Shiva Kumar
Feb 2013
Outsourcing is the real manta in today’s business world not to mention its relevance in our organization. Even though it looks alike a very simple process, that has a very interesting evolution in the last decade. I closely watched how this metamorphosis process and was very keen in understanding the fundamental driver to this approach. The businesses due to the globalization of products and services, were purely focussed on maximizing the profits eventually had to venture this road during their journey in the recent years.
When you see the merits of this process, we can easily articulate a list. However in the changing scale of economics, the merits are no longer merit anymore. On the contrary they are proving to be more drags on the business and the organizations embracing them.
What is Outsourcing?
Outsourcing in it simple form can be defined it is the provision of a service, resource or product from outside the organization. This method came to practice as quick and ways process of staff augmentation tied with cost reduction - a common process in modern economy - for many larger organizations. What for a previous generation of our senior managers was a tactical option, is now an essential component of the business strategy in our core effectiveness and efficiency exercise.
Evolution of Outsourcing
Until few years ago, the managers, like me in regarded and used outside contractors and short term consultants to overcome the temporary constraints on resources. In my last decade long of working in this organization, I’ve consistently used hiring consultants from outside purely as a part of the staff augmentation and to support our initiatives and work, which are completely decided and driven by us. This was purely a tactical decision and was considered as a project with a unique mandate and clear start and end dates.
This was the same in the private sector as well till end of 90’s. The beginning of the new millennium and the harsher financial realities brought in many new vocabulary in to the business. They were downsizing, agile workforce, offshoring and delayering, etc. The departments were told not to increase their workforce at the same time to focus on the core competency. This meant clearly not to take on new ones. By taking this way of outworking, the organizations started to relay on their external partners increasingly than before. The advancement in the computing technologies combined with the word wide web, paved multiple ways to define and build a viable delivery model that can run from any part of the world.
Why outsource?
One of the main objective of the outsourcing is the cost arbitrage, however there are more than one significant reasons for this.
Cost: It is very easy to understand in the laypersons terms that the major advantage of doing this is the cost arbitrage. Geoffrey Moore, a famous management consultant in his book ‘Dealing with Darwin’ had demonstrated this by dividing the organizational activities to core and context. His argument was the organization should focus on the core activities whereas everything else is context and can be moved outside the organization, to leverage the cost benefits of doing so.
Time: Many organizations realized that reducing the tome to go-to market is very critical for their success. The outsourcing keeps the core company small, agile and at the same time focussing on the core activities that might reduce the time to go to market with new products and services.
Skill set: Due to the variety of skill sets that are required in the organization, some of the special skill sets are hard to develop & maintain and as well have a dedicated resource. The in-house resource can be better used, if they can be directed towards the core areas of business.
Management’s psychology: The very nature of moving the work outside the organization, it provides a perception of reduced risk to the management. Risk averse organizations will more likely to see this as a great benefit. The organizations with a stronger staff associations and unions, management benefits greatly with the contractual obligation with an outside partner.
Behind the Outsource
Even though the obvious reasons of the benefits of the outsourcing is compelling for the organizations to adopt, it does work only in certain areas to the benefit. In most o the cases, the benefit is not realized or in the contrary may cost the organization more than insourcing. One of the compelling reason is that the ability and maturity of the organization to identify the core and non-core activities. The non-core activities are the ones that might be yielding a diminishing value over time for the organization to invest on staffing perspective. Moreover the cost of insourcing vs outsourcing is also calculated on cost per resource which does not take the total cost of resource, while is always considered and represented as the obvious cost of the resource, which is most of the time is the standard cost of the post.
One of the main reason of the outsourcing is that it gives the organizations to tag certain tasks as non-core and move the cost under their own recurring operating cost to the non-recurring operating cost. Most if not all organizations are very well aware of the fact that the non-recurring operating cost is not a true statement. As an industrial engineer and very conversant in standard cost calculation, I’d like to bring to our attention the very interesting phenomenon of hidden cost of outsourcing
Hidden Costs
After a decade of outsourcing of the jobs low cost countries such and India and China, many studies were conducted and have published reports on the hidden costs, which are mostly ignored by the organizations that venture into the outsourcing. Some of them are
- Internal resources to select and manage the outsourced partners
- Quality related costs
- Costs related to resolving cultural and communication
If these costs are includes and accounted for the comparison, the outsourcing may not be a good choice as against out-locating the operations may yield a greater and effective benefits for the organization.
Responsibility & blame
The one of the reasons that the organizations have clear cut silos of function is to assign and delegate a specific set of functions and responsibility to a group. This is the natural evolution of humankind that follows the pattern of group dynamics. This is the underlying management psychology, that drives structures organizations to work as a well oiled machinery. It not only streamlines the execution of non-core functions, but also assign an entity for assigning responsibility and blame. This becomes part of the non-core activities more then the core activities for the very reason for the accountability on the cost to run those activities are always highlighted.
