By John Norcross
THE MANAGEMENT consultant of the 17th century (yes, you read that correctly) working for the English East India Company would have found this early multinational corporation facing many of the same management challenges that its modern-day corporate descendants face. Corporate ethics, good governance, sustainable labor practices, multiculturalism, cash-flow, corporate strategy, supply chain management and supplier relations, among others, would certainly appear on the list of things that kept that 17th-century executive up at night.
Although the English East India Company pioneered some of history's most reprehensible colonial practices, it does present some of the earliest evidence of outsourcing that would not be unfamiliar to a modern manager (e.g., contractors, offshore factories, intermediaries and brokers). Problems of information management (knowing what level of cash reserves is necessary to continue trading), management systems (systematic decision-making across geographies) and process management (ensuring the timely purchase of goods in foreign ports) are the same ones faced by the contemporary company that has outsourced a portion of its operations.
Outsourcing — the substitution of goods and services provided by suppliers for those previously provided internally — is therefore hardly a new concept. What is new, however, is the degree to which outsourcing is being deployed by companies as a competitive strategy. Some experts estimate business process outsourcing alone to grow to over $200 billion next year, along with the scale and global reach of outsourced operations. Add to this the Internet speed with which management information can be shared so that outsourced operations work, and you can see why many would think outsourcing is something new.
Avoiding the Five Pitfalls
Even as the scope, speed and scale of outsourcing increase, companies fail to take full advantage of the benefits outsourcing has to offer. Instead, they're falling into the booby traps along the way. To take one well-publicized example, Dell's enterprise customers barraged the computer maker with negative feedback after their experiences with Dell's offshore customer support. That led to some managerial backpedaling and questions about whether offshoring had gone too far.
Getting it right is a challenge and some common pitfalls can be outlined:
- Pursuing an outsourcing strategy to "remove a headache" is a misdirected motive. More than one executive has let the thought cross his or her mind that "it really would be nice if my managers didn't complain about system downtime and connectivity problems every time they speak to me." Operational headaches can be cured, and outsourcing is indeed one of the ways of doing so, but that should not be the primary motivation.
- Treating outsourcing as a monolithic, oversimplified strategic concept can prevent managers from exploring other, potentially more beneficial options. Outsourcing is related to but is not the same as moving operations offshore, relocating operations or functions within a geography, and sharing and centralizing services. In addition to the various "hows" of outsourcing, there are many other questions: Do we outsource an entire function, or just selected services? Do we enter into a long-term agreement, or conduct a series of short-term "experiments?" Do we multi-source to several vendors at once, or find a single outsourcing partner?
- Outsourcing poorly managed operations in the hopes that someone else can manage them better. This is a way of trading one headache for another. While it is critical for value chain partners in an outsourcing relationship to play to their relative strengths, outsourcing something you don't know how to manage or understand can lead to problems later on. For example, it is difficult to develop sensible and realistic service level agreements and long-term, mutually beneficial contracts when one party doesn't understand the complexity of the network infrastructure being serviced or the reasons why employees call a soon-to-be-outsourced help desk. It is also unlikely that the ongoing management of the relationship with the vendor will be results-driven, since the optimal results and performance indicators won't be defined and managed systematically, let alone understood.
- The failure to follow a sound approach to evaluating, selecting and implementing an outsourcing strategy can lead to less than optimal results. A simplistic approach to identifying what is currently considered core and noncore to the business may result in the loss of future capabilities, an increase in operational risk or the loss of control over critical business processes. When pursuing an outsourcing strategy, success will depend on the depth to which management can understand operational performance and the degree to which the team follows a well-tested process for evaluating the opportunity, selecting the best way of optimizing the operation or function, implementing the change program and regularly monitoring the service going forward.
- Market developments can change the relative value to be gained from outsourcing altogether. Many observers of the pharmaceutical industry had high hopes for a rapid increase in the use of small drug manufacturers in emerging markets as outsourcing partners. But when large pharmaceutical and biotech companies decided to merge operations, there was a tendency to emphasize improving the utilization of unused internal capacity rather than looking to move functions and operations outside. External factors can change the relative pay-offs.
While the first two of these issues require a change in mind-set, the last three demand a clear, systematic and results-oriented approach to understanding and realizing the opportunities from outsourcing. In other words, overcoming the issues of poorly managed operations, finding and following a sound approach to outsourcing, and monitoring market developments are all very much about implementation and execution.
Companies will be better off when the attention moves from building hype to crafting practical, implementable outsourcing solutions.
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