CEO, phone home

Picture the company of the future. Its main assets are its brands, its know-how and the loyalty of its customers. Almost everything it does, from product design to manufacturing to sales and customer service, is outsourced to far-flung, specialist providers. It does business wherever its customers and suppliers are, not in a fixed location. There are no central corporate headquarters, no cubicles, no water coolers and there is no executive suite.

Sound familiar? Of course not. Although futurists have long been heralding the arrival of the flexible, virtual, networked organization – companies linked by their brand images and internal telecoms systems but otherwise atomized and dispersed – the reality is somewhat different. While more and more companies are using dispersed or even ‘virtual’ offices to manage the many parts of their businesses, most of them take pains to replicate the environment of bricks-and-mortar headquarters to ensure they function as a team.

‘Human contact is still the most efficient way to pass information along when you really need to understand something,’ says Minna Aila, a project director for Elcoteq, a global electronics manufacturing company that has its origins in Finland.

Elcoteq should know, since it is managed on a dispersed model. Its CEO, COO and CFO are based in Switzerland. The senior vice president for human resources is in Beijing, the senior vice president for product development is in Hong Kong and the senior vice president of business development is in the US.

The reasons for this structure have to do with the growth of Elcoteq’s global markets and the need to be close to both end-users and manufacturing locations worldwide. The company has regional headquarters in Budapest, Dallas and Hong Kong. ‘As we became a global company, our connection to Finland became thinner,’ Aila says.

Racking up the airmiles

Despite its multiple locations, the company keeps to a program of personal meetings to ensure that key issues are addressed. For example, the top management team meets in person twice per month. So does the CFO and his team, although he is in Switzerland and his team is located in Finland.

This will continue even after the company’s legal domicile shifts officially to Luxembourg in January 2008. Managers still need to be close to global markets and manufacturing locations and are prepared to bridge their geographic distances with frequent travel. In addition to the travel strain on executives, ‘all this is quite challenging for the assistants, since they have to put this puzzle together,’ Aila notes.

Creating a new environment

Inttra, a US firm that manages an online ocean-transportation booking portal, takes a similar approach. While its senior management are all based in New Jersey, the next level of management is spread far and wide: IT functions are run from both Singapore and New Jersey; customer service is based in Florida and Hong Kong; and finance is run in part from Singapore. Beyond that, the firm’s 238 employees are spread across 11 offices worldwide.

The geographic spread of the company has become part of its culture. ‘Our employees are quite used to having late-night emails and phone calls with colleagues in other time zones,’ says CFO William Jennings.

He adds that there are advantages to the difference in time zones, along with the inconveniences. ‘There are certain tasks that we can send to Singapore as our day is ending in New Jersey, and they then have a whole day to work on it. When I come in the next morning, we can see where we are.’

Nonetheless, the firm insists on some in-person interaction among its dispersed managers. A team of operational managers holds conference calls once a month and face-to-face meetings at least twice a year. These meetings focus predominantly on improving internal communications. ‘They are about getting people out of thinking only of their function, and becoming more aware of their colleagues’ functions,’ Jennings says.

The meetings are also about strengthening internal networks. ‘Email doesn’t communicate emotional tone very well,’ Jennings says. ‘Telephone does better, but there is nothing like being in front of someone and having a conversation and seeing their reaction to what you are saying as you say it.’

Airwide Solutions, which markets mobile messaging products and services, takes a similar view. It operates from four regional headquarters: Reading, UK; Burlington, Massachusetts; India; and Singapore. Each region has roughly equal weighting within the company. In all, the company has 300 employees spread out in 15 offices worldwide.

Airwide’s reasons for parceling management out to various regions are similar to those of Elcoteq and Inttra: to stay close to its customers. ‘In our industry, different regions have very different requirements,’ says chief marketing officer Jay Seaton. ‘For example, the technology used in Europe for mobile messaging is GMS whereas the US standard is CDMA. The US market is more oriented to personal computers and instant messaging, whereas Western Europe is more into text and voice messaging via mobile phones, and Asia is more oriented to text messaging.’

Members of senior management, who are based in the various regional headquarters, meet with each other once a month, and with their own far-flung employees on a regular basis. According to Seaton, ‘This means that they are on the move a lot.’

Decentralization brings challenges

The decentralized model entails some duplication of administrative functions among the regions, and internal communications are more difficult than if the company were centralized, ‘but we think the benefits outweigh the costs,’ Seaton says.

As the company grows, the challenges of operating on a decentralized model grow as well, he concedes. The company has started adding global managers for each function, such as a global head of sales, and has started rotating staff among the regions. The firm is also developing common procedures, for example for sales and marketing and for financial reporting, to generate economies of scale and to ensure a consistent company image. Seaton says, ‘As long as you can put in place processes and systems to coordinate everyone’s activities, you are growing in a controlled way.’

