Access to talent worldwide, broadband connectivity, powerful collaboration tools, and fierce global competition are causing a recalibration of thinking about sources of economic advantage. Traditionally, the key sources are associated with economies of scale and scope, so let me start by defining those:
Economies of scale: cost advantages gained from efficiencies when a firm produces a lot of the same product – when production increases the average cost per unit falls due to fixed costs being distributed across a larger number of units.
Economies of scope: cost advantages gained from efficiencies resulting when a firm produces a variety of products that draw on the same resources. For example, research & development, design or marketing costs being used across product lines, and not just one.
Are these still important? Yes, absolutely! But as the world around us changes, so must our thinking.
A prime candidate for being factored into the economic equation is economies of expertise, although you won’t find many references to this concept on the Internet. I first came across the term in a blog posting by Rod Brown (http:investmentinnovation.wordpress.com) in which he summarizes a speech in Sydney by Michael Cannon-Brookes (IBM VP – Business Development, China and India). Some essentials of the speech are:
· Work flows to places where it is done best
· Economies of expertise describe firms that take advantage of skill sets wherever they are
· The horizontalization of business needs collaboration to deliver maximum results
This isn’t about reducing costs by finding cheap labor overseas to perform low skill jobs. In a speech given by Glen Boreham, also of IBM, he says “Global sourcing . . . once purely a cost play . . . is now an expertise play.”
One response to leveraging skill sets has been the creation of centers of excellence. These centers can be located where the skills are. IBM Asia has HR functions mostly in Manila, procurement in Shenzen, accounts payable in Shanghai, accounting in Malaysia, and help desk/customer services in Brisbane, Australia where there is a significant multilingual pool of expertise.
Locating a function where specific skills are advanced and abundant certainly can yield economic benefits – possibly lower salaries (although salary gaps between the developed and developing economies are closing all the time), but also economies of scope in that each specialist function provides services across businesses and product lines. A concentration of skills will also generate higher levels of productivity and quality.
Before continuing, let me say that I see the economies I’m talking about here as being combinations of efficiency (producing results quickly with little wasted effort or resources) and effectiveness (producing the desired effect). You can do something efficiently, but without producing the desired effect. You can also do something effectively, but in an inefficient way. It is the optimal combination of the two that generates powerful results.
If we take the essence of economies of expertise to be: Taking advantage of skills sets wherever they are (which I believe to be correct), we can distinguish between at least three sources of economic benefit:
Individual Expertise (IE): Utilizing the expertise of a specific individual in completing a task most efficiently and effectively - no matter where that individual is located.
Distributed Expertise (DE): Utilizing the expertise of two or more individuals - at different locations - in efficient and effective collaborative efforts to produce outcomes that no individual could have produced alone.
Concentrated Expertise (CE): Utilizing the combined expertise of a specialized, defined group efficiently and effectively across multiple business areas.
Accountability for achieving global economies of expertise lies principally with the Chief Learning Officer, but responsibility lies with other senior executives, managers, and project team leaders who make frequent decisions about the organization of work and leveraging of expertise. Scale and scope economies must make room for another family member.