How many times have you heard someone say: "People are a company's most valuable resource"? As the information age continues to mature, this has never been more true. Companies are refocusing their energy and resources on core competencies in ways that have traditional capital-asset managers running for cover. Cisco and Microsoft have led the way, showing that physical and working capital are becoming less significant indicators of corporate value as they continue to decapitalize physical assets to free up capital for brand name development, customer-relationship management, and product innovation-all considered parts of an intellectual-capital model.
For example, according to Grady Means and David Schneider from the business consulting firm Pricewater-houseCoopers, Cisco has realized tremendous success through decapitalization and outsourcing. In 2000, Cisco celebrated over 40 consecutive profitable quarters while maintaining a market capitalization of $485 billion, which made them the second most valuable company in the world, trailing only Microsoft. Yet they manufacture virtually none of their products.
Conversely, there are some analysts and CEOs who share a different perspective. In a recent article by David Goode, chairman, president and CEO of Norfolk Southern Corp., he asks the question: "What is shareholder value, and how do we create it in this changing world?" In response to internet stocks, Goode states: "To gauge their (internet stocks) value, Wall Street is summing up their parts and tacking on huge premiums based on a lot of intangibles, such as market position and the value the franchise is likely to have in the future." At the time he wrote the article, the market cap for America Online, Yahoo and Amazon combined was $190 billion. To put that into perspective, the market cap for all four major U.S. rail corporations during that same time was about $40 billion.
As companies battle over market valuation methods, production continues. It is within the production region that the greatest impact can be expected from decapitalization and outsourcing. E-business has created an information sharing foundation that allows outsourcers to operate independently, while at the same time remain intimately connected to customers, suppliers, and support services. As a result, according to Means and Schneider in their book MetaCapitalism, small value-added communities (VACs) are expected to emerge. These are similar to today's outsourcing relationships, only much more intense and rapid, consisting of networked companies strategically aligned and linked via the internet and electronic media to minimize costs and maximize value.
Means and Schneider believe that a significant difference between the old paradigm of production and the new °° will be in the way the VACs are connected to each other and the brand owner." As one example suggests, real-time key indicator tracking such as financial accounting, customer-relationship management, and other data (including environmental activity) will make many companies feel even more intruded upon. This especially will be true if one considers the possibility of government and general public access to certain types of sensitive data. The brand owners are expected to initially either directly or indirectly control and manage many of the VACs primarily through key indicator tracking. Brand owners will employ outsource managers who will demand real-time reporting of key indicator metrics through inter/intra or extranets.
Don't be too surprised to see regulatory compliance management reporting and public access under the freedom of information act to capitalize on this trend. Even if the agency doesn't ask for pollution tracking information on a daily basis, your brand-owner outsource manager may routinely observe environmental check points via the internet to ensure a company is achieving expected or agreed upon terms.
It may be hard to imagine, but this trend is expected to increase efficiency and support innovation, thereby adding tremendous value to the economy. Means and Schneider predict that " . . . global capital market value will grow from $20 trillion to $200 trillion in fewer than ten years, unleashing undreamed-of possibilities and solutions to longstanding problems." They estimate that most major corporations will be faced with the decapitalization paradigm shift and must respond aggressively to survive. They predict that a full transformation to an outsourced-decapitalized environment will reach maturity over the next two years.
Market analysts and economists agree that the world is changing rapidly, and even the most recent swings in the NASDAQ aren't capable of changing this dynamic. The key to survival is to stay focused on what you do best, while creating strategic alliances within a VAC. And by all means, keep your information services up to speed and your "environmental nose" clean.