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Volume 32, Issue 1

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As companies look for new ways to grow in an unstable economic climate, strategic outsourcing, the strategy of outsourcing entire business functions, is gaining popularity.

However, there’s more to successfully executing an outsourcing strategy than meets the eye. On the one hand, having suppliers and contractors handle entire functions from research and manufacturing to accounting, human resources, sales and information technology services can accomplish a variety of business objectives while enabling you to control costs and quickly respond to the rapidly changing marketplace. However, executives often overlook thinking through and planning for critical organizational reality implications at the earliest stages of considering this approach. The result is often a phenomenon that I call “strategic gridlock”: persistent organizational problems that can pile up and cause the company’s progress to grind to a halt.

Consider the case of “Company A“, a technology company that decided to outsource their manufacturing function. This strategy should have worked. After all, they contracted with a highly regarded supplier. However, Company A’s executives overlooked the fact that their organization’s informal culture of secrecy and departmentalized functions did not encourage information sharing. Consequently, the outsourcing arrangement became bogged down by distrust and poor communication between the two companies. Conflicts and slips in quality became commonplace as the supplier worked with missing data. Strategic gridlock built up as these errors caused a series of problems in departments throughout Company A, ultimately damaging their relationship with several key customers. Within a year, the outsourcing arrangement was ended by mutual agreement.

This scenario did not have to happen. Yet unfortunately, it’s a common occurrence. Too many executives believe that outsourcing is a cut and dry issue and that it’s up to the outsource provider to make the outsourced business function successful. However, successful outsourcing requires much more than simply handing over a business function to an outside party. When executives overlook their organization’s reality and incorporate their company’s starting point into the strategic thinking phase of the initiative, disastrous results can occur beyond an unsuccessful outsourcing partnership. Depending on the function you decide to outsource, customers can be lost, profits can plummet, and good employees can become disgruntled and leave.

By including organizational reality guidelines into the strategic thinking process, companies can make any outsource initiative a rewarding experience in terms of both profits and productivity.

The following questions will help you think through and plan for some critical issues associated with outsourcing various company functions.

Do Your Assumptions Match the Organizational Reality?

It’s critical to understand the magnitude of the change that strategic outsourcing represents for your company and the employees. That’s why you must make certain that you’re outsourcing the most appropriate function in the best way to deliver the results you desire. Frequently, CEOs and executives bring into the picture assumptions that don’t match their organization’s reality. They assume that all they need to do is delegate the function to an outsource provider and that it will be a quick and easy transition. This can result in unanticipated problems as new workflow patterns disrupt entrenched habits. In reality, as an entire function gets moved to an outsource partner, managers and employees will have to take on new roles as liaisons and perform their jobs in different ways. Your organization may or may not have the competencies and resources readily available in order for this to happen. This information will also impact your decision on which functions are most suitable to be outsourced. Additionally, because outsourcing has been used for so long as project support, some companies may not be used to thinking of their outsource provider as a partner rather than a vendor. This is a tremendous mindset change, from an “us / them” mentality to an “us / us” one. Both parties must have a “we’re in this together” attitude to succeed.

Are You Negotiating the Buy-In of Stakeholders?

Overt and covert resistance from your stakeholders who don’t understand and buy into the outsourcing strategy can seriously undermine the success of the effort. For example, managers and employees will have questions about how and why this is happening, as well as how it will change their jobs and compensation. Tapping into and addressing stakeholders’ concerns before launching an agreement will help move the strategy forward. Knowing the various perspectives beforehand can keep you from getting unpleasant surprises later on. For example, one company learned that they had to resolve union issues before they could outsource their manufacturing function. As you’re developing your partnering arrangement, don’t forget to address stakeholders’ concerns in the provider’s organization as well. Many times outsource employees have a dotted line relationship with the client company’s managers. Because they aren’t actual employees and don’t fall under the usual policies, it’s easy for them to ignore your procedures and follow their own company’s guidelines. It’s important to reach clear, up front agreements on expectations, roles, and relationships between the two organizations in order to avoid wasteful conflict and resistance.

