Academic journal article The McKinsey Quarterly

Unbundling the Unbundled

Academic journal article The McKinsey Quarterly

Unbundling the Unbundled

Article excerpt

A second wave of disaggregation is transforming--yet again--the way asset-intensive companies work.

Not so long ago, in the United States and other industrial nations, basic capital-intensive services such as electricity, gas, rail travel, telecommunications, and water were delivered by monolithic monopolies. Almost all of them were heavily regulated or owned by the state. But over the past 10 to 20 years, these industries have disaggregated into businesses that perform one segment of what had formerly been a vertically integrated product-delivery process. The provision of electricity, for example, now involves four distinct businesses focused, respectively, on generation, high-voltage transmission, low-voltage distribution, and retailing. Significantly, each service in the first wave of disaggregation rested on an asset base owned by the company providing it.

The first wave sparked tremendous innovation and improvements in efficiency by introducing competition into those parts of the business system--such as generation in electricity and long-distance service in telephony--that are not natural monopolies. As a result, the logic of disaggregation has become widely accepted, even though the process has some way to go in many countries.

A number of companies are beginning to experiment with disaggregation at a second, deeper level. The major difference between this stage and the first is that now only one of the resulting businesses remains an asset owner; the formerly united functions are disaggregated into asset ownership, asset management, and service delivery (Exhibit 1). So, for example, the distribution entity of a gas utility might split itself into one business that owned the pipelines; one that oversaw operations, maintenance, and upgrading; and one that undertook the day-today work.

The initial stage of disaggregation might simply have involved a clearer system of reporting, so that each function's relative level of performance could be evaluated. The next stage might involve the functions' internal disaggregation into corresponding subsidiaries or divisions. After assessing their viability as freestanding businesses, the asset owner might choose to spin off the functions of oversight and of day-to-day operations, maintenance, and other work-delivery activities. Each function might continue to perform its accustomed role on behalf of the asset owner, though the relationship would now be contractual.

If the company undertaking a function was especially skilled and efficient at what it did, it might decide to provide its services to other companies as well; in some cases, it may have begun doing so while it still belonged to the asset owner. It could even acquire other companies in the same business. But the company may have been spun off precisely because of its weaknesses. In that case, the asset owner would want to obtain those services from a best-in-class organization with which it had no previous affiliation.

Of course, if the still aggregated business decided that its core competence was, let us say, asset management rather than ownership, it should feel perfectly free to sell its physical assets outright, to divest its asset ownership business, to spin off its service-provision function, or to try some combination of these approaches.

The impact of this second wave of disaggregation will be at least as great as that of the first wave.

Three roads to unbundling

Asset ownership is an activity in its own right. Its responsibilities are financing and compliance with regulatory regimes that are still necessary because no company is going to build, say, a new gas pipeline between two points or a new electricity distribution network in a given area to compete with existing ones. Asset owners own the asset base and provide the capital needed to develop and maintain it. Because they pass on responsibility for construction, management, and maintenance to others, asset-owning businesses--with billions worth of assets on their books--can often be run from offices of no more than 30 people. …

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