Outsourcing and Management

Tags: SSON

To understand why outsourcing – specifically, the outsourcing of services – is completely overhauling management styles, we need to take a step back to see how we got here in the first place.

As the large corporation blossomed in the late 1800s, it was first modeled as a stiff hierarchy, not much different than a sole proprietorship writ large. The only examples it could draw from were the religious, governmental and military institutions that had been in place for centuries. Then in the 1920s, Alfred Sloan at General Motors, along with a handful of other innovative companies, crafted what we now know as a multi-divisional form. This new organizational design left finance and strategy functions at headquarters, but pushed operations and other tactical functions into the hands of field personnel. Large companies were able to grow even larger and manage ever greater scope because they were more nimble than their comparatively hierarchical counterparts.

Although the structure of the large organization changed, it was only a first step. Even into the late 20th century the old hierarchical, manufacturing-oriented management styles endured. A lot of those old-school boys are still with us. Such antiquated management styles may have been okay during the manufacturing era, but the emphasis on services changes everything. When services used to be classified as merely overhead, they made up a small percentage of overall costs relative to raw materials and direct labor. They were safely ensconced within the walls of the old-style organization.

Now services are the products, and they contain a huge people component. The ability to readily outsource services, which now comprise over 80% of the economy in terms of employment, will strip down the old corporation to its core. All of the attendant functions and non-related processes will be turned over to specialists, and as a result more and more work will get done outside corporate boundaries. This speaks to functions that were formerly housed in the SG&A (sales, general and administrative) line entry on a company’s profit and loss statement: human resources, for example. Many finance and accounting functions. Routine transaction processing. None of these functions are core competencies for most organizations, so they will be farmed out to companies where they are core. Executives and professionals will manage services across a growing global network of other organizations resembling nothing that has been seen before.

This change in governance may seem unremarkable, but it will have a huge impact on management practice. Management behavior will be forced to change at long last – not because of goodwill or altruistic intentions on the part of management – but rather through the discipline of the market, the nature of the new rules of competition and the pervasiveness of services outsourcing. And make no mistake – the lessons will be harsh.

Because the old governance mechanisms won’t work anymore as outsourcing and cross-organizational relationships become far more important, new management competencies will be required. Working with other organizations requires skills that many traditional managers just don’t have. Internal departments, for example, can be managed by whim or fiat. External suppliers can’t and won’t operate in such a fashion. The upshot will be that old authoritarian management styles will prove ineffective - even laughable. Strong working relationships will win the day; idiosyncratic, ego-driven personalities will be an expensive luxury that few can afford.

While in the 20th century it was hard to communicate across organizational boundaries, nowadays we can easily trade or obtain information, skills, or services across the globe by tapping expertise in hundreds of thousands of organizations. Managers still relying too much on in-house resources will find themselves at a distinct competitive disadvantage. So clearly, organizations – even smaller ones – will become dispersed and porous as more transactions occur across organizational boundaries. The extended organization is posing new challenges for managers and will require new skills to be successful.

Many of these new skill sets will be outside our traditional comfort zones. Learning Mandarin, Cantonese or other Eastern dialects/languages, for example, will present significant challenges to most people in the West. Diligence in the more quantitatively oriented disciplines is also lagging for developed countries, particularly the U.S.

If in fact many skills have become obsolete or commoditized, it’s fair to ask what skills will be in demand ten years from now. Below is a list of some possibilities:

Soft Skills

  • Cultural Awareness
  • Global Diversity
  • Foreign Languages
  • Willingness to Travel
  • Humanities
  • Change Management
  • People Management
  • Strong Ability to Communicate
  • Continual Collaboration

Technical Skills

  • Software as a Service
  • Technical Certification (e.g., ITIL, COBIT)
  • Financial Analytics
  • Spend Management in Procurement
  • Project Management
  • Life Sciences: Impact of Nanotechnology
  • Commercial Terms and Contracts
  • Industrial Engineering/Operations Management

Both soft and hard skills will be required. Computer savvy alone won’t cut it. Being a great engineer without the ability to work effectively with people from different cultures will not be enough. The workers of the 21st century will have to have specialist skills as the price of admission, but they will also have to have people skills. That’s what it will take to be successful in the next phase of economic evolution: new specialist skills, new people-oriented management styles, new flexible organizational structures. These are the new realities. The grim alternative is to face obsolescence or marginalization, both as organizations and as individuals.

Greater collaboration will become a must because it improves coordination. Management will be more systematic by being focused on outputs, process interfaces, and clear rules of engagement – all of which go part and parcel with outsourcing. Strong working relationships combined with a portfolio of skills decidedly different from those of the last century will spell success in the new economy.

In the years ahead, watch the old-school managers and executives retire early or be forced to bring new mindsets to the game. Many old-school boys have become casualties already. Will you be next?