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[March 4, 2004]

Defining The Virtual Business And Its Benefits

BY MARTHA YOUNG AND MICHAEL JUDE


Virtual business (VB) and virtual business processes (VBP) are terms that are seeing increasingly more press.  Before the media and sensational journalists take control of the terms sending them through the usual over-hype, heightened expectations versus reality, then practical implementation cycle, Im suggesting we short circuit the cycle and jump right into the definitions, benefits and practical implementation examples. Net out the business benefits, so to speak.

THE DEFINITION OF VIRTUAL BUSINESS/BUSINESS PROCESSES
A virtual business or business process is not the equivalent of outsourcing.  Outsourcing is outsourcing, the act of turning a specific function over to a third party provider to implement and support, for a fee.  The virtual business/business process is the act of decentralizing an operation for the greater good of the company.  This is better known as directly impacting either top line revenues or the bottom line; either way, the implication of VB and VBP is highly correlated to a firms financial measures.

A virtual business/business process, then, can be implemented and managed either utilizing internal resources or outsourced.  The determining factors for the decision of retain or outsourcing a process are rooted in the overall business objectives of the firm, as well as its ability to provide the defined service most efficiently and effectively relative to an outsourcer.

EXAMPLES OF A VIRTUAL BUSINESS AND A VIRTUAL BUSINESS PROCESS
Jet Blue is probably the most frequently cited example of a virtual business.  This is an airline that became and retained profitable during a period of time when other airlines where either flirting with bankruptcy or were in the thick of bankruptcy court.  How is Jet Blue different from other airlines?  They still require planes, pilots, flight attendants, ground crew, airport gates, baggage handlers and a host of other expensive functions that other airlines require.  Where are they able to save a nickel to apply, in this case, directly to the top line revenues?

  • Standardization is one key.  By using a single airplane type, Jet Blue is able to maintain and support its fleet much more efficiently.  Think Henry Ford and interchangeable parts.  The fewer parts required, the lower the inventory needs and reduction in warehousing space, the more effective and skilled the maintenance crew and the reduced level of working capital tied up on non-revenue producing assets.
  • Reduction of real estate expenses is one key.  Buildings are expensive to acquire and maintain.  Yes, there is a tax benefit in terms of depreciation, but the 50 years it takes to fully depreciate a building doesnt begin to address the costs associated with owning or even leasing such properties. This is a pure focus on how to best use working capital.  An investment in an intelligent information technology infrastructure to support remote workers and sales agents will consistently be a better use of working capital every time.
  • Distributing the workforce is another key.  Jet Blues sales agents work from their homes.  This practice eliminates a wide variety of expenses associated with real estate and employee support functions while concurrently improving productivity and business continuity. Natural and manmade disasters do not impact Jet Blues sales functions.  Its business continuity 100% of the time whether a tornado hits in Oklahoma , a snowstorm in Colorado , or a power outage in the northeast.

Information technology (IT) is probably the most frequently cited example of a virtual business process.  Since there are so many functions that make up IT, lets look at a different function instead contact centers.  Contact centers are an important business process because they are the first line of direct communication with a companys customers. 

Contact centers can be virtualized and supported internally, or they can be outsourced to a third party. The decision should be driven by the method that proves to be the optimal use of a companys assets (employees, real estate, capital) when the variables are inserted into a business decision model.  Without opening the Pandoras box associated with offshore contact centers, the benefits of virtualizing contact centers are substantial. 

  • Reduction of real estate expenses is one key.  Buildings are expensive to acquire and maintain.  Contact centers, while typically small (10-100 agents), still require at least one floor of an office building. Depending on the location of the center, the real estate expenses can be substantial, upwards of $100 per square foot each month in major metropolitan areas like New York , Chicago and San Francisco . Yes, the tax benefit is still there in terms of depreciation, but again, the 50 years it takes to fully depreciate a building doesnt begin to address the costs associated with owning or even leasing such properties. This is a pure focus on how to best use working capital.  An investment in an intelligent information technology infrastructure to support call agents will consistently be a better use of working capital every time. Include the cost of commuting to the office (toll ways and bridges) plus monthly parking fees or public transportation passes, and the costs associated with centralizing a workforce quickly add up to big dollars.
  • Distributing the workforce is another key.  Like the Jet Blue example above, Proctor and Gamble, Farmers Insurance and other firms support their call agents working from home.  As noted above, this practice eliminates expenses associated with real estate and employee support functions while concurrently improving productivity and business continuity.  The emphasis here is on business continuity.
  • Reduction of employee churn is important.  Employee satisfaction studies have shown that employees who are happy in their work environment are less likely to leave for greener pastures.  Less employee churn leads to reduction in costs associated with recruitment and training.  Retained contact center employees are also more productive in responding to customer issues quickly and effectively, improving customer satisfaction levels. This is a positive impact no matter which way you look at it.

WHAT ARE THE BENEFITS?
The benefits identified in the examples above only begin to define why a company should seriously consider moving along the path of virtualization.  The bottom line, or the top line contributions, is the litmus test for any company when evaluating virtual businesses or business process virtualization.  Through extensive case studies and market research conducted by Nova Amber, LLC, a virtual research firm, additional benefits include:

  • A measurable reduction in capital and operational expenditures
  • Improved customer satisfaction
  • Faster time to market
  • Improved focus on the companys core business

WHERE DO I BEGIN?
There is no right or wrong beginning point to virtualizing business processes. Start with some of the easier components and reap those benefits first. This would include processes such as payroll, human resources, benefits administration or accounting, all of which can be either managed and supported remotely, or outsourced.  The point is to begin. 

The benefits obtained through virtualization are not singular in nature.  They provide on-going, repetitive benefits.  In addition, by virtualizing one process at a time, the benefits are cumulative and greater than the sum of their parts.  Finally, by approaching virtualization one component at a time, the success rate will be substantially higher due to the bounded parameters of a discrete, manageable project.

Martha Young has more than nineteen years of experience in the technology market and is a partner in Nova Amber, LLC, a consulting firm. Martha is the co-author of The Case for Virtual Business Processes, published by Cisco Press. She can be reached at info@novaamber.com.

Michael Jude, Ph.D. is a well-known industry analyst with more than twenty years of experience in telecommunications and management automation. Michael is the co-author of The Case for Virtual Business Processes, published by Cisco Press.

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