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When executives began outsourcing substantial portions of their operations more than a decade ago, they did it to offload activities they declared to be noncore in order to cut costs and improve strategic focus. Today, however, companies are looking outside for help for more fundamental reasons -- to facilitate rapid organizational change, to launch new strategies and to reshape company boundaries. In doing so, they are engaging in transformational outsourcing: partnering with another company to achieve a rapid, substantial and sustainable improvement in enterprise-level performance. On the basis of research on 20 companies that have attempted the practice, the author has identified four broad organizational categories that can benefit from transformational outsourcing. Startups such as TiVo, for example, need partners to scale up rapidly. "Crouching tigers" such as Family Christian Stores are being stymied by a deficiency in some key capability from meeting their strategic aspirations. "Fallen angels" -- such as BP in the mid-1990s -- settle into the wrong performance trajectory and need strong action to change their tack. And organizations on the edge of survival -- as Britain's National Savings and Investments was several years ago -- need transformational outsourcing to become "born again."

Performance variability frustrates managers everywhere. According to the authors, it takes a variety of forms: vastly different sales figures for similar retail stores in similar neighborhoods; significantly varying productivity rates at factories producing the same products; major differences in insurance payments for similar auto accidents. In their quest to reduce performance variability, however, managers often go too far, say the authors. By forcing workers to "copy exactly" or "follow instructions exactly" in every situation, they make it far more difficult for people to use their own judgment and knowledge to solve problems that would benefit from a new approach. Having studied this issue in depth, the authors found that the appropriate intervention to reduce differences in performance depends on individual work practices -- their frequency and predictability. Practices that are more frequent and predictable tend to be more conducive to rigid duplication, whereas those that are rare and unpredictable have greater need for flexibility and innovation. The authors contend that it's not enough to have a balance between uniformity and discretion at the company level: Each group of practitioners within an organization must also have it.

Many companies have embraced the notion that to operate effectively in today's economy, it is necessary to become a knowledge-based organization. But few truly understand what that means or how to carry out the changes required to bring it about. Perhaps the most common misunderstanding is the view that the more a company's products or services have knowledge at their core, the more the organization is, by definition, knowledge based. But products and services are only what are visible or tangible to customers -- they're the tip of the iceberg. Like the iceberg, most of what enables a company to produce anything lies below the surface, hidden within the so-called invisible assets of the organization -- its knowledge about what it does, how it does it and why. In the course of working with more than 30 companies over the past eight years, the author found that a knowledge-based organization is made up of four elements. Each one forms a basis for evaluating the degree to which knowledge is an integral part of the organization and the way it competes. Executives who understand how the four elements interact will be able to start changing their companies to take advantage of the intellectual assets hidden below the surface.

Companies with the best connections to their customers focus on the people and businesses that buy from them.

In recent years, many companies have learned to use the Internet as a powerful platform for collaborating directly with customers on innovation. But direct interactions & #8212; facilitated by customer advisory panels, online communities and product-design tool kits & #8212; have limitations. They don’t always allow companies to reach the right customers at the right time and in the right context. Thus, to fully exploit the Internet as an enabler of innovation, companies need to complement their direct channels of customer interaction by using third parties that can help them bridge gaps in customer knowledge. The authors call this process of indirect, or mediated, innovation innomediation and the third-party actors at the center of it innomediaries. In their research, the authors identified three distinct types of innomediary and observed how each one can help companies acquire different forms of customer knowledge. Using case studies, they suggest ways in which companies can begin to think about exploiting the power of these emerging intermediaries. For businesses that learn to use customer knowledge from both direct and indirect sources, the Internet holds the key to a multichannel innovation strategy.

Adapting to rapid structural change requires exploration, not contraction.

