The World is Flat

TEN: How Companies Cope

As I conducted interviews for this book, I kept hearing the same phrase from different business executives. It was strange; they all used it, as if they had all been talking to each other. The phrase was, “Just in the last couple of years...” Time and again, entrepreneurs and innovators from all different types of businesses, large and small, told me that “just in the last couple of years” they had been able to do things they had never dreamed possible before, or that they were being forced to do things they had never dreamed necessary before.

I am convinced that these entrepreneurs and CEOs were responding to the triple convergence. Each was figuring out a strategy for his or her company to thrive or at least survive in this new environment. Just as individuals need a strategy for coping with the flattening of the world, so too do companies. My economics tutor Paul Romer is fond of saying, “Everyone wants economic growth, but nobody wants change.” Unfortunately, you cannot have one without the other, especially when the playing field shifts as dramatically as it has since the year 2000. If you want to grow and flourish in a flat world, you better learn how to change and align yourself with it.

I am not a business writer and this is not a how-to-succeed-in-business book. What I have learned in researching this book, though, is that the companies that have managed to flourish today are the ones that best understand the triple convergence and have developed their own strategies for coping with it-as opposed to trying to resist it.

This chapter is an effort to highlight a few of their rules and strategies:

Rule #1: When the world goes flat—and you are feeling flattened—reach for a shovel and dig inside yourself. Don't try to build walls.

I learned this valuable lesson from my best friends from Minnesota, Jill and Ken Greer. Going to India gave me an inkling that the world was flat, but only when I went back to my roots and spoke to my friends from Minnesota did I realize just how flat. Some twenty-five years ago Jill and Ken (whose brother Bill I profiled earlier) started their own multimedia company, Greer & Associates, which specialized in developing commercials for TV and doing commercial photography for retail catalogs. They have built up a nice business in Minneapolis, with more than forty employees, including graphic artists and Web designers, their own studio, and a small stable of local and national clients. As a midsize firm, Greer always had to hustle for work, but over the years Ken always found a way to make a good living.

In early April 2004, Ken and Jill came to Washington to spend a weekend for my wife's fiftieth birthday. I could tell that Ken had a lot on his mind regarding his business. We took a long walk one morning in rural Virginia. I told him about the book I was writing, and he told me about how his business was doing. After a while, we realized that we were both talking about the same thing: The world had grown flat, and it had happened so fast, and had affected his business so profoundly, that he was still wrestling with how to adjust. It was clear to him that he was facing competition and pricing pressure of a type and degree that he had never faced before.

“Freelancers,” said Greer, speaking about these independent contractors as if they were a plague of locusts that suddenly had descended on his business, eating everything in sight. “We are now competing against freelancers! We never really competed against freelancers before. Our competition used to be firms of similar size and capability. We used to do similar things in somewhat different ways, and each firm was able to find a niche and make a living.” Today the dynamic is totally different, he said. “Our competition is not only those firms we always used to compete against. Now we have to deal with giant firms, who have the capability to handle small, medium, and large jobs, and also with the solo practitioners working out of their home offices, who [by making use of today's technology and software] can theoretically do the same thing that a person sitting in our office can do. What's the difference in output, from our clients' point of view, between the giant company who hires a kid designer and puts him in front of a computer, and our company that hires a kid designer and puts him in front of a computer, and the kid designer with a computer in his own basement?... The technology and software are so empowering that it makes us all look the same. In the last month we have lost three jobs to freelance solo practitioners who used to work for good companies and have experience and then just went out on their own. Our clients all said the same thing to us: 'Your firm was really qualified. John was very qualified. John was cheaper.' We used to feel bad losing to another firm, but now we are losing to another person!”

How did this change happen so fast? I asked.

A big part of their business is photography-shooting both products and models for catalogs, Greer explained. For twenty-five years, the way the business worked was that Greer & Associates would get an assignment. The client would tell Greer exactly what sort of shot he was looking for and would “trust” the Greer team to come up with the right image. Like all commercial photographers, Greer would use a Polaroid camera to take a picture of the model or product he was shooting, to see if his creative instinct was right, and then shoot with real film. Once the pictures were taken, Greer would send the film out to a photo lab to be developed and color-separated. If a picture needed to be touched up, it would be sent to another lab that specialized in retouching.

“Twenty years ago, we decided we would not process the film we shot,” Greer explained. “We would leave that technical aspect to other professionals who had the exact technology, training, and expertise—and a desire to make money that way. We wanted to make money by taking the pictures. It was a good plan then, and may be a good plan today, but it is no longer possible.”

Why? The world went flat, and every analog process went digital, virtual, mobile, and personal. In the last three years, digital cameras for professional photographers achieved a whole new technical level that made them equal to, if not superior to, traditional film cameras.

“So we experimented with several different cameras and chose the current state-of-the-art camera that was most like our [analog] film cameras,” Greer said. “It's called a Canon Dl, and it's the same exact camera as our film camera, except there's a computer inside with a little TV-screen display on the back that shows us what picture we're taking. But it uses all the same lenses, you set things the same way, shutter speed and aperture, it has the same ergonomics. It was the first professional digital camera that worked exactly like a film camera. This was a defining moment.

“After we got this digital camera, it was incredibly liberating at first,” said Greer. “All of the thrill and excitement of photography were there— except that the film was free. Because it was digital, we didn't have to buy film and we didn't have to go to the lab to have it processed and wait to get it back. If we were on location and shooting something, we could see if we got the shot right away. There was instant gratification. We referred to it as an 'electronic Polaroid.' We used to have an art director who would oversee everything to make sure that we were capturing the image we were trying to create, but we would never really know until we got it developed. Everyone had to go on faith, on trust. Our clients paid us a professional fee because they felt they needed an expert who could not only click a button, but knew exactly how to shape and frame the image. And they trusted us to do that.”

For a year or so there was this new sense of empowerment, freedom, creativity, and control. But then Ken and his team discovered that this new liberating technology could also be enslaving. “We discovered that not only did we now have the responsibility of shooting the picture and defining the desired artistic expression, we had to get involved in the technology of the photograph. We had to become the lab. We woke up one morning and said, 'We are the lab.'”

