What Makes Us Think Transformational Outsourcing Can Work?

If the conventional wisdom provides us with clear rules of the road on outsourcing, but transformational outsourcing takes a very different path, what gives us confidence that transformational outsourcing will create the results we want? First, this way of using outsourcing is well suited to the problem of transformation. And second, in the hands of capable executives, like the CEOs of NS&I and Archer Financial Group, transformational outsourcing can be executed effectively. Let’s look at each of these points separately.

The ‘‘Hammer’’ of Transformational Outsourcing Hits the Nail on the Head

We’ve all heard the criticism—especially of technologists and consultants—that when they have a particular hammer in their hand, every problem looks like a nail. Let’s look at how the hammer of transformational outsourcing measures up to the other tools that executives can use to transform their organizations.

By its very nature, business transformation is risky and extraordinarily disruptive, no matter how it is approached. For instance, when Jim Collins went looking for companies that made substantial improvements in their performance trajectories to go from good to great, he found only 11 examples out of 1,435 companies for which he had data. Among the 16 turnaround companies that Frederick Zimmerman followed for 20 years, more than 40 percent failed.^[7] Hannan and Freeman^[8] argue that organizations stumble in the short term when their coherence is disrupted in order to adjust to compelling changes in their environment. Over the long term, they may be more successful, but the short-term disruption endangers their survival. Too much change, too radical a change, or change at the wrong time leads to chaos, loss of cultural glue, fatigue, and organizational breakdown.^[9]

Some noted management scholars even say transformation is impossible, almost by definition. Remember that we defined transformation as ‘‘big change fast.’’ John Kotter^[10] notes that transformation efforts produce poor results because executives fail to sustain their commitment over the years that these take to implement. He also states that effective transformations must be anchored in the organization’s culture. Well, culture represents an accumulation of behaviors practiced for so long that they become values. When transformation involves new behaviors, which it must by definition, it would certainly fly in the face of existing culture.

Forward-looking executives will avoid transformation when they can. Instead, they will opt for relentless incremental change, which has a much higher success rate.^[11] In some cases, however, they have no other choice.

Transformation, again, by definition, depends on developing new or dramatically improved capabilities. If an organization had all the capabilities it needed to succeed, it wouldn’t be failing. For example, when Gerstner turned IBM around, he demanded that business units cooperate to provide customer solutions instead of competing with each other.^[12] This change involved shifting organizational structure, rewards and incentives, sales and marketing programs, and a host of other behaviors. Transformation relies on making and sustaining deep and well-thought-out behavioral changes of this sort.

Leaving aside speed for a moment, what tools can executives use to pull off a change of this magnitude? It turns out that organizations use one of four approaches:

1. Do it yourself through a concerted organizational change initiative. This was Gerstner’s approach. It’s also the way DuPont transformed itself from an explosives company to a chemical company after World War I.

2. Merge or acquire other organizations that have the needed capabilities. Seagrams transformed itself from a wine and spirits company to a media and entertainment company through a series of mergers, acquisitions, and divestitures. FleetBoston used acquisitions to turn itself from a minor player in the banking industry in the late 1980s—a Rhode Island community bank—to one of the ten largest retail and commercial banks in the United States by 2001.^[13]

3. Form a joint venture with another organization that has the necessary complementary skills. The government of Brunei formed a 50/50 joint venture with Accenture to manage the country’s treasury systems. This followed a debilitating scandal in the late 1990s during which a member of the ruling family was found to have diverted millions, if not billions, in public money to his private construction company.^[14]

4. Outsource critical functions and processes to an organization with the ability to transform them.

What familiar options are not on this list? First, implementing a particular computer system doesn’t appear. Despite vendors’ claims to the contrary, this approach results in effective transformation only when coupled with concerted management initiatives. Technologies themselves, no matter how disruptive, do not create transformational change.^[15] Second, strategic alliances do not appear to be an effective tool for transformation. We see this more by the complete absence of examples than by any specific research.

Outsourcing differs from other transformational tools in one extremely critical way: It offers reliable execution at speed. In every other case, the existing executive power dynamic puts up tall, virtually impenetrable barriers to the new capabilities that the organization sorely needs. Let’s go through each alternative to outsourcing to examine why it doesn’t work (see Exhibit 2.4).

Exhibit 2.4: Outsourcing works better for transformation than any other option.

Do It Yourself

The idea here is for the existing management to organically grow the missing capabilities. What that means is that executives steeped in other ways of succeeding must loosen their hold on the practices that got them to the top. Then they must embrace new and unfamiliar approaches. At the very least this makes them vulnerable and not especially competent for the time it takes to become expert in these approaches. In most cases, they will revert to what they know and what they know how to do when business hiccups, as it most surely will during a strategic transformation. For example, Xerox was unable to capture value from many of its breathtaking technological advances—the mouse and the Macintosh-type visual interface, for example—because the company was being run by ‘‘copier people’’ who just ^[16]couldn’t see the value.^[17]

Acquisitions

Companies can acquire organizations with the capabilities they need. But the structure of an acquisition keeps the executives without these capabilities in charge. Just as in the ‘‘do it yourself’’ option, they must subordinate themselves to the acquired management team’s priorities, expertise, and culture. This requires a power structure that would look utterly upside- down from the acquiring executives’ perspective. Ask yourself how many times your organization has acquired a smaller company to get access to their expertise. When your company tries to integrate it into the core company—to absorb the new capabilities—the change backfires. Instead of transforming the core company, the initiative kills the acquired company.

