Let's network. Now who's in charge?
Sunday 05 October 1997
And so it is, or now perhaps mercifully is not, with BT, MCI and WorldCom. The events of the last week have highlighted an enormous new and unresolved question: what is the right ownership structure for the global networked business?
The problem is this. The standard multinational model of a company operating all round the world but controlled from a single place works perfectly well in virtually all industries. Thus all the big motor manufacturers are national companies, even though they increasingly make their cars near their markets; the oil companies (apart from Shell) are national; so are pharmaceutical groups (apart from SmithKline Beecham). Management control almost invariably gravitates to one place, and the location of headquarters does determine how the group is run. Even in a company selling more than 90 per cent of its output abroad, like Nestle or Nokia, real power remains rooted in one centre. And though there are a tiny number of genuine "bi-nationals" - where ownership and control is genuinely split down the middle between two countries - there are no "tri-nationals", where there is a genuine three-way split.
Up to now this has not really mattered. It hasn't mattered that Toyota is Japanese or Microsoft American, for there is no loss of comparative advantage from having top management located in one place. These are not network businesses - though Microsoft may eventually become one - where the value of the network increases the more people there are connected to it. But in airlines or telecommunications, where much of the business results from traffic which is being passed from one carrier to another, the model of the single, nationally-based entity seems increasingly inappropriate.
The result has been the string of deals designed to increase the size of the network - and its value. The practical effect in airlines has been the boom in code-sharing and shareholding cross-holdings. Meanwhile, in telecoms there have been a similar string of co-operation deals and shareholding tie-ups, of which the BT-MCI deal was to be the largest.
The trouble is that neither the code-sharing model nor the ownership one is really satisfactory. Code-sharing leads to jealousies between the partners over which one is benefiting most from the deal, and it fails to deliver consistent quality of service. The ownership one may be even worse if there is a clash of culture between the dominant partner and the subsidiary one. So neither the BA-American Airlines proposal, which is really just souped-up code-sharing, nor the BT-MCI deal, which was a takeover of ownership, seem (or seemed) attractive. And if you wonder whether there is a middle way between co-operation and ownership, look at the earlier arrangement between BA and USAir, where BA, despite owning a large minority shareholding in USAir, failed completely to live in any harmony with its partner.
So what is going to happen? Is there a better way of organising network businesses? It is an immediate practical question for BT, MCI and WorldCom, of course, but it is one which is going to occur again and again in the future.
More and more types of economic activity may become network businesses, so in the future we may not just be talking about airlines and telecommunications. Already there is great pressure on the management consultants such as Andersen Worldwide and the proposed merged firm of Coopers & Lybrand and Price Waterhouse to operate as true 24-hour networks rather than collections of local partnerships. Investment banking has already become pretty much a network business and the entertainment and media industries seem to be going that way. But could one envisage, say, a Morgan Stanley which did have a dominantly New York culture? Or a News International run as a genuine multinational from three headquarters of equal importance, one in each time zone?
You see, we are moving to a world where it is very easy technically to create cross-national mergers, but one in which many, maybe most, of these mergers eventually fall apart.
There are several possible ways forward. One is "winner take all" - to accept that there will be a tiny handful of winners in the network businesses and those winners will take over the losers. That will mean that individual national airlines and phone companies will disappear and there be half a dozen, maybe less, global giants. The majority of these will be American, and the rest of the world will have to accept that just as it accepts the dominance of Microsoft and of Hollywood.
That may happen, but there would be profound resistance to it. Can you imagine, say, the French accepting a takeover of Air France by American Airlines, or even seeing AT&T taking over a significant portion of their domestic phone network?
Another way forward is "better code sharing" - to make alliances work much better. Here BT would not make a bid for MCI or even worry about whether to keep a minority shareholding in a merged MCI-WorldCom. Instead it would become part of a family of telecom providers around the world which would co-operate most of the time, but organise detailed (and frequently negotiated) cost and revenue-sharing agreements so that each party to the venture felt that the benefits of the added value of the network were fairly shared.
But to make this work means that there has to be trust between the various participants, and a willingness to accept that sometimes one player will get more out of an arrangement than the other, at least for a while. The most obvious model here is the relationship between the various national partnerships in the big six accountancy/ management consultancy firms. When this is working well (and of course there are always some tensions) the firms are able to offer a genuine global service, using the experience of one consultant on one side of the globe to help solve the problems of another one's client on the other.
Yet another way forward is "the Internet model" - to try to distinguish network business from proprietary business, and where possible have the network provided centrally, maybe by the state. Thus the core of the Internet, the big computer "routers" which swing the signals around the world, are a common good, like a highway system on which the private sector can drive its vehicles. That does, however, require a public sector prepared to take on the responsibility for the network, even if it need not itself own it.
None of these three ways of organising global network businesses is optimal and of course in practice what will happen until someone thinks of something better will be a messy combination of all three. I personally suspect that the code-sharing model will be the one which will increasingly be adapted to other network industries, and that this will lead to loose alliances between still-independent national entities. But it will not be a neat, easy solution.
On the other hand, nor is the present situation where companies hunt around the world for partners, get married to the flash-bulbs of the financial markets, and then get taken to the cleaners at a nasty divorce. That is messier still. Anyone remember the Dunlop-Pirelli union?
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