In turbulent markets, companies can enhance their agility and minimize risk by orchestrating a network of resource providers. The story of Promon, a Brazilian engineering company, illustrates the advantages of orchestrating a network.
Promon initially grew on the back of government funded infrastructure projects that were the mainstay business of Brazil’s engineering firms during the 1970’s and early 1980’s. This all changed when a fiscal crisis in 1986 prevented the Brazilian government from commissioning new projects and forced it to renege on existing contracts. Most Brazilian engineering firms collapsed in the face of this sudden-death threat and disappeared.
Promon survived and thrived while its competitors floundered, in large part, because the company successfully transformed itself into an innovative systems integrator for the telecommunications, power and industrial segments. As an illustration, one joint-venture formed by Promon has 82 employees who supervise a project with 1,907 workers representing 573 separate subcontractor companies. Promon rolled out this system throughout the 1990’s. System integration projects increased from less than 20% in the late 1980’s to over 90% by the end of the 1990’s.
The company developed sophisticated skills for forging and managing partnerships, which allowed it to increase net revenues (including both revenues for services and the value of goods and services procured under its responsibility) from $10 million in 1987 – the year after the Brazilian government’s fiscal crisis – to $852 million in 2008, while decreasing total staff from 4,000 to approximately 1,360 professionals over the same time period. Higher labor productivity is not the only benefit of orchestration, and other advantages include:
- Minimize resources committed Companies that try to do everything in-house must make a tremendous investment in people and hard assets. Relying on partners can allow a company to minimize its resource commitment. Lower commitment of resources has three advantages. First, lower resource commitment minimizes the company’s losses if the situation changes and the business is no longer viable. Second, it enables the company to pursue more initiatives and diversify its portfolio of projects. Finally, by decreasing the equity investment, it can increase the percentage return on invested capital.
- Select employees in and out based on values The “asset-light” model conferred a less obvious benefit as well. The lower staff requirements allowed Promon management to selectively cull out those employees that had not fully bought into the vision or did not have the required skills. By the late 1990s, the remaining staff consisted of the professionals most committed to the asset-light organizational structure, and most capable of managing relationships with external partners.
- Share risk with partners For risk transfer to succeed, however, the allocation of risk between parties must be clearly agreed and formalized. When Promon formed a consortium with Nortel to deploy a cellular network for Brazilian cellular provider Americel, for instance, speed of deployment was critical to the client. Americel stipulated a penalty of $6 million if the consortium missed its agreed completion deadline by even one day. Promon and Nortel had a master collaboration agreement, whereby each party would be liable for its own faults. Nortel was responsible for the bulk of the equipment supplied, while Promon provided required systems integration services. Service provision entailed a greater potential for delay than product delivery, and Promon was therefore more likely to incur the penalty than Nortel, exposing Promon to a large risk. Since Nortel and Promon jointly acquired the contract, however, Promon convinced Nortel to split the penalty, irrespective of who caused the delay. (The contract was awarded and the network was successfully completed on time).
- Provide flexibility to seize golden opportunities. Executives can generally secure the use of necessary resources through partnerships much more quickly (and at lower cost) than they can build them from scratch internally. Promon’s “asset-light” model was particularly well suited to seizing the golden opportunity in Brazil’s telecommunications market in the 1990s. The Brazilian government invested heavily to prepare the state-owned telecommunications companies for privatization. Over the same time frame, corporate clients were investing to upgrade their data communications capability. And, of course, the rise of mobile telephone technology created tremendous demand for local cellular networks. In nearly all of these cases, corporate and government customers preferred turnkey solutions rather than dealing directly with hundreds of subcontractors. Promon leveraged partnerships to quickly seize these opportunities. In 1988, for example, Promon established a strategic partnership with Hughes Network Systems to supply data communication systems to large corporate clients. In 1993, Promon and Nortel jointly won the bid to build the cellular network in four Brazilian states. With partners, Promon was able to couple and uncouple resources quickly in response to demands for specific projects. External networks also prevent companies from holding on to businesses too long. Too often, executives view internally developed projects as “sacred cows” that can never be slaughtered, because the company has invested so much in them. A networked approach fosters agility in getting out of opportunities quickly as well as getting into them fast.