Chapter 2: Outsourcing Isn t What It Used to Be


Transformational outsourcing is definitely not the most common form of outsourcing; it’s an unusual and specific flavor. However, it’s also an essential tool in every executive’s bag of tricks. In some important situations, it’s the only tool that works. These are bold assertions, but I’m confident that they’re true. Let me take you through my logic.

What Is Outsourcing Anyway?

Until I asked executives this question, I thought outsourcing was well understood. In fact, the definition is quite fuzzy. Most leaders would agree that outsourcing involves purchasing services from an outside company. But that’s where the agreement stops. Some argue that it isn’t outsourcing unless a company’s employees transfer to the service provider. Others would not hold that high standard, but would stipulate that the organization has to have once provided the service for itself. Still others would insist only that the organization could have provided the service for itself. After speaking to hundreds of executives, here’s what I have found to be the real underlying concept:

Outsourcing means purchasing ongoing services from an outside company that a company currently provides, or most organizations normally provide, for themselves.

For example, if a company uses an outside company to do its manufacturing, most managers would say it ‘‘outsources manufacturing.’’ This is true even if the company never made a single widget on its own. Why? Because companies generally manage their own manufacturing operations. By the same token, almost no company would say it outsources its investment banking, auditing, or garbage collection, because the vast majority of companies purchase these services.

This definition also establishes that projects, while they may be service purchases, are not usually considered outsourcing. When a company contracts with XYZ Systems to develop a computer application for them, XYZ’s responsibilities end when the system is delivered. Outsourcing providers, in contrast, offer ongoing services. Their responsibilities end when the contract date arrives.

What’s important about this definition is that the line between what is and what is not outsourcing moves over time based on accepted practice. For example, the mining companies in the United States and Canada at the end of the nineteenth century often operated company towns. Employees of these companies staffed stores, credit unions, and real estate development offices—certainly a much broader range of services than companies provide for their employees today. As late as 1966, the U.S. Naval Academy operated its own production facility to provide milk for the midshipmen. At the time when these services were handed off to a third party, the organizations would have said they ‘‘outsourced’’ them. Today, however, no one would refer to buying milk from a dairy as outsourcing.

In other words, if we take the long view, we can recognize that a deal that is considered radical—almost unthinkable—at one time is thoroughly commonplace at another. Do you recall the buzz that was created when Eastman Kodak decided to outsource its information technology in 1988? This $18 billion company shook the corporate world by announcing a $250 million, ten-year deal to outsource its corporate IT infrastructure: 17 data centers, all its networks and desktop systems, and some 650 of its 4,000 IT employees.[1] At the time, I was teaching at Harvard Business School. To delight and amaze my students, I convened a debate between Kathy Hudson, Kodak’s CIO at the time, and the chief operations officer of Fleet Bank. Now, the banker was no shrinking violet. It was on his watch that Fleet had expanded from a sleepy Rhode Island retail bank to one of the largest banks in the nation through years of acquiring and relentlessly integrating other institutions. Predictably, sparks flew. The Fleet executive condemned Hudson for giving up control of one of the key strategic levers in her business. She defended herself admirably by arguing that her ability to fix PCs and run data centers was never going to make one whit of difference to Kodak’s future.

The point is not who was right. It is that, in 1988, contracting with an outside company to provide IT infrastructure services was considered radical outsourcing. Today, it’s a low-margin business that some consider almost a commodity service. IT infrastructure services have moved some distance on the spectrum from radical outsourcing to purchased services. At the same time, some companies are now beginning to outsource services that many others would consider unthinkable. This sets the stage for us to talk about the real subject of this book: transformational outsourcing.

[1]See Kathy Hudson’s presentation on the deal at http://ais99.sba.uwm.edu/outsourcing.ppt.




Outsourcing for Radical Change(c) A Bold Approach to Enterprise Transformation
Outsourcing for Radical Change: A Bold Approach to Enterprise Transformation
ISBN: 0814472184
EAN: 2147483647
Year: 2006
Pages: 135

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