The virtual organization has long been a neat theory. Now organizations throughout the world are turning it into reality.

It is only when the tide goes out you can see who’s swimming naked. And so, it is only when times get tough that you see whose business and management models are most robust. The global downturn that we faced last year has exposed the frailties of many organizations and confirmed the strengths of others.

One model that looks increasingly robust in difficult times is the virtual model – organizations that orchestrate the activities of many independent actors rather than owning, employing and controlling lots of people. The major virtue of virtuality is that, if it is done right, it creates truly agile organizations well equipped to negotiate the crumbling markets of recession.

Consider Eden McCallum. The London-based consulting firm began life in 2000. Founders Liann Eden and Dena McCallum wanted to build a consulting firm unencumbered by the usual trappings of a large headquarters, plant-filled atrium and teams of consultants on salaries. “First and foremost we wanted to create a business. So, we looked at the marketplace in a business we knew: management consulting. And we saw a couple of major trends – the maturing of the consulting market, and professional people wanting to take more control of their careers,” says Dena McCallum. “These then led us into our unique business model. And in creating this business, we also ended up with an entirely new organization model.”

Eden McCallum works with organizations of all shapes and sizes. It has worked with some 200 since 2000 and its turnover is now more than £12 million. All of its projects are delivered by a pool of more than 400 independent consultants. The majority are former employees of big name firms – 44 per cent formerly worked with McKinsey, BCG or Bain. “The consultants set their own constraints. Some don’t want to work during the summer for example and so we work around them,” says Dena McCallum. For around 150 of the consultants, Eden McCallum is their major source of work. The remaining 250 offer latent potential, ready to be called on if and when the project demands it.

The end result is flexibility: quality consultants at reasonable prices. “We chose to work with Eden McCallum over two better know competitors because when we compared the teams person for person, we realised that we were getting more experienced resources for a lower price,” says Richard Branson, chairman of the Virgin Group.
While traditional consulting firms have been forced to reduce numbers and work ever harder to attract clients, Eden McCallum has continued to grow during the downturn. It now has an office in Amsterdam and plans another in Germany. “There has undoubtedly been a shift in emphasis,” says Liann Eden. “Previously around 70 per cent of our work could have been categorised as strategy-related. That figure is now around 50 per cent. Instead we are finding greater demand for performance improvement – up from 10 to 25 per cent of our work.”

Agile times

In turbulent times the virtual model has a clear plus side for Eden McCallum and its clients.
First, a virtual organization does not face the training or headcount issues faced by a traditional competitor. As Eden McCallum’s work has shifted to a greater emphasis on issues such as procurement and reducing costs, it has simply begun to use more consultants with expertise in that area. “At a time like this there is a premium on experience. Anyone over forty who has worked as a consultant has done cost cutting,” notes Liann Eden. There has been no need to re-train legions of consultants. Clearly, the virtual model also means that redundancies are never an issue.

Second, a virtual organization has very low overhead costs. Freelancers have almost zero tolerance for non value-added activities, so Eden McCallum does’t have complicated budgeting and planning systems, and they don’t call meetings unless there is a burning need. The net result is a very lean corporate centre.

Third, as it comes with so little baggage, a virtual organization can actually foster a greater sense of client ownership and involvement. Being small and responsive is reassuring and suggests value for money. “We are not a scary brand name like McKinsey,” says Dena McCallum. “But, at the same time, we actually share some of the McKinsey values such as a focus on the client first, long term relationships and trying to solve the right problem. The reality is that clients know the big issues and their industries very well and know the issues they want to solve. Very little is rocket science. It’s not about leading edge thinking; it is about asking the right questions and being rigorous.”

Clearly, the downturn has also thrown up issues for Eden McCallum, as with any virtual organization knowing when and where to share information and how much is a constant balancing act. Now it has weekly meetings of its core team to encourage knowledge sharing. It is also continuing to wrestle with the issues raised by its own success. “If you want to become bigger, to scale your activities, you need the systems to underlie it,” says Liann Eden. “Our biggest investment was locking all of our people in a room for two hours each and capturing data on all of their projects. Now we capture that information as we go. We were a scrappy organization. We doubled in size rather than investing in putting in a big system. Now there is a realisation that if you want to manage a network like ours you need a keen sense of the connections between people and projects.”

Virtuous growth

Eden McCallum is not alone. Other virtual organizations have continued to grow during the downturn.
Topcoder, the Boston-based software developer, has built a community of more than 200,000 programmers around the world. When a client asks Topcoder to develop a software code, the work is chunked into small modules and community members then compete to develop the best code. Topcoder awards a prize to the winning developer for each module, and the pieces are then put together and handed over to the client. Topcoder is still a small company (revenues of $20 million) but it is growing rapidly, and its unique virtual business model is attracting a lot of interest. Again, flexibility and client responsiveness are key selling points. The unusual prize-based compensation model also helps in a turbulent business environment, because the size of the prize can be adjusted to match supply and demand.

Keystone Law, based in London, is another example of a virtual company. Founded by James Knight, it has a very similar business model to Eden McCallum with a network of freelance lawyers, and a small head-office team who find new clients and match supply and demand. “We have removed most of the overhead normally associated with the law firm,” says Knight, “what remains is a team of motivated lawyers who want to work in a more personal, on-going and client-focused way.” Key management principles at Keystone are simplicity and transparency. We believe that sometimes less is more. Less overhead means less emphasis on fees which, in turn, means a more dedicated, personalised and attentive service.”

The risks of virtuality

Of course there are downside risks to virtuality as well. First, it is hard to maintain a vibrant network. Freelancers are free to sell their services to others, so if they don’t feel they are getting the interesting work and opportunities they need, they are likely to go elsewhere—with the best ones being the first out the door. So Eden McCallum, Topcoder and Keysytone law invest a lot of time with their freelance communities, looking for ways to make the work more interesting and listening to their concerns.

Second, by outsourcing work, virtual firms are giving up control of many of the core competencies that are essential to their offering in the marketplace. Eden McCallum does not employ consultants, and it does not have any proprietary methodologies, the traditional mainstays of any consulting firm. But it has to have sufficient expertise to evaluate the competencies it is buying, so there is an internal group that stays on the leading edge of practice and ensures that the consultants who are hired are genuinely top-quality.

Third, by creating a community of independent experts, virtual firms are potentially creating competitors. In theory, the freelancers who work for Eden McCallum, Topcoder and Keystone Law could sell their services directly to the clients in question. In practice, this won’t happen as long as the company continues to do its job well. But there have certainly been cases in other contexts where this has happened. Magna, the Canadian auto parts manufacturer, used to see itself solely as a component manufacturer, a subsupplier, to the likes of GM and Ford. Now it is poised to buy GM’s European assets and become a fully-fledged manufacturer.

The virtual model is challenging to manage because it requires constant adaptation as the needs and capabilities of the freelance community evolve. But it has definite benefits in the turbulent business environment we are operating in today. Indeed, there is a growing appreciation of the benefits of flexibility in more conventional organizations. Observes Dena McCallum: “People definitely value flexibility. Companies are learning now that you can actually keep great people and cut costs. Increasingly we are seeing companies using their own alumni as a flexible talent pool to draw on when the peaks return. Our clients want to build stronger teams to do things better when we are out of the downturn. They want to build internal capabilities.”

Julian Birkinshaw is a Professor of Strategic and International Management at London Business School and co-founder of MLab