How so? Because digital cameras gave Greer the ability to download those digital images into a PC or laptop and, with a little magic software and hardware, perform all sorts of new functions. “So in addition to being the photographer, we had to become the processing lab and the color separator,” said Greer. Once the technology made that possible, Greer's customers demanded it. Because Greer could control the image farther down the supply chain, they said he should control it, he must control it. And then they also said because it was all digital now, and all under his control, it should be included among the services his team provided as the photographic creators of the image. “The clients said, 'We will not pay you extra for it,'” said Greer. “We used to go to an outside service to touch up the pictures-to remove red-eye or blemishes-but now we have to be the retouchers ourselves also. They expect [red-eye] to be removed by us, digitally, even before they see it. For twenty years we only practiced the art of photography-color and composition and texture and how to make people comfortable in front of a camera. This is what we were good at. Now we had to learn to be good at all these other things. It is not what we signed up for, but the competitive marketplace and the technology forced us into it.”

Greer said every aspect of his company went through a similar flattening. Film production went digital, so the marketplace and the technology forced them to become their own film editors, graphics studio, sound production facility, and everything else, including producers of their own DVDs. Each of those functions used to be farmed out to a separate company. The whole supply chain got flattened and shrunk into one box that sat on someone's desktop. The same thing happened in the graphics part of their business: Greer & Associates became their own typesetters, illustrators, and sometimes even printers, because they owned digital color printers. “Things were supposed to get easier,” he said. “Now I feel like I'm going to McDonald's, but instead of getting fast food, I'm being asked to bus my own table and wash the dishes too.”

He continued: “It is as if the manufacturers of technology got together with our clients and outsourced all of these different tasks to us. If we put our foot down and say you have to pay for each of these services, there is someone right behind us saying, 'I will do it all' So the services required go up significantly and the fees you can charge stay the same or go down.”

It's called commoditization, and in the wake of the triple convergence, it is happening faster and faster across a whole range of industries. As more and more analog processes become digital, virtual, mobile, and personal, more and more jobs and functions are being standardized, digitized, and made both easy to manipulate and available to more players.

When everything is the same and supply is plentiful, said Greer, clients have too many choices and no basis on which to make the right choice. And when that happens, you're a commodity. You are vanilla.

Fortunately, Greer responded to commoditization by opting for the only survival strategy that works: a shovel, not a wall. He and his associates dug inside themselves to locate the company's real core competency, and this has become the primary energy source propelling their business forward in the flat world. “What we sell now,” said Greer, “is strategic insight, creative instinct, and artistic flair. We sell inspired, creative solutions, we sell personality. Our core competence and focus is now on all those things that cannot be digitized. I know our clients today and our clients in the future will only come to us and stick with us for those things... So we hired more thinkers and outsourced more technology pieces.”

In the old days, said Greer, many companies “hid behind technology. You could be very good, but you didn't have to be the world's best, because you never thought you were competing with the world. There was a horizon out there and no one could see beyond that horizon. But just in the space of a few years we went from competing with firms down the street to competing with firms across the globe. Three years ago it was inconceivable that Greer & Associates would lose a contract to a company in England, and now we have. Everyone can see what everyone else is doing now, and everyone has the same tools, so you have to be the very best, the most creative thinker.”

Vanilla just won't put food on the table anymore. “You have to offer something totally unique,” said Greer. 'You need be able to make Chocolate Chip Cookie Dough, or Cherry (Jerry) Garcia, or Chunky Monkey“-three of the more exotic brands of Ben & Jerry's ice cream that are very nonvanilla. ”It used to be about what you were able to do,“ said Greer. ”Clients would say, 'Can you do this? Can you do that?' Now it's much more about the creative flair and personality you can bring to [the assignment]... It's all about imagination.“

Rule #2: And the small shall act big... One way small companies flourish in the flat world is by learning to act really big. And the key to being small and acting big is being quick to take advantage of all the new tools for collaboration to reach farther, faster, wider, and deeper.

I can think of no better way to illustrate this rule than to tell the story of another friend, Fadi Ghandour, the cofounder and CEO of Aramex, the first home-grown package delivery service in the Arab world and the first and only Arab company to be listed on the Nasdaq. Originally from Lebanon, Ghandour's family moved to Jordan in the 1960s, where his father, AH, founded Royal Jordanian Airlines. So Ghandour always had the airline business in his genes. Shortly after graduating from George Washington University in Washington, D.C., Ghandour returned home and saw a niche business he thought he could develop: He and a friend raised some money and in 1982 started a mini-Federal Express for the Middle East to do parcel delivery. At the time, there was only one global parcel delivery service operating in the Arab world: DHL, today owned by the German postal service. Ghandour's idea was to approach American companies, like Federal Express and Airborne Express, that did not have a Middle East presence and offer to become their local delivery service, playing on the fact that an Arab company would know the region and how to get around unpleasantries like the Israeli invasion of Lebanon, the Iran-Iraq war, and the American invasion of Iraq.

“We said to them, 'Look, we don't compete with you locally in your home market, but we understand the Middle East market, so why not give your packages to us to deliver out here?” said Ghandour. “We will be your Middle East delivery arm. Why give them to your global competitor, like DHL?” Airborne responded positively, and Ghandour used that to build his own business and then buy up or partner with small delivery firms from Egypt to Turkey to Saudi Arabia and later all the way over to India, Pakistan, and Iran-creating his own regional network. Airborne did not have the money that Federal Express was investing in setting up its own operations in every region of the globe, so it created an alliance, bringing together some forty regional delivery companies, like Aramex, into a virtual global network. What Airborne's partners got was something none of them could individually afford to build at the time— a global geographic presence and a computerized package tracking and tracing system to compete with that of a FedEx or DHL.

