How it Works: The Virtual Organisation

It is widely alleged that the business organisation of the future will be virtual. But precise definitions of what it means to be a virtual organisation are hard to find. The origin of the phrase, though, is clear. It comes from the expression “virtual reality”, an experience in which electronically created sounds and images are made to resemble reality. A virtual company resembles a normal traditional company in its inputs and its outputs. It differs in the way in which it adds value during the journey in between.

The virtual organisation has an almost infinite variety of structures, all of them fluid and changing. Most of them need virtually no employees. A New York insurance company was once started from scratch by someone whose overriding aim was to employ nobody but himself. The UK’s Virgin Group briefly held 5% of the British cola market with just five employees. This was achieved by tightly focusing on the company’s core competence: its marketing. Everything else, from the production of the drink to the distribution of it, was done by someone else. A virtual organisation relies for the most part on a network of part-time electronically connected freelances, sometimes referred to as e-lances.

The virtual organisation has few physical assets, reflecting the fact that adding value is becoming more dependent on (mobile) knowledge and less dependent on (immobile) plant and machinery. Hollywood is often cited as a template for the virtual organisation. The way that movies have been made since the industry freed itself from the studio system (where everyone from Bette Davis down to the doorman was a full-time employee) has been virtual. A number of freelances, from actors to directors via set builders and publicity agents, come together with a common purpose: to make a movie, to tell a story on celluloid. They then go their separate ways and another (unrelated) bunch of people (with a similar set of skills) comes together to make another movie. And so it goes on, very productively.

Linked to the idea of the virtual organisation is the idea of the virtual office, a place where space is not allocated uniquely to individual employees. People work as and when they need to, wherever space is available. This practice is commonly referred to as hot-desking. The virtual office has the advantage of providing a different vista every day. But it makes it difficult to form close relationships with colleagues.

In “Rethinking the Future”, Lester Thurow, a former dean of Sloan School of Management, gave a vivid portrayal of the virtual office:

You walk in and there’s an electronic board that says room 1021 is empty. You go to 1021. You have your personal telephone number. You call up your computer code. You press a button and your family picture is up on the flat-screen TV set on the wall. And that’s your office for as long as you’re there. The minute you leave, it ceases to be your office.

We know why you don’t do that at the moment; human beings like to have a cave. But the first company that figures out how to make this work will save 25% on office space, 25% on telephones, 25% on computers. These will be the low-cost producers, and low-cost producers will inherit the earth.

AT&T, an American telecoms company, reckons that it saved over $500m between 1991 and 1998 by reorganising its office space along virtual lines.

The process of defining the virtual organisation is a gradual one. As companies withdraw more and more into their core competencies, so they become more virtual. The virtual organisation is able to leverage this core into almost any industrial sector. Thus it can be in the pensions business and the railway business at the same time (as is the Virgin organisation in the UK). It can then rapidly desert any one of those businesses, and equally rapidly move into something completely different by establishing strategic alliances with organisations that have the essential skills that it lacks. It can do this anywhere in the world.

The virtual organisation is inevitably ephemeral because it has no repository of long-term memory, no individuals who have worked for the same organisation for years and years. Nor has it any long-term geographical presence or a local community that remembers “Old Mr Chambers from way back”.