Cross-company business processes as a critical success factor for SMEs

Reduction of transaction costs in virtual cooperations

In practice, it has been shown that the spontaneous coming together and cooperation of legally independent companies in the form of virtual companies represents a genuine alternative to internal growth or external growth through mergers. This is due to the great flexibility and speed of virtual companies that focus on core competencies. However, they only work if a network with a prepared organizational and technical infrastructure has been established between the companies involved in order to reduce transaction costs to the level of internal costs. The use of new information technologies is becoming increasingly important.

Transaction costs include all costs that are necessary to carry out transactions between two parties. There are two ways to reduce these transaction costs: Either you reduce the number of transactions or you optimize the transaction costs per transaction. As it is still important today to do the right thing first and then do it right (effectiveness before efficiency), it is advisable when setting up virtual companies to first define the transaction requirements and then optimize them. And in principle, this is very simple if you understand virtual companies to be similar to natural companies that have still internalized the status of departmental thinking.

Let’s remember: organizational processes, be it the development of a product or the processing of a customer order, used to be and still are often hampered by departmental thinking in many SMEs. In English, the term “over the wall approach” is used very vividly: companies lose a lot of time and money when departments complete their isolated tasks and then pass on the cemented results to the next department.

In order to design the processes in a company effectively, the organizational walls between these departments must be overcome; a continuous business process must be established. If several companies want to work together effectively, they must also take precisely this step between the individual companies: Organizational processes in the individual companies must be coordinated in such a way that they also form a continuous business process across companies, which causes as few interfaces and therefore as few transaction costs as possible. Such a business process, optimized across companies, is the basis for the functioning and success of virtual companies.

Additional effort at the start of the process chain

When streamlining business processes, it is often found that additional effort is required at the beginning of the process chain in order to be able to work more efficiently at the end of the process chain. This effect sometimes makes it difficult to optimize business processes within a company, as each division is keen to keep its costs as low as possible. This becomes even more difficult when supposed costs and benefits are shifted not between different departments of a company, but between different companies.

This is where many attempts at cooperation in the form of virtual companies fail. Nevertheless, an optimized and consistent business process is the basic prerequisite for any successful long-term cooperation between companies. For this reason, the virtual company VIA, which was founded in 1997 by six automotive suppliers from North Rhine-Westphalia, decided to bring in a management consultant with experience of virtual companies to support the design of the business process in a non-partisan manner and to act as an ombudsman to resolve potential conflicts between the individual parties. In addition, particular emphasis was placed on joint development cooperation, as this is where the greatest opportunities were seen to realize optimized solutions at lower costs. This virtual development cooperation is now being optimized by an electronic cooperation platform called Kopl@, thus addressing the second key point of transaction cost reduction, namely doing the right thing right.

The fine tuning

The more freely the cooperation between different parties is organized and the thinner the common set of rules is, the more important trust is between the employees of the companies involved. This trust between the partners can only be achieved through regular personal contact. Nevertheless, it is not necessary to be unnecessarily distracted from the actual work with countless meetings, coordination and steering committee meetings and to drive up transaction costs. This applies to both real and virtual companies.

“Countless meetings drive up transaction costs”

The necessary intensive communication between the distributed members of cross-company or cross-location project teams, as is usually the case in product development today, can now often be realized using new means of communication. They enable information to be exchanged easily, quickly, cost-effectively and intensively, thus reducing transaction costs.

It is therefore crucial for effective collaboration between the geographically distributed partners of virtual companies,

  • that all participating companies have the same, always up-to-date information regarding joint projects,
  • that duplication of work for recording required information and for managing documents and document versions is avoided,
  • that the know-how of individual cooperation partners and implemented projects can be made available to the entire network,
  • that the partners can find information easily and quickly,
  • that they are automatically informed about the project changes that are important to them and
  • that workflows can be specified and monitored across company and location boundaries.

“Work processes must be controllable across company boundaries”

The latter aspect is particularly important in terms of reducing transaction costs. In order to achieve this goal, the participating companies should have a joint cooperation platform, which in the case of the VIA Virtual Enterprise was designed as follows:

All employees in the participating companies can access the cooperation platform via their web browser and the Internet. The cooperation platform is presented to the individual user as a workstation portal on his PC. He is automatically informed by Kopl@ about project changes and can log into Kopl@ from anywhere via an Internet connection and a web browser. From here, he can access all projects with the associated documents, task lists, discussions, etc. to find out about the project status, project changes, deadline, cost and capacity shifts and other project-relevant data. Particular attention is paid to ensuring that each employee only receives the information relevant to them and can recognize priorities in the processing of the individual subtasks.

For their daily work, they can “upload” documents or edit existing documents in Kopl@, distribute tasks or tick off or check completed tasks. To ensure that projects are handled as orderly as possible, Kopl@ provides a container individually packed for VIA projects with predefined project phases, milestones, forms and approval procedures at the start of a new project and is adapted to the certified product development process of the user companies or can be adapted with regard to new standards (e.g. for the introduction of EN ISO 9000 or the new automotive standard TS 16.949) or new process optimizations.

The workplace portal also offers him access to company standards, procedural instructions and other important information and provides him with links to other important websites if required. Documents can either be kept on the cooperation platform or access to a so-called Product Data Management System (PDM system) can be activated.

Kopl@ uses powerful search functions to make the know-how stored in projects and on external file systems accessible to users again. This is intended to provide the project teams involved with all available technical information in order to avoid development errors during the course of the project or to recognize them more quickly.

Encryption techniques are used to ensure sufficient data security when exchanging information over the Internet.

In the future, it is hoped that even faster data transfer options and Internet video telephony will be introduced to further increase the performance of the system. These are expected in the next three years. Until then, the aim is to bring project management to virtual perfection in order to make optimum use of the options available and further reduce transaction costs.

CONCLUSION

When asked why large companies are more successful in some sectors and smaller, networked companies are more successful in others, business management today has a clear, simple answer: if the internal “transaction costs” are lower than the external ones, companies must grow in order to remain successful. Where internal transaction costs are higher than external ones, smaller networked companies have better competitive opportunities. With the support of a cooperation platform, external transaction costs can be reduced to the level of internal transaction costs. They therefore represent a central instrument with which medium-sized companies that work in a network and focus on core competencies can compete with or even overtake large competitors. In theory, there is already agreement on this. [Laubacher] In practice, however, the tools that enable any company to become part of a virtual company are only available today. Small and medium-sized companies should not miss out on these opportunities, otherwise they run the risk of being passed by by the train that has been set in motion by the Internet.


Author: Dr. Götz-Andreas Kemmner, Managing Partner of the management consultancy Abels & Kemmner GmbH, Herzogenrath, Germany.

References: Laubacher, Robert J., Malone, Thomas W.: Two Scenarios for 21st Century Organizations: Shifting Networks of Small Firms or All Encopassing “Virtual Countries”?

Prof. Dr. Andreas Kemmner

Prof. Dr. Andreas Kemmner

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