Airborne “made their online computerized tracking and tracing system available to all its partners, so there was a unified language and set of quality standards for how everyone in the Airborne alliance would deliver and track and trace packages,” explained Ghandour. With his company headquartered in Amman, Jordan, Ghandour tapped into the Airborne system by leasing a data line that was connected from Amman all the way to Airborne's big mainframe computer in its headquarters in Seattle. Through dumb terminals back in the Middle East, Aramex tracked and traced its packages using Airborne's back room. Aramex, in fact, was the earliest adopter of the Airborne system. Once Ghandour's Jordanian employees got up to speed on it, Airborne hired them to go around the world to install systems and train the other alliance partners. So these Jordanians, all of whom spoke English, went off to places like Sweden and the Far East and taught the Airborne methods of tracking and tracing. Eventually, Airborne bought 9 percent of Aramex to cement the relationship.

The arrangement worked well for everyone, and Aramex came to dominate the parcel delivery market in the Arab world, so well that in 1997, Ghandour decided to take the company public on Broadway, also known as the Nasdaq. Aramex continued to grow into a nearly $200-million-a-year company, with thirty-two hundred employees-and without any big government contracts. Its business was built for and with the private sector, highly unusual in the Arab world. Because of the dotcom boom, which deflected interest from brick-and-mortar companies like Aramex, and then the dot-com bust, which knocked out the Nasdaq, Aramex's stock price never really took off. Thinking that the market simply did not appreciate its value, Ghandour, along with a private equity firm from Dubai, bought the company back from its shareholders in early 2002.

Unbeknownst to Ghandour, this move coincided with the flattening of the world. He suddenly discovered that he not only could do new things, but he had to do new things he had never imagined doing before. He first felt the world going flat in 2003, when Airborne got bought out by DHL. Airborne announced that as of January 1, 2004, its tracking and tracing system would no longer be available to its former alliance partners. See you later. Good luck on your own.

While the flattening of the world enabled Airborne, the big guy, to get flatter, it allowed Ghandour, the little guy, to step up and replace it. “The minute Airborne announced that it was being bought and dissolving the alliance,” said Ghandour, “I called a meeting in London of all the major partners in the group, and the first thing we did was found a new alliance.” But Ghandour also came with a proposal: “I told them that Aramex was developing the software in Jordan to replace the Airborne tracking and tracing system, and I promised everyone there that our system would be up and running before Airborne switched theirs off.”

Ghandour in effect told them that the mouse would replace the elephant. Not only would his relatively small company provide the same backroom support out of Amman that Airborne had provided out of Seattle with its big mainframe, but he would also find more global partners to fill in the holes in the alliance left by Airborne's departure. To do this, he told the prospective partners that he would hire Jordanian professionals to manage all the alliance's back-office needs at a fraction of the cost they were paying to have it all done from Europe or America. “I am not the largest company in the group,” said Ghandour, who is now in his mid-forties and still full of energy, “but I took leadership. My German partners were a $1.2 billion company, but they could not react as fast.”

How could he move so quickly? The triple convergence.

First of all, a young generation of Jordanian software and industrial engineers had just come of age and walked out onto the level playing field. They found that all the collaborative tools they needed to act big were as available to them as to Airbome's employees in Seattle. It was just a question of having the energy and imagination to adopt these tools and put them to good use.

“The key for us/' said Ghandour, ”was to come up with the technology and immediately replace the Airborne technology, because without online, real-time tracking and tracing, you can't compete with the big boys. With our own software engineers, we produced a Web-based tracking and tracing and shipment management system.“

Managing the back room for all the alliance partners through the Internet was actually much more efficient than plugging everyone into Airbome's mainframe back in Seattle, which was very centralized and had already been struggling to adapt to the new Web architecture. With the Web, said Ghandour, every employee in every alliance company could access the Aramex tracking and tracing system through smart PC terminals or handheld devices, using the Internet and wireless. A couple of months after making his proposal in London, Ghandour brought all the would-be partners together in Amman to show them the proprietary system that Aramex was developing and to meet some of his Jordanian software professionals and industrial engineers. (Some of the programming was being done in-house at Aramex and some was outsourced. Outsourcing meant Aramex too could tap the best brains.) The partners liked it, and thus the Global Distribution Alliance was born-with Aramex providing the back room from the backwater of Amman, where Lawrence of Arabia once prowled, replacing Airborne, which was located just down the highway from Microsoft and Bill Gates.

Another reason Ghandour could replace Airborne so quickly, he explained, was that he was not stuck with any “legacy” system that he had to adapt. “I could go right to the Internet and use the latest technologies,” he said. “The Web enabled me to act big and replicate a massive technology that the big guys had invested millions in, at a fraction of the cost... From a cost perspective, for me as a small guy, it was ideal... I knew the world was flat. All my preaching to our employees as the CEO was that we can compete, we can have a niche, the rules of the game are changing, you don't need to be a giant, you can find a niche, and technology will enable us to compete with the big boys.”

When January 2004 rolled around and Airborne began switching off its system, Aramex was up and running for a seamless handoff. And because Aramex was able to run its new system off an Internet platform, with software designed primarily by lower-cost Jordanian programmers, installation of the new system took place virtually, without Aramex having to send its engineers to train any of the alliance partners. Each partner company could build its own client base over the Internet through the Aramex system, do its own tracking and tracing, and be part of the new virtual global air freight network.

“So now we are managing this global network, with forty alliance partners, and we cover every geographic area in the world,” said Ghandour. “We saved so much money... With our Web-based system all you needed was a browser and a password to get into the Aramex network, and suddenly you're inside a global shipment management system.” Aramex trained many of the employees of the other alliance companies how to use its system by using various online channels, including voice over the Internet, online chatting, and other virtual training tools available on Aramex's intranet-making the training incredibly cheap.

Like UPS, Aramex has quickly moved into insourcing. Arab and foreign banks in the Middle East have outsourced the delivery of their credit cards to Aramex; mobile phone companies are using Aramex delivery men to collect bills on their behalf, with the delivery men just scanning the customer's credit card and then issuing a receipt. (Aramex may be high-tech, but it has not shrunk from using donkeys to cross military roadblocks to deliver packages in the West Bank when Israeli-Palestinian clashes have closed roads.)

