Strategy and Tactics – Page 64 – IS Survivor Publishing

Lessons from a failed outsource

Oh, what the heck. Best Buy isn’t going to bring me in as a consultant anyway — not after last week’s column about the retention bribes it paid to execs whose names are all over its steady decline.

So now, a few words on why its headlined 2004 IT outsource to Accenture (followed by its covert 2011 re-insource from Accenture) should have failed. Not, I have to add, why it failed. Best Buy hasn’t even formally admitted that the outsource was a bad idea, let alone explained in non-ManagementSpeak terms what led it to reconstruct its internal IT organization.

But a key reason it should have failed, and in fact why Best Buy should never have considered it in the first place, was right there in the press release:

Accenture advocates taking “packaged vanilla solutions and weaving them together in as simple a fashion as possible” and changing business processes, rather than heavily customizing software, as the most cost-effective approach for retailers, [Angela] Selden [Best Buy’s spokesperson] said.

Selden said she recognizes that the approach would represent a dramatic change for the legions of retailers that claim they had to heavily customize systems because of the unique needs of their businesses. But she said they must change the way they do business in order to be nimble enough to “absorb innovation quickly.”

What’s wrong with this picture?

Had Accenture’s pitch been that it had the expertise to help Best Buy leverage its bricks-and-mortar retail strength so as to beat Amazon.com at its own game, there might have been some sense in this arrangement. But that wasn’t the supposed logic. Understanding how flawed that was could help your company avoid a number of common mistakes. Here goes:

In 2004, Best Buy was at the top of the consumer-electronics heap, growing while its largest retail competitor, Circuit City, was in a state of steady decline.

Let’s pretend, just for a moment, that its success wasn’t entirely accidental. If that was the case … if Best Buy’s success was due to actual business competence … then its business processes were a source of competitive advantage, even if they did need heavily customized software to support them.

Which means Accenture’s sales pitch, rephrased for honesty, went something like this: “In exchange for hefty fees, we’ll rip out your sources of competitive advantage and replace them with generic alternatives.”

Accenture, that is, claimed it had more expertise in Best Buy’s business than Best Buy had … a sales pitch that might have made sense had Accenture pitched it to Circuit City. But to Best Buy? Seriously?

Even if Accenture did know more about retailing than Best Buy, its assertion that changing business processes is more cost-effective than customizing software strongly suggests that Accenture knew nothing about what it takes to change a business process. Changing a business process takes more than drawing the new one on a swim-lane diagram and teaching it to the employees who will have to live with the new way of doing business.

Because when the trainers have all finished, those employees will have to become practiced at the new process. That takes time, during which the whole company is less effective than it used to be.

But wait! It’s even worse than that! You see, the effort needed to customize software is a one-time investment. The inefficiencies that are the inevitable consequence of tailoring business processes to deal with the software’s limitations are costs the business has to absorb every day.

Which is why the whole plain-vanilla vs customized-software argument is the wrong conversation to have.

Best Buy fell for it. It’s no longer competitive. Draw your own conclusion about cause and effect, but please, don’t allow anyone in your company to debate the merits of plain-vanilla vs customization, because no matter which side wins the debate, the company will only follow the optimal course of action by accident.

Understand, I’m a theory-of-constraints guy. ToC says that for every business function, right after ranking the six dimensions of optimization (fixed costs, incremental costs, cycle time, throughput, quality, and excellence) in order of importance, the next step is identifying the most serious barrier to improving the top-ranked dimension, doing what’s necessary to remove it or reduce it until it’s no longer the most serious barrier. If that means customizing the supporting software, so be it.

Repeat ad infinitum.

It’s straightforward. It works.

Even better, you won’t need to renegotiate terms after the thrill of an outsourcing deal is gone.

Do retention bribes make sense?

And now, three words about retention bonuses: Are you serious?

Take the badly misnamed Best Buy (or, as a friend calls it, “Amazon’s showroom”), whose board of directors has awarded big piles of cash and restricted stock to its CFO, EVP/HR, President/International, and President/U.S. to encourage them to stay with the company instead of jumping ship to join Best Buy’s founder, Dick Schulze, as he attempts to take over the company.

Understand, I’m jealous. Can you blame me? Nobody has paid me anything remotely like this for screwing things up badly and repeatedly. Heck, nobody has paid me anything like this for doing a good job.

I should probably leave the EVP/HR out of this. She’s hardly responsible for Best Buy’s failure to provide the best buy … or anything remotely close to it … and its consequent ever-increasing decline in marketplace relevance, especially as she’s only had a couple of years to do any damage. But then, what impact is she likely to have on Best Buy’s future competitiveness that makes her worth a retention bonus like this?

But, the presidents of U.S. and international operations have their names all over Best Buy’s failures. And its CFO, who joined Best Buy in 2003, has been in his current role since before the start of the Great Recession. If the CFO position is important enough that a retention bonus is in order, that means its occupant has been involved in the planning and decision-making that has led to Best Buy’s steady decline.

All of which leads to two questions. The first: Is it a good idea to bribe top executives to stay? And second: If you’re going to bribe some top executives to stay, should they be the ones whose names are all over past failures or who won’t have a significant impact on future success?

The second question is, of course, rhetorical. The first is worth serious thought.

That the sums in question are bribes is by definition. Best Buy is paying a lot of money specifically to get these people to do something they wouldn’t otherwise do — to stay with the captain of a sinking ship instead of joining the band of mutineers (pick a different metaphor if you don’t like this one).

So the question is, should a board of directors want top executives who will only stay if they’re bribed to do so?

Regular KJR readers know my position on this: No (see “Is it time to end incentive pay?” KJR, 4/23/2012). Any executive who doesn’t consider their opportunity to achieve something important to be an incredible privilege is an executive you’re better off encouraging a competitor to hire.

As for Dick Schulze’s attempt to take over the company, here’s a question for anyone considering an alliance with him: Why would you do that? He’s the guy who, when he had the chance to crush Amazon.com when it first expanded into consumer electronics and, oh, by the way, to crush Circuit City as an afterthought, instead chose to view Circuit City as the competitor that mattered?

Taking shots at Best Buy is easy and fun. Behind the fun is a question you might find yourself having to deal with in this era of frequent mergers and acquisitions: Whether to offer retention bonuses of your own.

That answer is, yes. There are times when retention bonuses make all kinds of sense, for example, when a company has been acquired, key positions are being consolidated, and you need the services of the good employees who hold those positions in the meantime, to ensure a smooth transition.

That’s assuming, of course, that while these employees are good enough to help with the transition, they aren’t good enough … or a good enough fit … to be worth finding a role for in the consolidated enterprise once the business integration process is complete.

So if you have employees like this — ones who will be essential to a smooth transition but who aren’t worth investing in as long-term highly desirable employees — you only have two ways to keep them on board — either bribe them, or lie.

Unless you lie, they’ll know that when the deal is done they’ll be out of a job. They’ll have no reason to do more than the minimum for you while finding a new place of employment that offers more stability.

If you need them and don’t want to lie, it’s the only solution that will work. Make the amount big enough to work, and no bigger.

Just don’t pretend that you’re doing anything fancy.

You’re offering a bribe.