RAND Europe Study Finds "Virtual Smart Organizations" Are Addressing New Opportunities of the Global Digital Economy Head-on

For Release

November 8, 2004

Businesses that use computer communications and flexible manufacturing processes to respond quickly to the needs of customers can contribute to European economic competitiveness, according to a report issued today by RAND Europe.

Use of the Internet, wireless technology, and software that tracks inventory is transforming European business. Flexible, rapid response to customer needs is offering a competitive advantage to virtual, smart businesses operating in Europe. Even so, Europe’s labor culture may hinder growth of the new business model, which often requires flexible hiring and firing practices, according to the study titled “Europe, Competing: Market Prospects, Business Needs and Technological Trends for Virtual, Smart Organisations in Europe.”

In the research study, RAND was asked by the European Commission’s Information Society Directorate-General to examine business practices of Virtual Smart Organizations (VSOs) in Europe.

“Through almost a year of research and polling across Europe, the RAND research study discovered and recommends best practices that we gathered from model companies in Europe,” said study leader Caroline Wagner. “Though some of our recommendations may appear to be in contrast with contemporary EU business cultures and long-standing labor practices, we are confident that our study will encourage creative approaches to matching responsible labor practices with the efficiency of VSO operations.”

Working in collaboration with the Danish Technology Institute (DK) and Addico Cornix Ltd (UK), RAND researchers looked at information technology structures, labor practices, and governmental policies that would encourage the growth of business-to-business VSOs. RAND also was asked to cite metrics for measuring a company’s transition from old-economy status to VSO status, and identify ways to mark their growth.

Nine months in the making, the RAND research study was inspired by the EC’s desire to encourage the growth of VSOs so that EU countries and companies, and their labor forces, realize the full benefits of the global digital economy.

Among the conclusions of the RAND research study:

  • VSOs make efficient use of Internet and web technology to increase efficient operations and drive down business costs. This is done by using customer relationship management (CRM) software that accesses a transparent historical record of the enterprise’s efforts on behalf of the client.
  • VSOs is an essential stage in the business evolution of escaping from the “commoditisation trap” (whereby ICT-enabled process efficiencies cease to be a positive benefit and become merely an essential hurdle for all to overcome) and moving into, first, a stage of internally derived innovation (the Virtual phase) that enables market leading and then a stage of externally derived innovation (the Smart phase) that enables more radical market creation.
  • While leading-edge businesses are making these transitions in Europe, most businesses will take on at least some features of VSOs over time.
  • Model VSOs cost-allocate every hour of labor. VSOs need the freedom to expand, contract, or outsource their labor pools in response to actual demand. Laws, regulations, or legacy labor agreements that require companies to carry non-cost-allocated labor may be in conflict with the VSO business model.
  • In model VSOs, discrete company departments are replaced by alliances of talent and capabilities that form, dissolve and reform to accomplish highly specific, cost-allocated tasks. The alliances that form can be made up of individuals, teams, or technology owned by the parent company (“native” skills and capabilities) or “outsourced” labor or technology that is engaged for just the duration of the required task.
  • The ability to be flexible is seen by European experts as the primary benefit of the transition towards VSO operations.

The study clearly demonstrated that VSOs are a real and significant phenomenon; that they can be observed and measured; that they can and do offer significant and particular benefits that are potentially very large in their contribution to competitiveness, and that support (including additional research topics) leading to facilitation of their implementation is clearly appropriate. Detailed justification and explanation is offered for these conclusions, and recommendations are made appropriately.

“These are exciting prospects and it is clear that support for VSOs should, in principle, be actively promoted,” said research team member Steve Simmons of Addico Cornix, UK. “The full report analyzes the benefits and disbenefits and identifies winners and losers: the objectives of support should be to maximize the impact on the former and minimize impact on the latter. There are complex issues here, but it is significant that Virtual implementation produces less ‘losers’ than does initial ICT implementation, and Smart produces less losers still.”

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