How Does our Organization’s Culture Support or Detract from Strategic Outsourcing?

Because strategic outsourcing is an extension of your company, cultural compatibility takes on an increased importance. Be sure to look beyond the formal culture-the written mission, values, practices, and policies of the company. The informal culture-what really happens-may be very different. For example, “Company A’s” formal culture stressed openness and teamwork, but the informal culture rewarded secrecy and not working across departments. For a successful outsourcing partnership, CEOs and executives must identify their own company’s formal and informal cultures in addition to the potential outsource company’s. The next step is to make sure the cultures of the two companies complement each other. If not, the transition to outsourcing may take longer to complete or will present future challenges down the road, as policies and practices in each company begin to clash. In order to choose the right outsource partner, identify the culture that prevails in each organization and whether or not they can mutually support your goals.

What Steps Make Sense Given our Organization’s Unique Situation?

Both the client company and the outsource company have their own special issues that need to be factored into the equation. CEOs and executives need to look at the realities of both companies to determine what needs to happen first and how that will impact other key initiatives that are occurring. Do employees in one or both companies need to learn new skills? Does there need to be a new system of rewarding and compensating both the client company employees as well as the outsource company employees? Does the morale need to be increased before outsourcing takes place? Additionally, it’s important to realize that just because an outsource provider comes highly recommended, they may not be the best choice for the company’s goals, especially if the prospective partner has issues that can’t be worked out as quickly as necessary. In fact, you may need to “interview” a number of prospective outsource partners before finding one with not only the technical capabilities to get the job done, but also the goals, priorities, and action plans that are in line with yours.

How will we communicate credibly about the outsourcing strategy?

Misunderstandings and confusion can bog down even the best-planned outsourcing strategy. Therefore, CEOs and executives must decide ahead of time how they will credibly communicate information about the arrangement. In order to be credible, the messages must meet the organization’s needs. Not only do they need to be consistent, they also must come from a channel the employees use. For example, if there’s substantial information about the outsource strategy on the company’s intranet, but employees don’t use that as an information source, they won’t get the details they require to ease their fears. Above all else, your communications must match your actions. Realize that if there is already low trust in the organization, employees may rely on sources they do view as credible, such as the grapevine, to receive information. This not only fuels rumors, but it also lowers morale, spreads misinformation, and creates unnecessary fear. Putting together a communication plan that meets the unique needs of your organization can greatly reduce and even completely eliminate many problems.

What are the Critical Checkpoints for the Outsourcing Strategy?

Just as with any strategy or initiative, flexibility between the client company and outsource provider is just as important as the focus. Whenever there are two separate organizations-each with their own objectives-trying to come together to create one uniform goal, there needs to be frequent checkpoints to gauge the progress. At pre-designated times, analyze the results to date along with the current circumstances. Because every organization has a different style, you may need to adjust the way you do things in order to make progress. The goal is to of course stay focused on the big picture, but be prepared to adjust your plan if necessary. To some degree, the checkpoint reviews will be experimentation, especially since you’re evaluating the results according to two different company’s perspectives. The idea is to plan for the unexpected, and to evaluate the arrangement frequently enough that problems don’t escalate out of control.

Including organizational reality considerations at the earliest stages of considering strategic outsourcing enables you to more accurately weigh the benefits and risk factors that will be associated with this arrangement. It also provides you with a more focused process for execution.

With a thorough strategic thinking and planning effort, outsourcing an entire business function can be a cost-effective and highly productive way to meet your objectives. When you examine your assumptions and anticipate and address issues as early as possible, you can maximize the chances of a smooth outsource transition.

As founder and president of Business Advancement, Inc. (BAI), Pamela Harper has worked with a variety of clients in entrepreneurial firms, mid-sized companies, and large corporations, to transform business strategy into high performance. She can be contacted at www.businessadvance.com.