WSJ Online - Growth Strategy through Protean Corporate Structure
To Outsmart ObamaCare, Go Protean
Don't fire staff to avoid the 50-employee trigger. Make them corporations.
By PAUL CHRISTIANSEN
How big can a company get with just 50 employees? We're about to find out.
Thousands of small businesses across the U.S. are desperately looking for a way to escape their own fiscal cliff. That's because ObamaCare is forcing them to cover their employees' health care or pay a fine—either of which will cut into profits and stymie future investment and growth.
We've already seen many of America's biggest companies respond to the new law by laying off employees, putting them on part-time, or raising prices. But those are short-term solutions. Ultimately, these corporations will have to innovate and restructure to thrive in the era of ObamaCare. If small businesses follow their lead, they may even gain an advantage over their big competitors.
In his 2009 book "The Future Arrived Yesterday," veteran Silicon Valley journalist Michael S. Malone described a new organizational model called a "Protean Corporation." Like a protozoan single-cell organism, the protean corporation has the ability to "shape shift," rapidly adapting to internal and external forces in the market and the company. At the heart of a true protean corporation is a tiny number of core employees surrounded by a large cloud of resources, generally contracted or outsourced talent that does most of the work.
While the concept has been used successfully in large corporations like Intel, Microsoft and IBM, it is bound to appeal to smaller companies now. Such businesses have several ways to get their workforce under the 50-employee limit at which certain ObamaCare rules kick in. These include reducing workers' hours to move full-time employees to part-time; laying off workers; and either selling the company or closing down.
"Going protean" offers a better strategy for many businesses. Owners of protean companies create a core of strategic employees who manage the big-picture elements of the enterprise—the culture, business model, product mix, vision, strategy, etc. This core then outsources the business tasks to other corporations.
Non-core tasks could include things like accounting, marketing, product development, manufacturing, IT, PR, legal, finance, etc. There is almost nothing that cannot be outsourced—including even the CEO function (which can already happen, e.g., when a company is in turnaround.)
To most business owners, "outsourcing" means shipping jobs overseas. But in the protean sense, it means having tasks performed in the context of a contractual relationship as opposed to an employment relationship. It's not about replacing employees with contractors, but about replacing employees with corporations.
These new contracts will be a mix of large corporations, small businesses, micro-corporations and even nano-corporations (an individual doing business as a corporation). But to be a protean solution, it must involve a corporation-to-corporation relationship. Any substitute—e.g., a sole proprietorship—is only a time bomb because eventually the government will pressure you to turn any so-called 1099 contractors into employees.
In the context of ObamaCare, a small business could go protean by offering current employees contracts for doing their current work as a corporate entity instead of as an employee. Entrepreneurial employees will jump at the chance to form a corporation and run their own business. Non-entrepreneurial employees can choose to move on and find other work—or work hard to join the core company.
Going protean won't work without a massive mental shift. A company no longer manages employees, but tasks and contracts instead—a quantum leap in management styles and process.
The biggest change is replacing human-resources. Instead of writing position descriptions and managing employees, the protean corporation writes contracts and scope-of-work documents and manages those.
There is another subtle but powerful shift. Instead of relationships being vertical—e.g., boss-employee—the relationships are peer, corp-to-corp. Having your work done by people who own corporations will be completely different than working with people with an employee mindset.
Perhaps the biggest change protean corporations will experience is in the nature of their relationships with people. When a person is an employee, he or she is, by definition, in partnership with the government—the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, etc.—and is subject to all the government's regulations. But when a protean corporation enters into a relationship with that same person, now a corporation, it is a purely contractual relationship with a fellow enterprise. As long as there is no fraud or breach of contract, and the agreement is legal, the government really has nothing to say.
In the years ahead, as government continues to impose itself into the marketplace and reduce the freedom of the commercial sector through statist programs like ObamaCare, businesses will have to look for creative solutions to survive. Going protean is only one way, and others will emerge.
Yet as small enterprises approach 50 employees (or retreat back below that number), look for a significant number of them to concentrate on growing in revenues without ever again growing in employees. The result can be a wave of entrepreneurship, new company creation, business growth and economic freedom. Not a bad result when you consider that it will be spurred by the government's bid to keep America's businesses under its thumb.
Mr. Christiansen is an entrepreneur based in San Diego. He has owned an IT-training company and an executive forum group and currently has a Web-design firm, Quorim.com