“We are a very flat organization,” Ghandour explained. “This is not traditional, because Arab institutions in the private sector tend to look like the governments-very hierarchal and patriarchal. That is not how Aramex works. There are no more than two to three layers between me and anyone in the company. Every single knowledge worker in this organization has a computer with e-mail and Internet access. Right here from your computer I can access my intranet and see exactly what is happening in the organization without my senior people having to report to me.”

In sum, Fadi Ghandour took advantage of several new forms of collaboration-supply-chaining, outsourcing, insourcing, and all the steroids—to make his little $200-million-a-year company very big. Or, as he put it with a smile, “I was big locally and small internationally-and I reversed that.”

Rule #3: And the big shall act small... One way that big companies learn to flourish in the flat world is by learning how to act really small by enabling their customers to act really big.

Howard Schultz, the founder and chairman of Starbucks, says that Starbucks estimates that it is possible to make nineteen thousand variations of coffee on the basis of the menus posted at any Starbucks outlet. What Starbucks did, in other words, was make its customers its drink designers and allow them to customize their drinks to their exact specifications. Starbucks never thought of offering soy milk, Schultz told me, until store managers started to get bombarded with demands for it from customers, to the point where they were going to the grocery store across the street in the middle of the day to buy cartons of soy milk. Starbucks learned from its customers, and today some 8 percent of all the drinks that Starbucks sells include soy milk. “We didn't dream up the different concoctions with soy milk,” said Schultz, “the customers did.” Starbucks just collaborated with them. The smartest big companies clearly understand that the triple convergence allows them to collaborate with their customers in a totally new fashion-and, by doing so, to act really small. The way that big companies act small is not by targeting each individual consumer and trying to serve that customer individually. That would be impossible and impossibly expensive. They do it by making their business, as much as possible, into a buffet. These companies create a platform that allows individual customers to serve themselves in their own way, at their own pace, in their own time, according to their own tastes. They are actually making their customers their employees and having them pay the company for that pleasure at the same time!

One of those big companies that have learned to act small in this way is E*Trade, the online bank and brokerage house. It did so, explained Mitchell H. Caplan, the CEO of E*Trade as well as a friend and neighbor, by recognizing that behind all the hoopla around the dot-com boom and bust, something very important was happening. “Some people thought the Internet was going to revolutionize everything in the world with no limits-it was going to cure the common cold/' said Caplan. Sure, it was hype, and it led to crazy valuations and expectations, which eventually came crashing down. But meanwhile, with much less fanfare, the Internet was creating ”a whole new distribution platform for companies to reach consumers in a whole new way and for consumers to reach your company in a whole new way,“ Caplan said. ”While we were sleeping, my mom figured out how to use e-mail and connect with the kids. My kids were instant-messaging all their friends. My mom figured out how to go online and check her E*Trade balances.“

Companies that were paying attention understood they were witnessing the birth of the “self-directed consumer,” because the Internet and all the other tools of the flat world had created a means for every consumer to customize exactly the price, experience, and service he or she wanted. Big companies that could adapt their technology and business processes to empower this self-directed consumer could act very small by enabling their customers to act very big. They could make the consumer feel that every product or service was being tailored for his or her specific needs and desires, when in fact all that the company was doing was creating a digital buffet for them to serve themselves.

In the financial services industry, this constituted a profound change in approach. Historically, financial services was dominated by large banks, large brokerage houses, and large insurance companies that told you what you were getting, how you were getting it, when and where you were getting it, and the price you had to pay for it. Customers reacted to these big companies with emotions ranging from apathy to distaste. But if I didn't like the way my bank was treating me, I didn't have any real choice. Then the world was flattened and the Internet came along. Consumers started to feel that they could have more control, and the more they adapted their buying habits to the Internet, the more companies-from booksellers to financial services-had to adapt and offer them the tools to be in control.

“Sure, the Internet stocks blew up when the bubble burst,” said Caplan, whose own company's stock price took a big dip in that market storm, “but underneath, consumers were getting a taste of power, and once they tasted it, things went from companies being in control of consumers' behavior to consumers being in control of companies' behavior. The rules of engagement changed, and if you did not respond and offer customers what they wanted, someone else would, and you would be dead.” Where once the financial services companies acted big, now they strove to act small and to enable the consumer to act big. “Companies who prosper today,” argued Caplan, “are the ones who understand the self-directed consumer.” For E*Trade, that meant thinking of the company not as a collection of individual financial services-a bank, a brokerage, and a lending business-but as an integrated financial experience that could serve the most self-directed financial consumers. “The self-directed consumer wanted one-stop financial shopping,” said Caplan. “When they came to our site they wanted everything integrated, with them in control. Only recently, though, did we have the technology to really integrate all our three businesses-banking, lending, and brokerage-and pull them together in a way that didn't just deliver the price, not just the service, but the total experience they wanted.”

If you came to the E*Trade site just three or four years ago, you would see your brokerage account on one screen page and your lending on another. Today, said Caplan, “On one page you can now see exactly where you stand in terms of your brokerage in real time, including your buying power, and you see your bank account and the scheduled payments for your loans-what is pending, what is the balance on your home mortgage, and [what is your] line of credit-and you have the ability to move seamlessly between all three to maximize the benefit of your cash.”

While Fadi Ghandour coped with the triple convergence by taking a small company and devising a strategy to make it act very big, Mitchell Caplan survived by taking a big company and making it act very small so that his customers could act very big.

Rule #4: The best companies are the best collaborators. In the flat world, more and more business will be done through collaborations within and between companies, for a very simple reason: The next layers of value creation-whether in technology, marketing, biomedicine, or manufacturing-are becoming so complex that no single firm or department is going to be able to master them alone.