For example, the Information & technology division for an organization that is involved in designing and developing programs to improve the livelihood of women and children of the under developed and developing countries may be a non-core activity. Eventually, the nature of IT has changed from support role to the enabler role, which is hardly noticeable. When the core activities of the organization does not get and feel the enablement role of this division, the only reason to have the group is to held them responsible and accountable. You guessed it right, it is mostly blame!
Organizational Psychology: Obliterate the blame
When risk shy and monolithically organization it makes more sense for the outsourcing from the cost perspective. The outsourcing partners are well aware of this psychology and factor into their cost the price to take over the blame. The most unobserved part of this whole process is the missed opportunity of the innovation and process improvement, which are possible with no additional cost.
By outsourcing, the blame is obliterated between the demand generator and the service provider. The Senior management is very happy to carry out their core functions, and wherever not possible, they have an option to deal with the partner on the agreed service levels.(SLAs). The partner gets a steady stream of revenue to keep his books look good with the skill set they have and have to listen to the blame. The most ignored and important thing is that the lost opportunity to continuously innovate and provide opportunities for the core activities to build upon them. This was realized by many organizations and proved by numerous case studies that went full blown offshoring and outsourcing functions do no good to the organization in the long run.
Alternatives: To look within
When the cost of your operation is growing, and we are experiencing a tough inflow of contributions, we can’t offered to stay the same. We need to innovate the process to make the process efficient to keep up the compassionate work what we do around the world. Fortunately we are not alone. There are many private and public sector organizations that are in the same situation as we have today. Some of the best options we have right now to learn from the peers, learn and adopt the successful recipes to our organization. In the current economic conditions, the companies like Amazon, Apple and Netflix have excelled and we have something to learn from. These organizations have a balanced approach to their outsourcing and insourcing moreover created a very healthy organizational culture that creates an habitat for innovation and growth. All of them own thing in common is the freedom and responsibility that is encouraged and embolden within the employees. Let’s see some of the key elements that we can observe, leant and adapt.
Culture
Most of the successful organizations that make great products and deliver good services do not do them by accident. It is all pointing to the culture that the organization build and grow within before even they start serving their consumers. They value their employees as their first stake holders and provides them with the rich environment to grow and flourish. There are seven core values that were repeatedly cited in major management studies as the foundation for their success, which will enhance the organization to be cost-effectively in-source and at the same time be delivering the best products & services.
1. Values that we should value
We as other organizations have a very clear Vision and Mission statements. Further we should also articulated the values that we value. In practice we don’t remember or follow it through as it is very hard to measure and value them. We need to articulate and start valuing based on the behaviors and skills in our colleagues. We should embody the following values as the core values and enforce them.
- Judgement: The staff member are expected to make wise decisions (business, technical & creative) despite ambiguity; To solve the root cause of the issue as against treating the symptoms; able to think strategically what the staff member trying to do and what he/she does not trying to do; To smartly differentiate between what needs to be done now and what can be done later
- Communication: To be concise and articulate speech and writing
- Impact: To be able to accomplish amazing amount of important work and demonstrate consistently strong performance so that colleagues could relay on.
- Curiosity: Learn rapidly and eagerly and broadly knowledgeable in business, technology and policies.
- Innovation: To be able to re-conceptualize issues to discover practical solutions to hard problems; Challenge prevailing assumptions when warranted, and suggest better approaches
- Courage: To say what you think even if it is controversial. Ability to take smart risks.
- Passion: Inspire others with your thirst of excellence and celebrate your wins.
- Honesty: Non political even when you are disagreeing with others.
- Selflessness: Ego-less in searching for the best ideas.
II High Performance
A great workplace is nothing but having a stunning colleagues. The workplace health is not just measured by the team parties, free lunches, divisional retreats or employee benefits. It is some of these things and other things, if they are efficient at attracting and retaining stunning employees. The science and math is very simple: the more talent we have the more we can accomplish. Internal “gut-throat” and “swim or sink” behavior should not be tolerated and should be discouraged. Loyalty may be good, but not always. Hard work should not be just the measurement of the hours the staff member puts in, rather it should be the measurement of accomplishing great work. Sustained A-level performance, despite minimal effort, should be rewarded. Diversified styles should be allowed as long as they are aligned to the values mentioned before.
The organizational work can be split into procedural work and creative & inventive work and the staff members always have a mix of them. The general expectation to be in procedural work the expectation should be 2X better than the average. In creative and inventive work, the best are 10X better than the average. Care should be taken to implement this process as the high performance expectation might pose as a threat to the job stability and security.
III Freedom and responsibility
The organization has to focus on developing responsible people to get the most out of their contribution. A responsible staff is the one self motivating, self aware self disciplined, self learning and acts with compassion. The responsible people thrive on freedom and are worthy of freedom. The organization should focus on a model to increase employee freedom every day rather than limit it. This will continue attract and nourish innovative people and the organization has a better chance of success in meeting its objectives. Unfortunately as the organizations grow, they tend to curtail freedom and become bureaucratic. The science behind is very simple.
