5. Differences from an Arm's-Length Business

The BWB paradigm has its limits. While an organization within a corporation can behave very much like an external vendor, it reports to the same shareholders as do its customers. Hence, some adjustments are appropriate.

Profits generally accrue to the customers, not the provider.

Let's assume that an organization produces its products and services at a cost that's below their market value. (If it doesn't, it deserves to be outsourced.)

As an external vendor, it would charge market prices and earn a profit. Internally, however, chargebacks are not all that common; and even when organizations do charge internal customers, the price is almost always set to cost rather than market.

It's not that internal service providers don't make a profit. When a product that has a market value of $10 is produced for $8, the shareholders have earned $2. The only difference is that the profits are recorded on the books of the customers, not the provider.

This means that it's difficult to measure return on equity, as the shareholders of external companies do. Instead, internal businesses are measured on market share, customer satisfaction, and competitive cost benchmarks (eg, vendors prices and outsourcing bids).

A BWB is asked to do things for shareholders that would be inappropriate for external vendors to do.

Internal staff are often asked to do things for the benefit of the corporation as a whole, like setting standards and policies, managing vendors, and a service akin to "consumer reports" that includes vendor-product R&D and recommending safe, standard configurations to the company.

We term these corporate-good activities "subsidies."

They should be funded directly by the corporation, not imbedded in the organization's prices to customers. These are costs that would be incurred whether or not customers buy the organization's products and services; and imbedding these costs in its prices would put an internal entrepreneurship at a competitive disadvantage.

A BWB needs investment funding to buy infrastructure and make significant investments in its business.

When it makes significant capital investments in infrastructure, new lines of business, or major business improvements, an external company turns to its bank, shareholders, or venture capitalists for additional capitalization.

Internally, a BWB must get "venture" funding from the corporation through its budget.

Most corporations ask that the organization pay back venture funding through depreciation. Few demand interest on capital employed, although it would be appropriate to do so.

Whatever the payback method, ventures are amortized over time, not imbedded in this year's costs to customers.

When it comes to peers, internal entrepreneurs work through one another, not around one another.

If a supplier isn't performing, a corporation simply buys elsewhere. As long as other suppliers are available, a corporation doesn't really care if other companies fail.

Internally, the situation is a bit different. If a peer isn't offering the best deal, an internal entrepreneur doesn't let that other group sink while he or she looks outside for help. Instead, internal entrepreneurs help one another succeed, or escalate problems until the organization fixes them.

This short-term constraint on entrepreneurship is a long-term investment in the health of the entire organization.