware store can’t compete with say, Boeing is primarily because it doesn’t have the capital to support an in-house research and development staff, build manufacturing plants, and the like.

But what if your corner hardware shop could line up a contract with an independent engineering group online, arrange for financing and purchase time in a manufacturing facility – all within minutes of an airline RFP hitting the street? In theory, your local hardware shop could now compete with Boeing – and win. In other words, effective externalization minimizes the benefit of being a large, capital-rich company.

I’m glossing over a lot of issues here. But you get the idea: Externalization effectively lets business processes occur at warp speed – and that changes everything.