Restructuring The Back-Office: 4 Options
Have your back-office costs gone wild? Is their quality and efficiency, say, in HR, finance or legal, ordinary or poor? Is it time to restructure the back-office?
Done right, restructuring the back-office can dramatically improve quality in support services, and thus the value your organization delivers to customers (internal and external).
Inspired by progressive firms on our Bucket List, and the economic model of 'Market Structure theory', we highlight 4 options to do that.
1. Internal monopoly
As Bram wrote earlier this week, the typical back-office is an internal monopoly. It is the only provider. Employees needing support have no choice, and most back-offices face no competition for what they deliver.
This resembles a 'monopoly’, a market structure in which a single firm accounts for all sales of a particular good or service. This monopoly becomes 'pure' when no substitute is available. Without alternatives, such suppliers enjoy a pure monopoly and very strong market power. Simply, they control the market.
Most progressive organizations have back-offices with similar monopolies. And often they reduce them to the absolute minimum. This is the first option in restructuring your back-office: the 'minimal back-office'.
The idea is to simplify/minimize support services by eliminating non-essential activities and focusing on what is most important for staff and customers. The key is to focus on the most essential tasks, minimize bureaucracy, and using automation to make the work of front-line staff as smooth as possible.
Buurtzorg, a Dutch health-care organization, is a good example of an organization pioneering a 'minimal back-office.' Their ~15,000 employees are served by only 50 people who take care of all back-office tasks. (Read more)
2. Internal competition
Market Structure theory argues that a monopoly reduces choice for buyers. It also argues that this lack of competition gives companies the power to create product or service scarcity, which can lead to inferior products and services. It can also be argued that back-offices enjoying an internal monopoly can lead to inferior support services.
This has inspired some progressive organizations to implement an internal market mechanism between different back-offices teams. The idea here is that internal competition between different back-office teams will favor those with the most efficient, highest quality services. As such the organization can source the best possible services. This points to the second option of restructuring your back-office: creating an internal market.
VkusVill, a Russian retail chain with ~14,000 employees, is a good example of pioneering such an internal market. To protect their company from internal monopolies, they have duplicated everything in and around the company—including the back-office. There are, for example, two legal departments, giving employees the choice to work with either. They aim to create a healthy form of internal competition between these back-office departments. This should motivate them to add as much value as possible. (Read more)
This resembles the market structure called an 'oligopoly.' In an oligopoly a small collection of companies produce similar goods or services, and thereby dominate the market. The companies in an oligopoly tend to compete against one another. However, no other firms can or will enter the market, resulting in limited competition.
3. Monopolistic competition
Market Structure theory also argues competition is useful because it reveals actual customer demand and induces the seller to provide service and price levels that buyers want. In other words, competition can align the seller's interests with buyer interests.
This has inspired some progressive organizations to implement a more open market mechanism which resembles so-called 'monopolistic competition.' This is a market structure in which a large number of firms compete against each other in a market featuring low barriers to entry. Thus a third option in restructuring your back-office: create an open market.
As Bram wrote in more detail, Haier, a Chinese white-goods manufacturer with ~80,000 employees, is a good example of a company pioneering this approach. Haier has multiple internal back-office teams offering support services to other teams. However, at Haier any team can be dissolved if they do not provide a competitive service or product – much like any organization in a free market. Taking it one step further, teams can also source their back-office services from external resources. (Read more)
This means Haier's internal back-office teams not only have to deal with internal competitors (like at VkusVill) but also with external competition. Such an open market, based on monopolistic competition is considered highly accessible with few barriers preventing a competitor from entry.
4. Perfect competition
Perfect (or pure) competition is the fourth option in Market Structure theory. This structure is defined by a large number of small firms competing against each other in a market that produces an optimal level of output.
Such perfect competition is an ideal and rare in the real world. We have not come across any progressive organization pioneering this approach. If you happen to know of any please tell me below.
