Restructuring The Back-Office: 4 Options

Joost
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- 4 min read

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.

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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.

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Replies (5)

Sjaak Evers

Sjaak Evers

In my view it doesn't help to implement external market conditions within the organisation as well. We are just discovering the poor performance of the markerstructure theory w.r.t social and ecological criteria. It seems to me more helpful to require from support groups to go for the collective ambition of the organisation, to support the frontline

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jpmort

jpmort

The theory that the market pressures can produce effective support functions is one that the British government jumped on to some years ago. That followed the lead of some private sector organisations.
What we find now, is that the support function is run by an organisation whose purpose is to maxim their return on the contract, and only to provide those services that is in their contract to provide. What then happens is that real value is pushed aside, and the focus is on the KPIs. And as we know, KPIs can easily be manipulated.
The evidence from organisations like Toyota, is that if the support function focuses on the purpose and value to the operational services it is providing for. And the support function designs in its workflow to merge with the operational service. Then the service managers can ensure that the waste is minimised, and the value they get is maximised.
Beware of market competition that has proven to fail in the traditional auto industry,

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Markku I Nurminen

Markku I Nurminen

Buurtzorg is not a good example of internal monopoly. For me they seem to reduce the degree of outsourcing: each group (10-12 persons) take care of the most of back-office tasks themselves. The teams create services in 7 roles. All of them have the role "nurse" in the front-line customer contact. The another six roles (in addition to the nurse role) are back-office tasks:
- Housekeeper
- Informer
- Developer
- Planner
- Team Player
- Mentor

The roles are assigned on voluntary basis, and they are circulated with max 6 months in one role. The instant feedback of cost and quality is obvious and solves most of the problems addressed.

The question is not how to restructure the outsourced back-office tasks. We should ask why they should be outsourced.

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Sharon Green

Sharon Green

Oh where do I start with this article......Obviously I am biased as the specialism I have and the value I add is in what you would call, back office, support functions. Usually I am not that interested in the name above the day or my job title and I am all about the value I add to the business.

A great people function isn't a support function or back office. They serve and partner with the business. If they aren't, do something about it. Creating an internal market assumes all market forces are good. It creates unnecessary complexity, in my view, and ignores the problems of poor performance in line with business needs and expectations. I think we should tackle that, rather than bring something in like this. Not everyone situation requires a rebellious or radical solution, it requires work - on-going work with the aim to continually get better.

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jpmort

jpmort

Sharon, I think your point goes deeper into the concept of an internal market, and highlights the danger of simply adopting that practice, in the hope it will mimic the outcomes in the article. You have a very good point.

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