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|In: Industry Commentary|Last Updated:

There are simple sourcing strategies. There are effective sourcing strategies. But there are no simple, effective sourcing strategies.

This, at least, was the perspective offered by yours truly at Outsourcing Strategies 2004 the week before last. It is, it appears, the minority perspective. The popularity of the Core/Context Theory — “Keep what’s core to your business and outsource the rest” — appears to be undiminished by the complete lack of any evidence to support it.

Complete lack of evidence?

Yes. In fact, that’s being gentle about it. In the past few years, two research teams reported the results of extensive research on what characteristics and practices lead to enduring business performance. The better-known, reported in Jim Collins’ Good to Great, found seven features common to outstanding corporations: A “Level 5” leader — one focused on building a great organization, not on personal recognition (I’m oversimplifying: there’s a lot more to Level 5 leadership than this); a strong, focused, coherent leadership team; a willingness to face the “brutal facts of their current reality”; clear focus around an organizing business goal (the “hedgehog principle”); creation of a “culture of discipline” (as opposed to achieving disciplined execution through close supervision); the use of technology as an accelerator; and reliance on the “flywheel” effect (building momentum for success on ongoing, continual, accelerating change, not on one-time transformational breakthroughs).

The second research effort was called the Evergreen Project. Described by William Joyce, Nitin Nohria, and Bruce Roberson in What Really Works, the project found eight factors — four primary, four secondary — that separated winners from the pack. While the factors aren’t exactly the same as those articulated in Good to Great, it appears the differences are more a matter of how each research team chose to define its categories than major disagreements as to what’s important. Having a clearly stated, focused strategy as stated in What Really Works isn’t very different from the hedgehog principle. Two other primary characteristics, flawless operational execution and a performance-oriented culture, together look a lot like instituting a culture of discipline and using technology as an accelerator.

The two studies don’t line up perfectly, which isn’t all that surprising. The Evergreen Project found that a flat, flexible organization was important to success. Collins was silent on this subject. And Evergreen’s list of secondary factors — retain and attract exceptional talent, creating industry-transforming innovations, growing through mergers and partnerships, and keeping leaders and directors committed to the business — have less overlap with Collins’ findings.

How to account for the discrepancies? When two study teams look at the same pile of raw data, there’s no particular reason to expect them to abstract the same generalities. The process of doing so isn’t purely analytical (Collins is direct on this point, describing lots of discussions and downright arguments over what a bunch of specifics might mean.) And since both pieces of research are correlative rather than experimental, this kind of disagreement is to be expected.

One point is clear: Keep the core and outsource the rest is nowhere to be found among either study’s recommended practices. Sounds to me like keeping the core and outsourcing the rest isn’t correlated with enduring business success.

(Keeping a wary eye on the ROI of individual projects or applying any other purely financial perspective on running a company is similarly absent, by the way, as is focusing on the maximization of shareholder value, two very popular points of emphasis among the current crop of business pundits … but that’s another column for another time.)

Adherence to the core/context theory isn’t among the factors driving outstanding business performance. It’s unsurprising when you look at how most large-scale outsourcing contracts are constructed. Much of their payoff comes from nothing more than the playing of financial games — a transfer of capital assets that front-end loads the benefits and back-end loads the costs. Gee, maybe that has something to do with why client satisfaction frequently runs out of steam just a few years into the average outsourcing relationship.

So why would a business theory that’s unsupported by the evidence retain such popularity?

Simple, easy-to-understand explanations are comforting — much more comforting than notions like the need for focus, disciplined execution and persistence. And given a choice between a comforting explanation and one that actually works, many people prefer comfort.

That’s one of the brutal facts of our current reality.

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|In: Industry Commentary|Last Updated:

This coming Thursday I’m participating on a panel at the Offshore Outsourcing Conference in Las Vegas. The panel’s subject is “Offshore outsourcing backlash.” If you can’t make the event, I’ll give you a preview of what I’m going to say: “Of course there’s backlash. Just what else, exactly, did you expect?”

Perhaps because of this panel, outsourcing, and more specifically the notoriously high failure rate of outsourcing arrangements, is on my mind. So is the too-seldom-remembered dictum that to optimize the whole you have to suboptimize the parts.

There’s a connection, and it lies in one of those well-hidden assumptions that only reveals itself when you’re looking from exactly the right angle.

Why do companies outsource? It’s often for the wrong reason — because a particular business function isn’t “core” to the business, which is to say the function doesn’t create competitive advantage. There’s little evidence to support this theory, and quite a few reasons to be skeptical, as has been mentioned in this space previously).

Here’s another reason: The logic for outsourcing non-core competencies emphasizes the likelihood that the outsourcing vendor will be better at the function than you will.

Ignore for a moment that this will only sometimes be true, and less often as the company doing the outsourcing increases in size and scale. Pretend it’s a universal truth. Let’s think for a moment about what “better” means.

When a company outsources a function, it has to define the responsibilities of the outsourcer contractually. This means defining specific responsibilities, and service levels for those responsibilities have to be negotiated. How are you going to do that in a way that’s fair?

Most companies do so by insisting on industry best practices and applying industry benchmarks. Industry best practices are generally defined in the context of running the business function in question as a separate, efficient business. As we saw last week, benchmarks are one-size-fits-all measures predicated on the assumption that your goal is to optimize this business function as a separate entity. It took awhile, but we’ve arrived: Outsourcing is predicated on the hidden assumption that you want to optimize the particular part being outsourced.

But to optimize the whole, you often have to suboptimize the parts. How are you going to write that requirement into an outsourcing contract?

Let’s imagine you do. After all, you can certainly treat any business function as a black box and start the outsourcing process by characterizing its inputs and outputs, required resources and constraints. All you need is a formal process model that establishes in quantitative fashion exactly how the parts fit together to make the enterprise function. Every enterprise has one of these, doesn’t it?

Okay, let’s imagine yours does, or at least close enough so you can define in realistic terms what the outsourcer is supposed to do for you and at what cost. It should work, shouldn’t it?

Yes, it should. For awhile. Many of the big, high-profile outsourcing arrangements are ten year contracts. Last I looked, there’s little in the world of business anyone expects to last longer than three. So what should we expect to happen in year four of an average ten-year outsource?

I’d expect it to be time to renegotiate, because what you need is likely to have changed, in numerous, subtle, hard-to define ways.

You have to suboptimize the parts to optimize the whole. Most outsourcing arrangements violate this premise, and they do so with the best of intentions: To perform a particular piece of work as well as possible.

Oddly, sometimes doing it worse is better.

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