What happens when global IT firms retreat?

shark eyeThe early 1990s were a wonderful time for global firms. China, India and the countries of the former Soviet Union opened their markets, and the European Economic Area (now the EU) was established. Businesses began to standardize their operating model and created, in the words of IBM's CEO Sam Palmisano, "the globally integrated enterprise."

Today, a number of global firms are struggling. Wages in many low-cost countries are rising. Local firms are becoming fierce competitors. The EU and other countries are making it more difficult to move profits around as a way of minimizing taxes. Environmental regulations are tightening. The dollar is strong, but oil prices are low.

During the last five years, multinational profits have decreased by 25%, according to The Economist magazine. While global technology firms and consumer products firms with strong brands are doing well, others are underperforming. Roughly 40% of all multinationals have a return on equity of less than 10%. The stock market has punished many of these companies, forcing them to take drastic action to remain relevant.

In response to this pressure, a number of global firms are localizing, franchising or divesting. Localization involves ceding authority to subsidiaries and relaxing global standards; subsidiaries are free to use local vendors and to adopt local business practices. Other firms maintain a market presence through franchising. They enjoy an ongoing revenue stream while releasing capital tied up in plant and equipment. Franchising does create some risk, since the franchisor can monitor product and service quality but cannot prescribe all of the activities to deliver a high-quality user experience. Other companies are divesting in selected markets. In 2016, Yum Brands spun off its China business after foreign profits fell 20% from a 2012 high point.

These retreats have a big impact on IT organizations. Specifically, retreats:

Change the IT governance model. The globally integrated enterprise relies on standardized business processes and, in some cases, on centralized systems to provide consistent services around the world. While this standardization increases efficiency and product consistency, it makes it more difficult for local management to adapt to local market conditions and in many cases to serve smaller customers.

When firms localize or franchise, headquarters has limited involvement in field operations. To be successful, the field needs control over project prioritization, resource allocation and project delivery. Headquarters has to rely on a small number of standard measures to monitor performance. This represents a return to the loose federation approach that Coca-Cola, Unilever, Shell, etc. used for decades before the rise of the globally integrated enterprise.

Change the IT architecture. The IT architecture has to be relaxed enough to enable country and regional operations to employ local technical solutions. Similar to what often happens when BYOD is debated, IT architects in a federated organization have to choose their battles wisely. Most focus on making sure the IT Infrastructure and operational systems are secure and compliant. Typically, local operators are required to use only a handful of corporate systems, while the rest are optional. For example, a restaurant chain might insist that all properties use the corporate loyalty program and the corporate above-property data aggregation system, while allowing any POS.

Create extreme budget pressure. Companies with a low return on equity push every department to reduce the operating budget and defer capital investments. During the localization process, a large portion of whatever capital budget remains will shift to local operators or will become the responsibility of franchisees. After this shift, headquarters rarely has enough capital to create global systems on its own. Instead, headquarters must convince local operators to pay their share of any new system. Local operators must be convinced of the benefits of an investment if they are to use their limited capital to help pay for it.

Ideally, budget reductions can be accomplished over several years by shifting staff and responsibility for vendor charges to local operators. However, if the pressure is very high, needed investments may be deferred and employees might be laid off to meet short-term financial goals.