Still, ‘we revisit the issue (of multiple headquarters) from time to time, since coordination problems become magnified as the company grows,’ he adds.

The effect of rapid growth on a firm using a networked model is also a concern for VOXmarketing, a small advertising agency that operates entirely virtually. The three owners and around 20 employees stay in touch by phone and email, and use the same web-based project management system, but otherwise work on their own from their homes.

‘Not everyone is suited to working this way,’ says VOXmarketing managing partner Amy Paxson. ‘I have interviewed candidates who are completely qualified, but who have to go to an office every day because they need the structure and the social connections. Those people would not be a good fit for a virtual company.’

While its internal communication is mainly conducted by phone and online, the company replicates some aspects of traditional office-based companies. It has company outings and an annual Christmas party, and holds occasional brainstorming meetings. ‘There are times when we need to sit together in a room with a white pad on an easel and magic markers, and in those cases we do get together in person,’ Paxson says.

Growth limits

In addition, a company manual outlines every aspect of how VOXmarketing does business, including agency policies on such things as vacations and referral bonuses, job descriptions and procedures for tracking projects. Among other things, the manual ensures that all employees are opening, managing and tracking projects on the shared, web-based system in the same way. ‘We don’t want people to be designing their own ways of working just because they are working from home,’ says Paxson.

Still, the virtual model poses certain limitations. It reduces the potential resale value of the firm, and imposes limits on the type and size of clients the firm can serve. ‘Our virtual existence limits the types of clients we can successfully pitch. If we have larger clients, we will probably need to get an office,’ Paxson says. The company currently has eight regular clients, and estimates that two additional clients would bring the issue to a head: ‘We may reach a point where we have to decide we either get an office or we don’t get any bigger,’ Paxson says.

Youth movement

These firms, while keeping aspects of traditional headquarters-based companies, are on the vanguard of a more decentralized approach to management, say experts in organization design.

In part, the shift to greater use of virtual-work models is being driven by younger people, says Lee Dittmar, a principal and leader of the governance, risk and compliance practice at Deloitte Consulting. ‘People entering the workforce now tend to be efficient at using technology and expect more flexibility to work virtually,’ he says. ‘Many new college graduates do not have landline phones at home. This is a societal shift that also manifests itself in the workplace. It is a different mind set.’

‘The workers involved are usually white-collar professionals and they tend to be disciplined,’ notes Andrew Zacharakis, chair for entrepreneurship at Massachusetts’ Babson College. ‘They can work well without supervision and are more focused on outcomes than on the process.’

It is not necessary for a company to be small or high-tech in order for it to run successfully using a virtual or multiple-headquarters approach. Many well-known larger companies operate from more than one geographic base, and some have made moves to manage themselves entirely virtually.

However, being relatively new and high-tech certainly can strongly increase the chance that a company will develop this way, says Janice Klein, a senior lecturer in operations management at the Massachusetts Institute of Technology’s Sloan School of Management.

‘The shift to a networked form of organization is being led by the high-tech industry,’ she says. ‘This industry tends to be more comfortable with relying on communications technology to bring people together. The companies themselves are younger, and do not have centralized legacy systems and management infrastructure, which can be hard to disperse once they are in place.’

Policy becomes essential

The key to making a dispersed model an effective one is to instill shared values and identity, along with common processes, says Dittmar. ‘The center of the enterprise is less about a physical space, and more about common values, ways and principles, while at the same time recognizing cultural diversity within the company. Policies, procedures and values make it a common enterprise.’

‘Companies with more than one headquarters need strong governance structures, so that everyone understands their role,’ notes Zacharakis. ‘The organization chart has to be very clear, particularly concerning reporting lines and governance policies.’

Beyond that, employees of firms with multiple or virtual headquarters must learn to stay aware of the needs and activities of unseen colleagues who may be located many time zones away.

‘It requires a special type of person to work in this environment,’ says Jennings, adding, ‘It takes a person who can think about how someone on the other side of the globe may react to something. For example, it takes a certain type of person not to schedule a conference call on a Friday afternoon US time, because he is aware that it is already the weekend in Singapore or in Shanghai.’

The need for effective polices and a broader understanding of cultural issues is an important element of the process. As governance and disclosure regimes are rapidly evolving in many major markets in Europe and Asia, companies will need to gain a very firm understanding as to what the filing and reporting requirements will turn out to be. There is considerable compliance risk in employing such a model but this is something that is also beginning to impact companies operating on the traditional model of dispersed production or distribution units and centralized management. As regional and national regulatory regimes change, more companies may find benefits in moving to a more decentralized model, especially if some agreement can be reached between various regulatory bodies, thus reducing the potential for reporting duplication.