Desire for bigger positive impact by the organizations creates growth; Growth creates complexity; Growth often shrinks the talent density. When the growth exceeds the minimal talent density, the business become too complex to run informally with the available staff; To manage the chaos, process and procedures are introduced. No one loves process, but feels good compared to the pain of chaos. The organization starts adopting “time to grow up” mantra. This process focus in turn brings down the talent density and forces the people with talent out of the organization.
Process brings seductively strong near-term outcome as the managers start falling in love with it. However a small change due to the market shift can make their division or department tough to adopt and organizations generally grinds painfully to irrelevance. The outsourcing will start looking a better option.
The organization has a very clear choices before when it is imminently facing this situation, to avoid chaos:
Use process and procedures to drive effective execution of current model, but cripple creativity, flexibility and loose ability to thrive when the market and economics of operation changes. Alternatively as you grow with even more higher performance people with freedom & responsibility and not with rules.
The key objective is to increase the talent density faster than the organizational growth and complexity and at the same time to consciously try to minimize complexity growth. With the right people, we can shift from the culture of process adherence to a culture of creativity, self discipline, freedom and responsibility.
IV Context and not control
The best managers know how to get great outcomes from their team by setting appropriate context rather than by trying to control their people. They provide the insight and understanding to enable sound decisions. The context that every manager should embrace are Strategy, assumptions, metrics, clearly defined roles and transparency around decision-making. The control which they should avoid is topdown decision making, management approval & planning and process values more then the results. One of the key metric that we are doing and should be doing is the link the individual’s goal to align with the organizational goal.
The key to the manager is when one of your talented people does something dumb, don’t blame them; instead ask themselves what context they failed to set. At the same time, for the managers who are tempted to use “control” hey should be asking themselves what context they could be setting instead.
The benefit of focussing on context is that the high performing employees will do better work if they understand the context better. Having frequent departmental meetings, open discussion of strategies and results are some of the direction towards investing on context.
However in some cases control can be a tool over context, such as working on emergency, and working with a new hire. The one another case where control will be preferred if you have wrong person for the role-which should be only temporarily.
V Highly aligned loosely coupled departments
The organizational structure is the foundational component to the process of getting amazing results. There could be three distinct traits of organizational formation
- Tightly coupled Monolithic, where the senior management reviews nearly every tactics, lots of cross departmental buy-in meetings, focusing overly on keeping the internal groups happy as the external stakeholders, Mavericks get exhausted trying to innovate, Highly coordinated through centralization, but very slow and the slowness increases with the size of the division.
- Independent Silos, where each group execute their objectives with very little coordination, Alienation and suspicion between departments, may provide a deceptive perception of high results, but in reality produces low results to the organization due to lack of coordination.
- Highly aligned and loosely coupled: Highly aligned, where the strategies are clear, broadly understood, interaction between the team focussing on strategy and not tactical, requires a large participation from the top management to be transparent and articulate and perceptive. Loosely coupled where minimal cross functional meetings other than get aligned on straggles & goals. Trust between the groups on the tactical level without previewing and approving one another, managers reaching out proactively and perspective as appropriate, conducting occasional postmortems on tactics necessary to increase alignment.
The third option works great if you have high performance people and good context. The key objective of the our organization is to be big, fast and flexible. This way we can get the things done in-house with amazing results.
VI Personal Development
There meed to be two simple factors that need to be established to justify the post within the organization
- The Job has to be big enough: The job assignment should always be big enough so that it keeps the high performance people focussed and keep delivering results at the same time feel the accomplishment. For example we might have an incredible manager of something, but we don’t need a director of it because job is not enough. If the incredible manager left, replace with a manager and not a director.
- The employee must be a superstar in current role: This shows that the employee is consistently performing well and a go to person for his peers. This demands a promotion as he can fit on to the next big job.
The organization should aim the personnel development by giving their staff by surrounding them with stunning colleagues. Encourage them by providing them with opportunity to work on big challenges. Mediocre colleagues or unchallenging work is what kills of a person’s skills. However focussing on the career planning such as rotation, mentor assignment The organization should encourage staff to manage their own career growth. High performance people are generally self improving through experience, observation, introspection, reading and discussion. It is well ingrained in our society that the economic security is based on the people’s skills and reputation. The organization had to merely support the self improvements by providing the environment by surrounding them with great talent.
Final Points
As an organization we are in the crossroads with tough choices to make. The organization is growing and we are entering in to new areas of programs, initiatives and delivery by fostering innovation and creativity. The changing technological landscape and the economic factors will weigh in on organization to continue the growth and be sustainable, to improve internal efficiency and effectiveness of the programs. The natural inclination is to cut cost may be looking in to the option of outsourcing or offshoring. However many used cased and business studies had proved that that may not be the option for a long term strategic solution. However I tried to quote based on the best run companies where insourcing with proper direction would prove to be more beneficial. With stunning colleagues with compassionate objective, we can deliver amazing results that can’t be matched by any outsourcing partner.
