How Far Should You Go?

We have talked about how the four uses of transformational outsourcing differ strategically, but there’s one more important decision that executives must wrestle with no matter which purpose they embrace. They must decide how far they intend transformational outsourcing to take them.

This is really a question of horizon, and it matters because it influences how executives shape and manage their outsourcing relationships. Executives have two choices. They can use transformational outsourcing simply to reposition their company, or they can use it also to accelerate their performance improvement. I have yet to encounter an executive who is using this approach to ‘‘ennimble’’ an enterprise—to give it the capability for strategic agility, so we’ll hold that part of the discussion for Chapter 12, ‘‘Transformational Outsourcing Horizons’’ (see Exhibit 4.4).

Exhibit 4.4: Goals for transformation through outsourcing.

Reposition

The most narrowly focused leaders—sometimes the most desperate ones—use outsourcing to achieve their most urgent purpose: to reposition the organization. In other words, they want to move their company to a better competitive situation. They’ll deal with what happens next when they get there.

Start-ups and turnarounds often fall often into this category. Their needs are pressing, and the stakes are survival. In that kind of situation, it’s hard to think beyond the current tectonic pressures. Some other transformational outsourcing initiatives can fall into this category simply because executives have not attended to longer-term planning. In still other situations, executives intend to outsource to gain a new position, but to bring the function or activity back in-house once it is established. In this case, they want to take the responsibility for changing the performance trajectory on their own shoulders.

The executives who want to reposition their organizations focus primarily on putting robust working processes in place as quickly as possible. They are racing against time, and they measure their success primarily by whether or not they have met the deadlines they have set for themselves. For example, Consolidated National’s CEO charged his outsourcing provider with implementing a full-service banking capability in nine months.

Another example, a nonprofit organization we’ll call Mana, also illustrates the point.^[*] Mana is owned by a consortium of the 50 largest industrial-products companies in the world. It was launched in the late 1990s to help all the companies deal with the growing pressure for safe and effective disposal of hazardous materials. By 1998, this company had to be ready to accept declarations from member companies detailing the number of units of each type of hazardous material that was disposed of. It also had to be ready to present invoices back to the companies so they could remit their handling fees promptly and in the right amount. (These fees were designed to finance the cost of removing and recycling the packaging waste.) Mana’s president recognized that his company would be ineffective if it could not guarantee accuracy. In addition, he was responsible to the member companies for spending the money to administer the shared system wisely.

In order to start up quickly and meet the pressing deadline with quality work, Mana management believed they could not afford the risk of trying to hire and train a new workforce. So they outsourced finance and administration, customer contact, and information technology functions, under the leadership of a small core staff of employees. They did meet their deadline and achieve the accuracy their member companies expected.

Since speed to operation is the most pressing goal to executives who are repositioning their organizations, these organizations often absorb costs that come with a pedal-to-the-metal schedule. Mana, for example, estimates that its outsourcing fees cost 50 to 60 percent more than it would spend for an internally staffed operation.

Companies that aim for repositioning can state their objectives clearly and incentivize their provider for meeting them. They need not worry about governance processes to drive continuous improvement, benchmarking service levels to ensure their company remains competitive, or complex incentive schemes to motivate innovation. These companies can also make the strategic trade-off between single or multiple providers more easily. Coordinating a multiprovider environment requires more management attention, but the natural competition keeps an edge on the relationship as providers angle for increased business. This takes a toll on commitment and trust, but motivates operational improvements. If repositioning is the goal, these improvements are generally not as important as the ability to work closely with the provider.

Accelerate

Some companies choose to frame transformation as a longer-term initiative. Ultimately, they seek both to reposition the organization and to accelerate its performance trajectory. In other words, they don’t just want to use outsourcing to get to a better spot, they want to use it to equip the organization to improve faster than the competition once they get there.

Companies that are using outsourcing to catalyze change or remove a competitive roadblock frequently fall in this category, although start-ups and turnarounds can as well. Leaders that intend to accelerate their trajectories want to drive improvement in key functions and processes, but they don’t intend to stop there. They outsource to an especially capable partner to establish a top-quartile trajectory that includes continuing investment, innovation, and industry leadership. For example, in 1991, British Petroleum outsourced its North Sea finance and accounting operations to Accenture. BPX, the upstream exploration unit, transferred more than 300 workers to a shared services center in Aberdeen, Scotland. At the time, BP’s agenda was to transform its enterprise by creating a best-in-industry cost structure, by focusing firm management on value-adding activities, and by establishing a driving, aggressive culture. This outsourcing initiative, by itself, helped BPX reduce its finance and administrative costs. But management did not stop there. The leaders of the initiative worked with their outsourcing provider to leverage the asset—to bring additional clients into the center to improve economies of scale beyond what BPX could achieve on its own. BP leadership reasoned that no matter how well the company performed finance and accounting activities, these would not make a difference for its competitive position. The best it could do was to minimize the cost of a high-quality operation. All in all, six additional North Sea oil and gas companies transferred their finance processes to the center including Talisman Energy (U.K.), Conoco (U.K.), and Total-Fina Elf Exploration (U.K.). BPX executives brag that they have reduced administrative costs every year for a decade—ultimately halving costs while transaction volumes doubled.

Going for acceleration requires that executives stay tuned to the external business environment in order to guide the step-change and subsequent improvements effectively over the longer term. And they must shape their outsourcing relationship in a flexible way to enable it to react to business changes. If they neglect these steps, they can emerge from a serious and expensive change effort with a company that is no more likely to be successful than when they started. For example, one of the world’s largest telecommunications service companies asked a network equipment company to take over operations of its legacy voice network and to build it a new digital network in order to execute its strategic shift toward voice over IP and digital data services for the commercial market. Throughout the process, the two companies held annual ‘‘reality checks’’ involving senior executives in both. The purpose of these analyses was to determine whether the strategic direction continued to look appealing. If, in these sessions, the leadership reached the opposite conclusion, they had the flexibility in their relationship to stop and change course.

An acceleration agenda also involves devoting management attention to long-term plans, continuous operational improvement, and innovation as leaders shape the outsourcing initiative. We will talk more about how to incorporate these elements into the relationship in the following chapters. Suffice it to say that the contract duration, metrics, incentives, planning, governance, change control processes, and relationship-management aspects of the outsourcing initiative must all be constructed with the improving trajectory in mind.

In this chapter, we have addressed two major strategic questions that face transformational leaders:

• What is the major purpose of our transformational outsourcing?

• How far do we want it to take us?

With these grounding purposes set forth, we can now turn our attention to filling in the blanks with a clear set of objectives for this strategic initiative: transformational outsourcing. Executives who intend to use outsourcing for transformation (and even those who don’t) should write down exactly what they hope to accomplish and how they will know they are successful. They can then use this clear statement of purpose for the duration of their outsourcing relationship to continually remind themselves and their partners what they set out to do.

How do executives craft an arrangement that fulfills their strategic purposes? Read on.

^[*]For more on the changes at BPX, see Joel Podolny and John Roberts, ‘‘British Petroleum (A1): Organizing for Performance at BPX,’’ case study from the Graduate School of Business, Stanford University, S-1B- 16A2, 1998, revised April 2, 2002, and ‘‘British Petroleum (A2): Organizing for Performance at BPX, Graduate School of Business, Stanford University, 1B16A1, July 4, 1999.