When an activity turns into a buzzword, the odds are high that managers will stop thinking consciously about the behavior they’re trying to elicit and the best way to set expectations clearly. That’s why it’s important to pay attention when buzzwords take over management’s most important responsibilities. Business writer Joan Magretta explains, for example, how thinking outside the box,” a phrase that makes many people cringe, is a useful metaphor when properly understood. The vital work of innovation in companies is sparked precisely because there is a box & #8212; a puzzle with rules that limit and define good solutions. Managers must clearly understand the constraints & #8212; the shape of the box & #8212; if they are to help their employees think sensibly about innovation. She also takes on “resource allocation,” a dry-as-dust technocratic phrase that actually refers to one of management’s most difficult and emotionally charged responsibilities. The crux of the matter is that providing resources for one project means not giving them to another. In other words, it means that managers often have to say no when it is easier to say yes. Last, she focuses on “respect for the individual,” a phrase that, even when used sincerely (and often it’s said insincerely), implies a kind of everyone-gets-treated-the-same ideal. In an organizational context, this phrase really refers to management’s need to match the right individual to the job & #8212; and harsh as it may sound, to fire those who are in jobs they can’t perform. Buzzwords and catchphrases can speed communication. But when it comes to the messy, human realities of management, a dose of straight talk & #8212; and clear thinking & #8212; can go a long way.

During the dot-com frenzy of the late 1990s, most large, traditional companies had trouble finding successful e-business strategies to fight off aggressive new challengers. Many turned over their Internet efforts to the CIO and the information-technology organization. But that was not always a good idea, say management thinkers Glenn Rifkin and Joel Kurtzman. Enlightened corporations, they say, have made the Internet work for them by assigning e-business efforts to senior-level executives who know the business side intimately & #8212; and by getting the most out of technology-focused CIOs in the role of partner. They contend that someday all business will be e-business, so even in an economic downturn it’s important for companies to keep moving forward by integrating e-channels with their other business channels. The authors maintain that a downturn offers laggards a chance to get back into the game. Thus large companies with ineffective Web presences should take advantage of the current window of opportunity to make improvements. That means resisting the temptation to fob off e-business onto the IT department and instead treating it as a long-term, strategic, integral part of the enterprise. The authors report on the rare traditional companies that offer these valuable lessons: Integrate the new channel with other channels, build on your strengths, don’t let technical considerations be the tail that wags the dog, find a CIO who thinks like a business leader, and have a business expert head the operation. As Meg Whitman, the president and CEO of Internet star eBay, has said, “You can teach the dot-com stuff quickly, but you can’t teach the business quickly, so hire someone who knows the business.”

What shapes strategy today and how has it changed? While many executives were focused on the implications of the Internet, a more powerful force was at work, contends Stanford University professor Kathleen M. Eisenhardt: globalization. Globalization has quietly transformed the economic playing field. The traditional strategic paradigms (positioning, core competence and the like) are not dead, but they are less germane than they were. Schumpeter’s “creative destruction” and similar economic views are coming into their own. The new economics is more entrepreneurial. It centers on disequilibrium, fleeting opportunities to capture competitive advantage, and the creation and destruction of wealth. Successful strategy in today’s world is simple; it uses a few clear guidelines and allows for flexibility. It is supported by organizational design; it is not handed down from on high. And timing is everything. Eisenhardt cites Colgate’s use of simplicity in a key strategic process, global product management. Colgate has found success through allowing product managers considerable freedom within a couple of simple guidelines (Maintain the Brand; Keep Relative Product Positioning Stable). That thinking also has been a boon to Ispat International, which uses uncomplicated rules for choosing and integrating acquisitions and has thus become one of the world’s fastest-growing steel companies. In contrast, Intel and SAP stumbled with their joint venture for e-commerce services, Pandesic. Although the companies had ample resources and a clear vision of their desired strategic position, their plan’s complexity kept them from adjusting as the market unfolded. Eisenhardt explains how managers can refocus their strategy on key processes and simple rules, mapping their individual businesses to market opportunities and employing an evolutionary form of timing to move from one competitive advantage to the next.