Optimizing Outsourcing August 14, 2011Posted by Tim Rodgers in Management & leadership, strategy.
Tags: leadership, management, outsourcing, performance measures, strategy
The idea of outsourcing has been around for so long that it seems that people have stopped using the word itself. What started for many firms as a way to save money by reducing labor costs has increasingly become a strategic choice. The common view today is that internal resources should be focused on core competencies that help establish or maintain competitive advantage, and outsourcing gives companies access to specialized firms who focus on other elements of the value delivery system; elements that are essential but do not directly contribute to competitive advantage.
Start-ups and other small-to-midsize companies don’t have to hire and develop internal teams for every function; instead they can leverage the skills of a worldwide portfolio of hardware suppliers, design firms, service providers, and contract manufacturers, just to name a few. Most companies don’t perform their own product manufacturing these days, but those that do justify it because they believe they need close control over the process and they’re willing to pay a premium to keep it in-house.
Quick aside: one of the many legends of the early days of Hewlett-Packard is that they used to make their own nuts and bolts, believing that no one else could provide the conformance to specifications and general quality they required. HP has come a long way from that extreme level of vertical integration.
Although the concept of outsourcing has been around for a long time, many companies still struggle with the model, sometimes finding that it creates more problems than it solves and causing people to question whether outsourcing was the right thing to do. While there are certainly cases where outsourcing is a bad idea, I believe the problem is the execution of the model, not the model itself.
I’ve been on all sides of outsourcing over the last 25 years. My first job at HP was with a division that made printed circuit boards, an internal supplier to HP product lines, and that division was completely eliminated when it became clear that there was no competitive advantage to building your own PCBs. Later I worked in a procurement engineering team that helped match product requirements with the available supply base of part suppliers. During my time managing software quality and software development teams I organized and grew outsourcing programs, and in my most recent position I am an employee of the world’s largest electronics manufacturing service.
I’ve learned a few things about outsourcing along the way, and I’ve seen two common mistakes: fuzzy interfaces and internal resistance.
I believe that outsourcing works best when there’s a clearly-defined split of responsibility between the customer and the supplier (or service provider), and the supplier feels a sense of ownership for their deliverables and control over the quality of those deliverables. This means dividing the work in a way that provides clean interfaces and minimizes the need for daily communication. I don’t believe that “virtual teams” made up of in-house employees and “external” employees can be responsible for the same deliverable. It should be possible to specify the required performance, and measure achievement with a minimum of ambiguity. A part supplier builds a piece of hardware following a specification, and they can test their product to the specification to verify the quality. When outsourcing a service it may be harder to specify and measure performance, but it’s absolutely necessary to do so.
When a company decides to outsource something that is currently being performed by in-house employees some level of resistance is inevitable, particularly if the result is unemployment. In the ideal situation people who were previously doing a job that’s planned for outsourcing could be given a shot at a different job that adds more value to the organization. However, even in that rosy scenario there can be problems due to a failure to manage the changing roles and expectations. It’s a variation of Newton’s First Law: a body in motion tends to stay in motion, and people don’t stop doing their old job until they understand what they’re supposed to do next. That requires change management to make sure that in-house employees who are assigned a new job aren’t undermining the outsourcing strategy by trying to do their old job.
I’ve used the word “outsourcing” many times in this post, and it may be time to retire that word from common use, but these principles can be generalized to apply to any relationship with another company who provides part of the value chain.