“What we are seeing in so many different fields,” said Joel Cawley, the head of IBM's strategic planning unit, “is that the next layers of innovation involve the intersection of very advanced specialties. The cutting edge of technical innovation in every field is increasingly specialized.” In most cases, your own company's or your own department's specialization is going to be applicable to only a very small piece of any meaningful business or social challenge. “Therefore, to come up with any valuable new breakthrough, you have to be able to combine more and more of these increasingly granular specialties. That is why collaboration is so important,” Cawley said. So you might find that a pharmaceutical company has invented a new stent that allows it to dispense a whole new class of drugs that a biomedical company has been working on, and the real breakthrough-where the real profit is created for both-is in their collaboration in getting the breakthrough drugs from one firm together with the breakthrough delivery system from another.

Or take a more colorful example: video games. Game makers have long been commissioning special music to go with games. They eventually discovered that when they combined the right music with the right game they not only sold many, many more copies of that game, but they could spin off the music for sale on CD or download as well. So some big game companies have recently started their own music divisions, and some artists have decided that they have a better chance of getting their music heard by launching it with a new digital game than on the radio. The more the flattening of the world connects all the knowledge pools together, the more specializations and specialists there will be out there, the more innovation will come from putting them together in different combinations, and the more management will be about the ability to do just that.

Perhaps the best way to illustrate this paradigm shift and how some companies have adapted to it is by looking at a very traditional manufacturer: Rolls-Royce. When you hear the word “Rolls-Royce,” what immediately comes to mind is a shiny handmade car, with a uniformed chauffeur sitting in the driver's seat and a perfectly tailored couple in the back on their way to Ascot or Wimbledon. Rolls-Royce, the quintessential stodgy British company, right? What if I told you, though, that Rolls-Royce doesn't even make cars anymore (that business was sold in 1972 and the brand was licensed to BMW in 1998), that 50 percent of its income comes from services, and that in 1990 all of its employees were in Great Britain and today 40 percent are based outside of the United Kingdom, integrated into a global operation that stretches from China to Singapore to India to Italy to Spain to Germany to Japan and up to Scandinavia?

No, this is not your father's Rolls-Royce.

“Quite a long time ago we said, 'We cannot be just a U.K. company,'” Sir John Rose, chief executive of Rolls-Royce PLC, told me in an interview while we were both visiting China. “The U.K. is a tiny market. In the late 1980s, 60 percent of our business was defense [particularly jet engines] and our primary customer was Her Majesty's government. But we needed to become a world player, and if we were going to do that we had to recognize that the biggest customer in everything we could do was the U.S., and we had to be successful in nondefense markets. So we became a technology company [specializing in] power systems.” Today Rolls-Royce's core competency is making gas turbines for civilian and military airplanes, for helicopters, for ships, and for the oil and gas and power-generation industries. Rolls-Royce has customers now in 120 countries and employs around thirty-five thousand people, but only twenty-one thousand are located in the United Kingdom, with the rest part of a global network of research, service, and manufacturing workers. Half of Rolls-Royce's revenue is now generated by businesses outside the United Kingdom. “In the U.K. we are thought of as a British company,” said Rose, “but in Germany we are a German company. In America we are an American company, in Singapore we are a Singaporean company-you have to be in order to be close to the customer but also to the suppliers, employees, and communities in which we operate.” Today Rolls-Royce employs people of about fifty nationalities in fifty countries speaking about fifty languages. It outsources and offshores about 75 percent of its components to its global supply chain. “The 25 percent that we make are the differentiating elements/' said Rose. ”These are the hot end of the engine, the turbines, the compressors and fans and the alloys, and the aerodynamics of how they are made. A turbine blade is grown from a single crystal in a vacuum furnace from a proprietary alloy, with a very complex cooling system. This very high-value-added manufacturing is one of our core competencies.“ In short, said Rose, ”We still own the key technologies, we own the ability to identify and define what product is required by our customers, we own the ability to integrate the latest science into making these products, we own the route to the market for these products, and we own the ability to collect and understand the data generated by those customers using our products, enabling us to support that product while in service and constantly add value.“

But outside of these core areas, Rolls-Royce has adopted a much more horizontal approach to outsourcing noncore components to suppliers anywhere in the world, and to seeking out IQ far beyond the British Isles. The sun may have set on the British Empire, and it used to set on the old Rolls-Royce. But it never sets on the new Rolls-Royce. To produce breakthroughs in the power-generation business today, the company has to meld together the insights of many more specialists from around the world, explained Rose. And to be able to commercialize the next energy frontier-fuel cell technology-will require that even more.

“One of the core competencies of the business today is partnering,” said Rose. “We partner on products and on service provisions, we partner with universities and with other participants in our industry. You have to be disciplined about what they can provide and what we can sensibly undertake... There is a market in R & D and a market in suppliers and a market in products, and you need to have a structure that responds to all of them.”

A decade ago, he added, “We did 98 percent of our research and technology in the U.K. and now we do less than 40 percent in the U.K. Now we do it as well in the U.S., Germany, India, Scandinavia, Japan, Singapore, Spain, and Italy. We now recruit from a much more international group of universities to anticipate the mix of skills and nationalities we will want in ten or fifteen years.”

When Rolls-Royce was a U.K.-centric company, he added, it was very vertically organized. “But we had to flatten ourselves,” said Rose, as more and more markets opened worldwide that Rolls-Royce could sell into and from which it could extract knowledge.

And what does the future hold?

This approach to change that Rolls-Royce has perfected in response to the flattening of the world is going to become the standard for more and more new start-up companies. If you were to approach venture capital firms in Silicon Valley today and tell them that you wanted to start a new company but refused to outsource or offshore anything, they would show you the door immediately. Venture capitalists today want to know from day one that your start-up is going to take advantage of the triple convergence to collaborate with the smartest, most efficient people you can find anywhere in the world. Which is why in the flat world, more and more companies are now being born global.

“In the old days,” said Vivek Paul, the Wipro president, “when you started a company, you might say to yourself, 'Boy, in twenty years, I hope we will be a multinational company.' Today, you say to yourself that on day two I will be a multinational. Today, there are thirty-person companies starting out with twenty employees in Silicon Valley and ten in India... And if you are a multiproduct company, you are probably going to have some manufacturing relationships in Malaysia and China, some design in Taiwan, some customer support in India and the Philippines, and possibly some engineering in Russia and the U.S.” These are the so-called micromultinationals, and they are the wave of the future.

