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Seduced by Serial Ideologies
Fashion, it must be said, does not thrive just on the runways of Paris. It's alive and well, for better or worse, in the boardrooms, executive suites and business think tanks of the world.
Of course, the suits around the mahogany tables don't spend hours debating whether hems are rising or falling - at least not officially. But they do pay careful attention to the latest theories of management. Too often, that attention turns to slavish devotion to a "new" ideology that will be all the rage . . . at least until the next one comes along in a year or so. Then it's off again at full gallop, until the next one, and the next one and the next one . . .
Consider: At one point many years ago, the secret to production efficiency was said to be vertical integration. Henry Ford took this to its logical — some might say extreme — conclusion with the River Rouge plant. At one end of the plant, iron ore from Ford-owned mines went in, along with Ford-produced materials for virtually every part of the car. Out the other end came the finished Model T. Ford made everything that went into the car except the tires which Henry bought from his friend Harry Firestone. How many make-or-buy financial analyses were performed? In a well-managed company like Ford, at least thousands. And they almost always produced the "right" answer: don't buy, make.
But the pendulum did swing, and the ideology of vertical integration gave way to the Gospel of Many: build many smaller plants rather than concentrate the workforce. The ideal size was 600 workers per factory, ostensibly so that the managers could know the employees and get their arms around the problems. That this ideology emerged coincident with a surge in unionization — and the higher potential for strikes — was not talked about in polite circles. It just was.
More recently we fell all over each other to demonstrate our belief that North American manufacturing could not compete with Japan, then Korea, then Taiwan and now China. The upshot: we sent hundreds of thousand of jobs to first one country, then another, and another, and another . . .
With that treadmill having broken down at the same time as the myth of Asian invincibility, we have changed our beliefs to what is now called outsourcing. Company after company is outsourcing everything from making copies to manufacturing the whole product. Even the logistics of distribution and the handling of telephone enquiries or telemarketing are performed by contractors outside the company.
What remains is given the banner of "core competency". But in reality it may be just one more island of "overhead".
In this thrust of specialization in the "core", we are in danger of pushing the customer and our employees to the edge of the business model. But if history is any guide, we have to ask if this latest ideology — and its supportive popular mythology — will survive reality very long. One might even question whether outsourcing as a unifying idea of business will last as long as vertical integration or small plants which endured about 20 years each. Our answer? We doubt it because the strategy is even more flawed.
Providing a customer with a quality product or service starts back in the design phase. And design itself does not spring forth fully formed. It has truly mixed parentage: great intuitive feel, detailed customer study and even the empathetic evaluation of complaints and preferences surrounding existing products. How many untold dollars have we spent in tuition to learn and re-learn that manufacturability and quality are best dealt with and integrated at the design phase? How can we do this if we outsource manufacturing, particularly to some place remote from the day-to-day interface with the designers and the marketers?
How many times and what market share has it cost us to know that face-to-face contact with customers is vital to acquiring and keeping their loyalty? The best feedback on acceptability of the product or service comes from customers: when they visit, when they call customer service, or when you sit across the desk from them. In an outsourced environment, how do we get input unfiltered by middlemen?
If we insert filters between that knowledge and ourselves, we run the very high risk of clouding our line of sight and destroy our potential. What's more, we're creating a knowledge base of our products, our systems and our customers outside the company.
The fact is that outsourcing decisions are driven by financial evaluations and the cold arithmetic of cost accounting which places value on only those things that are easily measured. This approach totally ignores subjective judgments about intangibles, such as customer preferences, employee creativity and attitudes, that serve to organize the energy and focus the intent of a business.
Every chairman and president annually lavishes praise on the company's "most important asset" — its people — even if they do so only in the last paragraph of their letter to shareholders. Yet no balance sheet reflects that value. Truth be told, when executives make decisions, people are measured only as costs, not as sources of ideas to improve or invent. In those same annual reports and meetings, customers are reflected as "event" testimonials. Seldom do we talk of loyalty, attitudes toward the company or the capture on new customers, building the relationships or solving their problems.
Perhaps it is time to be skeptical about the Gospel of Outsourcing, to question the too-simple decisions about whether to outsource based on pure and incomplete accounting measures. It is easy to gain acceptance that the real assets of a corporation are not measured in the P&L or balance sheet. Market position is not measured, nor is reputation or customer loyalty. The intellectual property and know-how of a company are not generally recorded, but who would want to run a company without any of these elements?
Clearly, executives need to develop a broader range of possible outcomes to consider when evaluating alternatives. The downside of making wrong choices here is of the "bet your company" magnitude, so thorough discussion and evaluation of opinions as well as the hard data is vital to the process.
Think about this, too. If our logistics are outsourced, how do we get the differentiation of reliable delivery since our logistics supplier may well also serve our competitors. The same even holds for invoicing. While paperwork such as invoicing doesn't usually create value to the customer, it can certainly generate dissatisfaction if done poorly. In such a case, to whom does the customer complain? Another outsourcing supplier? Meanwhile we lose feedback, differentiation, time and flexibility to change and correct mistakes, all in the name of simplifying the management task of learning to be an expert in a range of activities.
One of the ways to gain a perspective is to extrapolate the decision being considered to a larger scale if the same logic is followed beyond the initial action. Think about a company who makes nothing itself, contracts out distribution logistics and customer interfaces and has all the paperwork done by outsiders. How hard would it be to compete with a company such as that, one which is not in control of the business model elements and which can only change very slowly and without co-ordination.
Take this thinking to its ultimate logical conclusion, like Henry Ford did on the River Rouge. Is the ultimate plan to have a few employees whose job is only to count the money that is forwarded to them, and maybe try to be creative in business design? How will that work when innovation in business frequently results from seeing the problems firsthand, then using that intimate knowledge to overcome issues of manufacturing, distribution or function.
So watch out for easy answers based in popular mythology or ideological beliefs. You may win and even be patted on the back . . . at first. But there's a good chance that even as you're being applauded for being ahead of the curve — or at least in tune with the times — you are undermining, perhaps lethally, the potential future of your company.
Many more articles in Insight & Commentary in The CEO Refresher Archives