All Posts in Outsourcing

|In: Career Management|Last Updated:

Argument by assertion seems to be on the increase.

Following my recent series on outsourcing, which argued against the popular non-core-competency theory (exercise core competencies in-house and outsource everything else), I received quite a few letters presenting the counterargument that you should outsource non-core competencies. Why? Because they aren’t your core competencies, that’s why!

It’s hard to come to grips with logic like that, let alone argue against it. But I’ll give it one more try. The more I try to figure out what “core competency” means, the more murky the whole thing becomes. I’m left with four outsourcing drivers – two positive, two negative:

  • Outsource when the outsourcer can provide the equivalent function for lower cost (or just fire the manager who can’t deliver the function without margins at the same price an outsourcer can deliver it with margins).
  • Outsource when the function being outsourced requires scarce high-value talent (for example, ad agencies).
  • Avoid outsourcing when the cost of changing your mind, also known as the switching cost, is high, as it is with IT.
  • Don’t outsource if your real goal is solving a personnel problem. If you’ve accumulated an inventory of unproductive employees over the years and are really outsourcing the unpleasant task of terminating them, there are far less drastic ways of handling this chore than outsourcing the function.

Nothing is quite this simple, of course, but I can at least understand these four decision factors. Why you’d want to increase the cost or risk of a function because it isn’t a “core competency” — a term whose definition is murky at best — continues to baffle me.

Not only that, but outsourcing doesn’t always solve the problem. Curt Sahakian of the Corporate Partnering Institute (www.corporate-partnering.com), which helps companies create partnership and outsourcing agreements, says many outsourcing deals are structured so badly it’s like drinking seawater when you’re adrift at sea. It isn’t a sustainable solution, and you end up thirstier than when you started.

Sahakian also offers this advice: Since your employers are going to buy their saltwater from someone, why not you? If outsourcing is inevitable, take charge of the situation and suggest a restructuring that turns your existing IT organization into an outsourcing provider, either as an independent or as a joint venture with one of the major outsourcing vendors.

When your choice is whether to be dinner or chef, chef is probably better.

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|In: Business Ethics|Last Updated:

When Cortez landed on the shores of became Mexico later on, he issued the famous order, “Burn the boats!” It’s testimony to either his leadership ability or his ruthlessness that his men didn’t shout back, “What are you, nuts?”

Through dumb luck (for the Spaniards that is) the Aztecs caught smallpox from Cortez’s crew and Montezuma despite his ongoing revenge, lost his empire. Cortez didn’t win because of his watercraft incineration but that hasn’t stopped it from becoming a symbol for total commitment to a result.

In business, burn-the-boats tactics are less useful than contingency plans. You can’t count on your competitors to fall apart all by themselves (they often do, but you can’t rely on it), and sailing back to Spain in an empty ship (that is, cutting your losses and trying the next idea) usually makes more sense than being either buried or eaten (filing for bankruptcy or being acquired at bargain-basement prices).

Many companies that have chosen to outsource IT burned their boats without realizing it. They signed a contract in which a change of heart is expensive, time-consuming, painful and risky — they can’t, in other words, go back. When negotiating an outsourcing deal, the business equivalent of a prenuptial agreement is essential. An outsourcing prenuptial agreement makes re-insourcing possible. Usually, it will include transition of both staff and intellectual property back to the client in case of contract termination. Otherwise the balance of power in the relationship belongs to the outsourcer, not the client.

That’s a very bad idea.

Imagine your CEO has decided to outsource IT and you’re part of the negotiating team. What do you need to know? Here’s one important fact: The outsourcer’s sales team is there because they love The Deal, not because they love running IT.

For the folks who sell big outsourcing contracts, closing a big deal is a rush. It’s a bit like a cocaine habit. When someone snorts cocaine, the user feels a rush of euphoria when the drug is inhaled (or so I’ve read). But when the drug wears off they sink into a funk, and to reach the same level of exhilaration they need an even bigger hit. The Deal has an equivalent impact on outsourcing companies: It provides a rush of euphoria as the deal closes, followed by something of a funk as the hard work of contract delivery starts … followed by the need for the rush of the next Deal.

These people don’t enjoy actually running IT. Running IT would interfere with pursuing the next Deal. If they’re smart, they’ll bring someone who loves running IT to their side of the table, but they might not be smart, because that individual … the future account manager … doesn’t love The Deal. The account manager has to deliver on the contract when it’s signed. That can interfere with The Deal.

That’s exactly why you’ll insist that the future account manager is part of the negotiating team. With this team composition, love of The Deal will keep the outsourcer at the table, unable to walk away, and the account manager’s need to run a successful account will prevent impossible-to-keep promises. (Don’t leave it to chance. When in doubt look the account manager in the eye and ask, “Can you deliver that?”)

There’s one other item to remember: You, not your employer, are your top priority. Look out for your own interests first.

Isn’t this immoral? Amoral?

No.

When your CEO decided to outsource IT he didn’t take your best interests into account. When the outsourcing company started the sales process, the process probably didn’t start in your office with your sponsorship. This is business, and altruism isn’t part of business. Nobody is going to look out for you except you.

So if you have any leverage at all, negotiate an arrangement that protects you. Have the CEO create a new executive position and promote you to it immediately. Or, become the outsourcing company’s account manager. Do what CEOs do and negotiate a golden parachute for yourself in exchange for your support during the transition.

While you’re at it, negotiate the best deal you can for the employees being outsourced. When they become employees of the outsourcing companies they’ll lose their seniority. It isn’t hard to insist on a contract provision that fixes this, but you need to ask for it — it won’t come automatically. If you become the account manager you’ll need their support. Even if you don’t, it costs you nothing.

And, it’s the right thing to do.

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