Mergers frequently fare worse on this score. Those theoretical ‘‘synergies’’ that merger architects promise often turn into sustained organizational conflict. The commitment to different strategies, competencies, and behaviors that the two executive teams bring to the party engenders mutual distrust and disrespect. Instead of combining their abilities to transform the organization, they frequently battle over power and control so fervently that the company itself languishes. The Bank of New England’s merger with Connecticut National Bank in the mid-1980s is a telling example. Initially, the two banks’ executive teams believed that a well- regarded commercial bank and a successful retail bank would make excellent partners. When they stepped into a so-called merger of equals, these two organizations practiced political infighting so intently and so well that the company was unable to address the imperatives of the recession of 1990, and the bank failed. A review of all the bank combinations in New England over that decade revealed that, on average, merging banks actually lost substantial ground to competitors within two years after striking a deal.^[18]

Joint Ventures

Carving out an organization that is dedicated to operating in a wholly new way does work. The joint venture has its own management and, often, the organizational latitude to develop the practices and culture it needs to succeed as a very different kind of company from either parent. That’s all fine. What a joint venture doesn’t do well is transform either original organization. For it to have this effect, it would have to be repatriated in a way that would infect its parent with its new behaviors. In short, the management team of the joint venture would have to take over in the parent company to instill their way of operating in it. At this point, it looks like a merger or acquisition, with all the problems we outlined above.

Outsourcing

Outsourcing is different from the other three options outlined above in one critical dimension: The power to implement new capabilities is placed clearly in the hands of the executives with the new skills. The outsourcing partner provides a management team that is experienced in the capability that the organization needs. And these individuals are empowered by the outsourcing process to implement the practices they bring with them. This is the only option of all the alternatives through which this is possible.

In the Hands of Capable Executives, Transformational Outsourcing Can Work

As we have seen from our examples, some companies have achieved transformation at speed through outsourcing. This is very much an emerging practice, but I have compiled 20 examples of transformational outsourcing. Seventeen of them have been in place long enough to show results. Of the 20 examples, 82 percent have actually achieved dramatic, organization-level results. And as we will discuss more fully later, all of them—100 percent—executed the transitional initiatives they intended. Where they failed to effectively transform, the leaders failed in strategy, not execution.

In a 2003 Accenture survey of U.S. senior executives, 54 percent of respondents agree or strongly agree that ‘‘outsourcing is one way the organization can implement dramatic changes effectively.’’ We all know the reliability problems inherent in check-box survey data, but this kind of overwhelming response indicates that business leaders are beginning to recognize the potential in this approach.

Make no mistake: This is risky business. And, as with every emerging practice, the guidelines for making it effective are a bit unclear at this point. But it appears that outsourcing, unlike the other options that executives have at their disposal, can deliver transformational results reliably and at speed.

^[7]Frederick M. Zimmerman, The Turnaround Experience (New York: McGraw-Hill, 1991), p. 72.

^[8]M. T. Hannan and J. Freeman, Organizational Ecology (Cambridge, MA: Harvard University Press, 1984), pp. 16–18. ‘‘Structural Inertia and Organizational Change,’’ American Sociological Review 49, no. 2, pp. 149–164.

^[9]H. W. Volberda, ‘‘Towards the Flexible Form: How to Remain Vital in Hypercompetitive Environments,’’ Organization Science 7, no. 4 (1996), pp. 359–374.

^[10]John Kotter, ‘‘Why Transformation Efforts Fail,’’ Harvard Business Review, March-April 1995, pp. 59–67.

^[11]Jane Linder and Susan Cantrell, ‘‘Carved in Water: Changing Business Models Fluidly,’’ Accenture Institute for Strategic Change Research Report, December 2000, pp. 8–10, www.accenture.com/isc.

^[12]Robert D. Austin and Richard L. Nolan, ‘‘IBM Corporation Turnaround,’’ Harvard Business School case study 9–600–098, revised November 14, 2000, p. 6.

^[13]Banks ranked by total assets according to Online Banking Report, http://onlinebankingreport.com/resources/100.html.

^[14]Roger Mitton, ‘‘‘Everyone Was Shocked’ A Scandal Climaxes as the Sultan’s Brother Is Sued,’’ Asiaweek.com 26, no. 9 (March 10, 2000),p. 1, http://www.asiaweek.com/asiaweek/magazine/2000/0310/nat.brunei.jefri.html.

^[15]Jane Linder, ‘‘Outcomes Measurement in Hospitals: Can the System Transform the Organization?’’ Hospital & Health Services Administration 37, no. 2 (Summer 1992), pp. 143–166.

^[16]Douglas Smith and Robert Alexander, Fumbling the Future: How Xerox Invented, Then Ignored the First Personal Computer (New York: William Morrow, 1988), p. 122.

^[17]For a useful review of all the ways internal change initiatives are inherently self-defeating, see Andrew Molinsky, ‘‘Sanding Down the Edges: Paradoxical Impediments to Organizational Change,’’ Journal of Applied Behavioral Science 35, no. 1 (March 1999), pp. 8–24.

^[18]Jane Linder and Dwight Crane, ‘‘Bank Mergers: Integration and Profitability,’’ Journal of Financial Services Research 7, no. 1 (January 1993), pp. 35–55.