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Outsourcing? Hollywood knows how

Keith Sherringham, Information Age

15/02/2007 11:55:00

To offshore or not to offshore? That is the question. It may seem to trivialise a critical business decision, but business is all about asking the right questions.

The questions are about how will your business operate going forward, about standardising the roles of knowledge workers to lower costs, guarantee service delivery and gain market dominance.

The questions are about transitioning to the Hollywood film model and the design and operation of the knowledge worker assembly line. Resolve these questions and the answer to outsourcing and/or off-shoring becomes self-evident.

The Hollywood film model? What does that have to do with financial services, ICT, telecommunications and airlines? This simple, but tried and tested, model has a lot to offer us in the outsourcing and off-shoring decision making process. (I am talking here about knowledge workers - not manufacturing, an entirely different model.)

In the Hollywood film model, core competencies such as research, strategy, design, problem resolution, ownership and accountability are kept in-house. Then using proven business principles, the best teams (lighting, sound, casting) are assembled as required to make a movie. When the job is done, the crews disband and may never work together again or for a given studio again.

As more and more routine business operations are automated by technology, the role of the knowledge worker changes. Routine processing is replaced with high-value problem solving when things go wrong. Knowledge workers are free to focus on value added servicing and business optimisation activities.

More and more, business is heading towards the Hollywood film model; project-based work is increasingly becoming the norm. Specialist teams are drawn together to deliver a business outcome, to disband and then move on to the next project, e.g. compliance projects. Members of the project are experts in a given area, complemented by industry-specific expertise, all under the direction of a visionary.

The Hollywood film model is how out-sourcing is meant to work. An outsourcer is brought in to provide specialist expertise and because they are the best at what they do. The Hollywood film model allows business to focus on its core competencies and bring in resources as required.

As well as using the Hollywood film model as an aid to business operations, one more model is of use in defining offshoring and outsourcing: that of the assembly line. In this case, the knowledge worker assembly line.

Whether we sell real estate, operate facilities, manage superannuation or insure vehicles, much of business operates using standard recipes and standardised assembly line principles, i.e. ICT is the assembly line for knowledge workers.

As a business, the ability to own, define and operate the knowledge worker assembly line is a core competency that is pivotal to successful operation. Toyota, Nokia or L.G. would never consider doing anything else with their core assembly lines.

Toyota buys in parts and uses outsourcers to help, but essentially, Toyota does not interrupt the overall operation of its assembly line by outsourcing. Toyota ensures the integrity of its assembly line, does not neglect the quality of hand-off along its assembly line and goes out of its way to assure the quality of hand-off because it knows that this is pivotal to product quality.

Toyota does not abdicate its responsibility when the assembly line does not deliver but takes ownership and responsibility for it.

We know that if we lose ownership we lose control. We know that just passing a problem to someone who has not been commissioned to fix it is not going to result in the problem being fixed. We know that if we abdicate our responsibility, we will get into trouble.

We need to keep our core competencies in-house and we need to ensure that the operation of the knowledge worker assembly line does not get interrupted. The quality of hand-off needs to be ensured.

We need to know clearly the impacts of what we are outsourcing or offshoring before a decision is made. Just as we pay sales staff by performance, pay outsourcers and offshorers by performance. If the arrangement is done on the basis of cost savings, then pay them by cost saving realised. Included within the service contract should be the ongoing review of costs with incentives for realising sustainable cost savings.

A clear definition of the scope of services to be provided, the performance and remuneration criteria is pivotal to both cost control and a sustainable relationship between parties in outsourcing and offshoring agreements. Providing out-of-scope services at consulting rates for sustained periods results in the escalation of costs. Additional unnecessary costs are incurred through a tendency to contract services for a Ferrari when only a station wagon is required.

The risks of outsourcing or off-shoring need to be properly managed and included within the justification. What is the cost of not having back office settlement occur? Determine the true cost, including loss of intellectual property.

Is the loyalty of workers to your company or to a third-party intermediary? Are you at risk of losing control and having increasing costs passed on to you on an ongoing basis?

Does the work require extensive collaboration and interaction, e.g. requirements gathering, selling or contract negotiation? Such work needs to occur at source by your people and is not suitable for outsourcing or offshoring.

Contracts for service need to be awarded not on the basis of cost alone but on the expertise that can be provided and the value-add that can be delivered, compared to current practices, for a given investment.

Above all, the relationship with outsourcers and offshorers needs to be properly managed. Basic business management tells us that persistent acrimonious and negative environments within an organisation are self-destructive. Outsourcers and offshorers form an integral part of business operation and few flourish in negative environments.

Whilst there are many benefits to be had from outsourcing and offshoring, care needs to be taken that outsourcer dependency is not replaced by or duplicated by offshoring dependency. Break the cycle as follows: • Take responsibility for actions. • Take strategy back in-house. • Initiate new work using in-house resources only. • Progressively skill-up in-house, creating more in-house work and take ownership. • Trap intellectual property in-house. • Reach the point that you no longer need the outsourcer. • Break the contract without fear because you have the skills and financial control. If you are an outsourcer or offshorer, remember one thing: control creates alienation but the more you empower someone, the more reliant they become on you. Outsourcing and offshoring are an integral part of business. It is not a question of whether they are used, it is a question of how they are used.

Keith Sherringham is a Sydney-based consultant to business and government. He is the author of "Cookbook for Shareholder Value and Market Dominance: Standardising the Roles of Knowledge Workers".