Today, your first management job out of business school could be melding the specialties of a knowledge team that is one-third in India, one-third in China, and a sixth each in Palo Alto and Boston. That takes a very special kind of skill, and it is going to be much in demand in the flat world.

Rule #5: In a flat world, the best companies stay healthy by getting regular chest X-rays and then selling the results to their clients.

Because niche businesses can get turned into vanilla commodity businesses faster than ever in a flat world, the best companies today really do get chest X-rays regularly-to constantly identify and strengthen their niches and outsource the stuff that is not very differentiating. What do I mean by chest X-rays? Let me introduce Laurie Tropiano, IBM's vice president for business consulting services, who is what I would call a corporate radiologist. What Tropiano and her team at IBM do is basically X-ray your company and break down every component of your business and then put it up on a wall-size screen so you can study your corporate skeleton. Every department, every function, is broken out and put in a box and identified as to whether it is a cost for the company or a source of income, or a little of both, and whether it is a unique core competency of the company or some vanilla function that anyone else could do— possibly cheaper and better.

“A typical company has forty to fifty components,” Tropiano explained to me one day at IBM, as she displayed a corporate skeleton up on her screen, “so what we do is identify and isolate these forty to fifty components and then sit down and ask [the company], 'How much money are you spending in each component? Where are you best in class? Where are you differentiated? What are the totally nondifferenti-ated components of your business? Where do you think you have capabilities but are not sure you are ever going to be great there because you'd have to put more money in than you want?'”

When you are done, said Tropiano, you basically have an X-ray of the company, identifying four or five “hot spots.” One or two might be core competencies; others might be skills that the company wasn't fully aware that it even had and that should be built up. Other hot spots on the X-ray, though, might be components where five different departments are duplicating the same functions or services that others outside the company could do better and more cheaply and so should be outsourced-provided there is still a savings to be made once all the costs and disruptions of outsourcing are taken into account.

“So you go look at this [X-ray] and say, 'I have these areas here that are going to be really hot and core,'” says Tropiano, “and then let go of the things that you can outsource, and free up those funds and focus on the projects that could one day be part of your core competency. For the average company, you are doing well if 25 percent is core competency and strategic and really differentiating, and the rest you may continue to do and try to improve or you may outsource.”

I first got interested in this phenomenon when an Internet business news headline caught my eye: “HP bags $150 million India bank contract.” The story on Computerworld.com (February 25, 2004) quoted a statement by HP saying that it had inked a ten-year outsourcing contract with the Bank of India in Mumbai. The $150 million contract was the largest ever won by HP Services in the Asia-Pacific region, according to Natarajan Sundaram, head of marketing for HP Services India. The deal called for HP to implement and manage a core banking system across 750 Bank of India branches. “This is the first time we at HP are looking at the outsourcing of the core banking function in the Asia-Pacific region,” said Sundaram. Several multinational companies competed for the contract, including IBM. Under the contract, HP would take charge of data warehousing and document-imaging technology, telebanking, Internet banking, and automated teller machines for the whole bank chain.

Other stories explained that the Bank of India had been facing increasing competition from both public— and private-sector banks and multinational corporations. It realized that it needed to adopt Web-based banking, standardize and upgrade its computer systems, lower its transaction costs, and generally become more customer-friendly. So it did what any other multinational would do-it gave itself a chest X-ray and decided to outsource all the funtions it did not believe were part of its core competency or that it simply did not have the internal skills to do at the highest level.

Still, when the Bank of India decides to outsource its back room to an American-owned computer company, well, that just seemed too weird for words. “Run that by me again,” I said, rubbing my eyes. “HP, the folks I call when my printer breaks, won the outsourcing contract for managing the back room of India's 750-branch state-owned bank? What in the world does Hewlett-Packard know about running the backroom systems of an Indian bank?”

Out of curiosity, I decided to visit the HP headquarters in Palo Alto to find out. There, I met Maureen Conway, HP's vice president for emerging market solutions, and put the above question directly to her.

“How did we think we could take our internal capabilities and make them good for other people?” she answered rhetorically. In brief, she explained, HP is constantly hosting customer visits, where its corporate clients come to its headquarters and see the innovations that HP has brought to managing its own information systems. Many of those customers go away intrigued at how this big company has adapted itself to the flat world. How, they ask, did HP, which once had eighty-seven different supply chains-each managed vertically and independently, with its own hierarchy of managers and back-office support-compress them into just five supply chains that manage $50 billion in business, and in which functions like accounting, billing, and human resources are handled through a companywide system? What computers and business processes did HP install to consolidate all this efficiently? HP, which does business in 178 countries, used to handle all its accounts payable and receivable for each individual country in that country. It was totally chopped up. Just in the last couple of years, HP created three transaction-processing hubs-in Bangalore, Barcelona, and Guadalajara-with uniform standards and special work flow software that allowed HP offices in all 178 countries to process all billing functions through these three hubs.

Seeing the reaction of its customers to its own internal operations, HP said one day, “Hey, why don't we commercialize this?” Said Conway, “That became the nucleus of our business process outsourcing service... We were doing our own chest X-rays and discovered we had assets that other people cared about, and that is a business.”

In other words, the flattening of the world was both the disease and the cure for the Bank of India. It clearly could not keep up with its competitors in the flattening banking environment of India, and, at the same time, it was able to get a chest X-ray and then outsource to HP all those things that it no longer made sense to do itself. And HP, having done its own chest X-ray, discovered that it was carrying a whole new consulting business inside its breast. Sure, most of the work for the Bank of India will be done by HP employees in India or Bank of India employees who will actually join HP. But some of the profits will find their way back to the mother ship in Palo Alto, which will be supporting the whole operation through its global knowledge supply chain.

Most of HP's revenues today come from outside the United States. But the core HP knowledge and infrastructure teams who can put together the processes that win those contracts-like running the back room of the Bank of India-are still in the United States.

