Don't throw the know-how off the plane

  • @TheIndyBusiness
The scene is Logan airport in Boston. People are boarding one of the three British Airways flights to London. The strike is over and the airline schedules are back to normal. But when they board, instead of the usual blue and grey colour scheme, they notice a different decor. The cabin crew has changed too: they are cheerful Americans. So has the plane: BA, struggling to get back to normal after the strike 10 days earlier, has "outsourced" the flight to a US charter firm.

Part of the row that BA has had with its staff has been over outsourcing. Quite aside from the dispute with its cabin crew, it wants to outsource the remaining bit of its catering for, unlike most airlines, it still prepares about a fifth of the meals it serves. But in this instance it had outsourced the whole flight. All it had provided was the computer reservation, the brand name and the billing service. Meanwhile, it has been spending money repainting its tailplanes with symbols supposed to emphasise its global nature instead of the truncated version of the Union flag. To say this is not to get at BA, for what has been happening is simply a good example of a worldwide trend. Everywhere large companies are cutting back to what they suppose to be their core businesses, while at the same time trying to establish their brand globally.

The twin trends of outsourcing all but core activities and trying to build global brands are both so powerful that people are wondering where it will all end. Will companies get to the stage already reached in Hollywood where studios are mere bankers and distribution agents, buying in everything from the stars to the stories, hiring sub-contractors to make each movie, but then selling the product worldwide?

When a trend is so strongly established, almost invariably there are economic forces at play. Companies are not putting themselves through wrenching change because they like it. They are doing it because economics requires it. Understanding these forces gives a clue as to how far the trends will go. The first force - outsourcing - is a result of the increasing specialisation of economic activity. The knowledge required to do something well has become much more specialised than it was, say, 20 years ago.

Take the example of meals on an aircraft. The quality expected now is higher than it would have been a generation ago and the price of air fares has tumbled. The result is a squeeze on costs. There is no reason why an airline should be good at running a catering business; after all, no one expects an airline executive to be good at running a restaurant. So a few specialist caterers have developed the knowledge of how to create appropriate meals at a reasonable cost, and since they work with several airlines which set different criteria, know more about the business than any individual airline could ever know. Outsourcing is driven by the need to buy specialist knowledge, not just to cut costs. That is one example. Multiply that thousands of times for there are thousands of competencies that no firm can have in-house.

Now take the force of globalisation. Here there are several drivers. One is the global growth of the middle-class. The fastest-growing markets for many products are in east Asia, where there has been an explosion of people with enough spending power to be attractive customers. There are enormous benefits to any company which is able to build a brand that can reach these people, partly because brand image enables it to charge a premium but also because the image becomes self-reinforcing the more global it becomes. You can see this best in McDonald's, where an unremarkable product can charge a premium in foreign markets even though it is discounting in its home one.

Another driver is the added value of running a network. An air route become more valuable if it connects to others, hence the popularity of Heathrow over Stansted or Manchester over Liverpool, and of course the explosion of code-sharing. In the case of BA, painting tailplanes differently is designed to make it more international. Presumably the aim of that is to make a more natural link for other airlines. Combine the need for specialised knowledge and the value of global brands and you can begin to see the limits to outsourcing.

In the case of BA, it can get other people to service its planes, provide its meals and so on. But it keeps the brand image, suitably modified, the routes, and its own customer knowledge.

It is astounding how much information people are prepared to give about themselves if they are offered incentives. People on frequent-flyer programmes give an enormous amount of information, with the result that airlines can not only deliver a special quality of personal service, but can also cross-sell other products like health insurance. Of course, BA knows how to run an airline, but even if it didn't it could hire people who do. But it could not easily buy in slots at Heathrow, and there is no way it could buy its network of customers, details of whom sit on its computers. This gives a clue as to the limits of outsourcing. Strip away everything else and there will be at least three things left.

First there is a core of knowledge in a company which is not easily replicated. It could be to design better mobile phones, discover new oil fields or provide cheaper and better meals. The knowledge is probably in the heads of a few people, and woe betide the firm that fails to reward them. The wise company will keep them by providing an environment where they can excel.

Second, companies will retain a brand. Brands become more important, particularly when they are part of a network. But there will not be just a few global consumer brands, there will be rapid growth of specialised brands, known all over the world by people interested in the product or service. As information becomes almost infinitely available via electronic communications it will become possible for any company with real excellence to sell itself globally. Of course, most will not succeed. But I think we will see more mini-brands achieving global reach. Indeed, you can see this in the entertainment world. With the possible exception of Disney, people do not identify with the studio which produces a film. That is the big brand. Instead they identify with the mini-brands associated with the movie, the stars.

Third, companies will keep customers. A mailing list, a loyalty club, a databank of people's preferences, a billing system - all these become important. You can have a virtual company, but you must have real customers. So firms which have a continuing relationship with customers, even if it is just through a quarterly telephone bill, will endure.

Over the past generation, the world economy has been transformed by specialisation and globalisation: the first force is behind BA's outsourcing of meals, the second behind repainting its planes. The next big force is the infinite availability of information, in particular information which reinforces the loyalty of customers. If it were wise, BA would worry about the extent to which it has damaged that loyalty by sticking people on other people's planes at, among many other places, Logan airport.