“The ability to dream is here, more than in other parts of the world,” said Conway. “The nucleus of creativity is here, not because people are smarter-it is the environment, the freedom of thought. The dream machine is still here.”

Rule #6: The best companies outsource to win, not to shrink. They outsource to innovate faster and more cheaply in order to grow larger, gain market share, and hire more and different specialists-not to save money by firing more people.

Dov Seidman runs LRN, a business that provides online legal, compliance, and ethics education to employees of global companies and helps executives and board members manage corporate governance responsibilities. We were having lunch in the fall of 2004 when Seidman casually mentioned that he had recently signed an outsourcing contract with the Indian consulting firm MindTree.

“Why are you cutting costs?” I asked him.

“I am outsourcing to win, not to save money,” Seidman answered. “Go to our Web site. I currently have over thirty job openings, and these are knowledge jobs. We're expanding. We're hiring. I am adding people and creating new processes.”

Seidman's experience is what most outsourcing is actually about— companies outsourcing to acquire knowledge talent to grow their business faster, not simply to cut costs and cut back. Seidman's company is a leader in one of those completely new industries that just appeared in the flat world-helping multinationals foster an ethical corporate culture around an employee base spread all over the world. Although LRN is a BE company-founded ten years before Enron exploded-demand for its services surged in the PE era-post-Enron. In the wake of the collapse of Enron and other corporate governance scandals, a lot more companies became interested in what LRN was offering-online programs for companies to forge common expectations and understandings of their legal and ethical responsibilities, from the boardroom to the factory floor. When companies sign up with LRN, their employees are given an online education, including tests that cover everything from your company's code of conduct to when you are allowed to accept a gift to what you need to think about before hitting Send on an e-mail to what constitutes a bribe of a foreign official.

As the whole issue of corporate governance began to mushroom in the early 2000s, Seidman realized that his customers, much like E*Trade, would need a more integrated platform. While it was great that he was educating their employees with one online curriculum and advising boards on ethics issues with another, he knew that company executives would want a one-stop Web-based interface where they could get a handle on all the governance and ethics issues facing their organizations— whether it was employee education, the reporting of any anomalous behavior, stewardship of a hard-earned corporate reputation, or government compliance-and where they could get immediate visibility into where their company stood.

So Seidman faced a double challenge. He needed to do two things at once: keep growing his market share in the online compliance education industry, and design a whole new integrated platform for the companies he was already working with, one that would require a real technological leap. It was when faced with this challenge that he decided to enlist MindTree, the Indian consulting firm, in an outsourced relationship that offered him about five well-qualified software engineers for the price of one in America.

“Look,” said Seidman, “when things are on sale, you tend to buy more. MindTree offered a sale not on last season's closeout, but on top-notch software engineering talent that I would have been hard-pressed to find elsewhere. I needed to spend a lot of money defending and extending my core business and continue to take care of my customers, who were working off my current programs. And at the same time, I had to make a giant leap to offer my customers what they were asking for next, which was a much more robust and total online solution to all their ethics, governance, and compliance questions. If I don't meet their needs, someone else will. Partnering with MindTree allows me to basically have two teams-one team [mostly Americans] that is focused on defending and extending our core business, and the other team, including our Indian consultants, focused on making our next strategic leap to grow our business.”

Since ethics is at the core of Seidman's Los Angeles-headquartered business, how he went about outsourcing was as important as the ultimate results of the relationship. Rather than announcing the MindTree partnership as a done deal, Seidman conducted an all-hands town hall meeting of his 170 or so employees to discuss the outsourcing he had in mind. He laid out all the economic arguments, let his staff weigh in, and gave everyone a picture of which jobs would be needed in the future and how people could prepare themselves to fit in. “I needed to show my company that this is what it would take to win,” he said.

Have no doubt, there are firms that do and will outsource good jobs just to save money and disperse it to shareholders or management. To think that is not happening or will not happen is beyond naive. But firms that are using outsourcing primarily as a tool to cut costs, not enhance innovation and speed growth, are the minority, not the majority-and I would not want to own stock in any of them. The best companies are finding ways to leverage the best of what is in India with the best of what is in North Dakota with the best of what is in Los Angeles. In that sense, the word “outsourcing” should really be retired. The applicable word is really “sourcing.” That is what the flat world both enables and demands, and the companies that do sourcing right end up with bigger market shares and more employees everywhere-not smaller and fewer.

“This is about trying to get bigger faster, about how we make our next leap in less time with greater assurance of success,” said Seidman of his decision to source critical areas of development of his new platform to MindTree. “It is not about cutting corners. We have over two hundred clients all over the world now. If I can grow this company the way that I want to, I will be able to hire even more people in all our current offices, promote even more people, and give our current employees even more opportunities and more rewarding career paths-because LRN's agenda is going to be broader, more complex and more global... We are in a very competitive space. This [decision to use outsourcing] is all about playing offense, not defense. I am trying to run up the score before it's run up on me.”

Rule #7: Outsourcing isn't just for Benedict Arnolds. It's also for idealists.

One of the newest figures to emerge on the world stage in recent years is the social entrepreneur. This is usually someone who burns with desire to make a positive social impact on the world, but believes that the best way of doing it is, as the saying goes, not by giving poor people a fish and feeding them for a day, but by teaching them to fish, in hopes of feeding them for a lifetime. I have come to know several social entrepreneurs in recent years, and most combine a business school brain with a social worker's heart. The triple convergence and the flattening of the world have been a godsend for them. Those who get it and are adapting to it have begun launching some very innovative projects.

One of my favorites is Jeremy Hockenstein, a young man who first followed a time-honored path of studying at Harvard and going to work for the McKinsey consulting firm, but then, with a colleague from McKinsey, veered totally off course and decided to start a not-for-profit data-entry firm that does outsourced data entry for American companies in one of the least hospitable business environments in the world, post-Pol Pot Cambodia.

Only in a flat world!

In February 2001, Hockenstein and some colleagues from McKinsey decided to go to Phnom Penh, half on vacation and half on a scouting mission for some social entrepreneurship. They were surprised to find a city salted with Internet cafes and schools for learning English-but with no jobs, or at best limited jobs, for those who graduated.

“We decided we would leverage our connections in North America to try to bridge the gap and create some income-generating opportunities for people,” Hockenstein said. That summer, after another trip funded by themselves, Hockenstein and his colleagues opened Digital Divide Data, with a plan to start a small operation in Phnom Penh that would do data entry-hiring locals to type into computers printed materials that companies in the United States wanted in digitized form, so that it could be stored on databases and retrieved and searched on computers. The material would be scanned in the United States and the files transmitted over the Internet. Their first move was to hire two local Cambodian managers. Hockenstein's partner from McKinsey, Jaeson Rosenfeld, went to New Delhi and knocked on the doors of Indian data-entry companies to see if he could find one -just one-that would take on his two Cambodian managers as trainees. Nine of the Indian companies slammed their doors. The last thing they wanted was even lower-cost competition emerging in Cambodia. But a generous Hindu soul agreed, and Hockenstein got his managers trained. They then hired their first twenty data-entry operators, many of whom were Cambodian war refugees, and bought twenty computers and an Internet line that cost them $100 a month. The project was financed with $25,000 of their own money and a $25,000 grant from a Silicon Valley foundation. They opened for business in July 2001, and their first work assignment was for the Harvard Crimson, Harvard's undergraduate daily newspaper.

“The Crimson was digitizing their archives to make them available online, and because we were Harvard grads they threw some business our way,” said Hockenstein. “So our first project was having Cambodians typing news articles from the Harvard Crimson from 1873 to 1899, which reported on Harvard-Yale crew races. Later, actually, when we got to the years 1969 to 1971, when the turmoil in Cambodia was all happening, they were typing [Crimson stories] about their own story... We would convert the old Crimsons, which were on microfilm, to digital images in the United States through a company in Oklahoma that specialized in that sort of thing, and then we would just transfer the digital images to Cambodia by FTP [file transfer protocol]. Now you can go to thecrimson.com and download these stories.” The Cambodian typists did not have to know English, only how to type English characters; they worked in pairs, each typing the same article, and then the computer program compared their work to make sure that there were no errors.

Hockenstein said that each of the typists works six hours a day, six days a week, and is paid $75 a month, twice the minimum wage in Cambodia, where the average annual income is less than $400. In addition, each typist receives a matching scholarship for the rest of the workday to go to school, which for most means completing high school but for some has meant going to college. “Our goal was to break the vicious cycle there of [young people] having to drop out of school to support families,” said Hockenstein. “We have tried to pioneer socially responsible outsourcing. The U.S. companies working with us are not just saving money they can invest somewhere else. They are actually creating better lives for some of the poor citizens of the world.”

Four years after starting up, Digital Divide Data now has 170 employees in three offices: Phnom Penh; Battambang, the second-largest city in Cambodia; and a new office in Vientiane, Laos. “We recruited our first two managers in Phnom Penh and sent them to India to get trained in data entry, and then, when we opened the Laos office, we recruited two managers who were trained by our staff in the Phnom Penh office,” Hockenstein said.

This tree has scattered all kinds of seeds. Besides the Harvard Crimson, one of the biggest sources of data-entry work was NGOs, which wanted the results of their surveys about health or families or labor conditions digitized. So some of the first wave of Digital Divide Data's Cambodian workers left the company and spun off their own firm to design databases for NGOs that want to do surveys! Why? Because while they were working for Digital Divide Data, said Hockenstein, they kept getting survey work from NGOs that needed to be digitized, but because the NGOs had not done enough work in advance to standardize all the data they were collecting, it was very hard to digitize in any efficient manner. So these Cambodian workers realized that there was value earlier in the supply chain and that they could get paid more for it-not for typing but for designing standardized formats for NGOs to collect survey data, which would make the surveys easier and cheaper to digitize, collate, and manipulate. So they started their own company to do just that-out of Cambodia.

Hockenstein argued that none of the jobs being done in Cambodia came from the United States. This sort of basic data-entry work got outsourced to India and the Caribbean a long time ago, and, if anywhere, that is where the jobs were taken from. But none of this would have been possible to set up in Cambodia a decade ago. It all came together in just the last few years.

“My partner is a Cambodian,” said Hockenstein. “His name is Sophary, and until 1992 he was living in a refugee camp on the Cambodia-Thai border while I was living in Harvard Square as an un-dergrad. We were worlds apart. After the UN peace treaty [in Cambodia], he walked home ten days to his village, and now today he lives in Phnom Penh running Digital Divide Data's office.” They now instant-message each other each night to collaborate in the delivery of services to people and companies around the world. The type of collaboration that is possible today “allows us to be partners and equals,” said Hockenstein. “It is not one of us dominating the other; it is real collaboration that is creating better futures for the people at the bottom and the top. It is making my life more meaningful and creating concrete opportunities for people living on a dollar or two a day... We see the self-respect and confidence that blossoms in people who never before would have had an on-ramp into the global economy.”

So Hockenstein and his partners are getting calls now from Mongolia, Pakistan, Iran, and Jordan from people who want to provide IT services to the world and are wondering how they can get started. In mid-2004, a client approached Digital Divide Data to digitize an English-Arabic dictionary. Around the same time, Hockenstein's office received an unsolicited e-mail from a company in Iran that was running a data-entry firm there. “They found us through a Google search in trying to find ways of expanding their local data-entry business beyond the borders of Iran,” said Hockenstein. So Hockenstein asked the Iranians whether they could do an English-Arabic dictionary, even though the language of Iran is Farsi, which uses some but not all of the same letters as Arabic. “He said they could,” said Hockenstein, “so we partnered on a joint project for this client to digitize an Arabic dictionary.” What I like most about the story, and why it is so telling of the flat world, is Hockenstein's kicker: “I still have never met the guy [in Iran]. We did the whole deal over Yahoo! instant messenger and e-mail. We wired him the money through Cambodia... I invited him to my wedding, but he wasn't able to come.”