Successfully Governing Business Process Outsourcing Relationships

The March 2006 issue of MIS Quarterly Executive has an article by me on the successful governance of BPO relationships. Let me know your thoughts - it'll be useful in evaluating the range of circumstances that circumscribe the research and will help set directions for future research on BPO.

Don't dismiss power

Attended this interesting presentation by Ranjay Gulati, a professor of management at Northwestern's Kellogg School of Business. He talks about how interdependence in a sourcing relationship can impact the performance of the relationship, where interdependence is defined as the criticality of the exchange to participant firms. Such interdependence is manifested in both the power dimension of interdependence as well as the degree of collaboration between the firms. Gulati argues that the latter effect is dominant and positively impacts performance of the relationship.

However, I think the power dimension of the exchange would most definitely determine important attributes of the relationship such as price points and payment structures that are not an explicit element of performance. In addition, in the context of more information-intensive outsourcing such as BPO, power asymmetry will determine who owns the outsourced process and is responsible for process improvement and innovation. This is not an important factor in Gulati's study which looks at component sourcing in the automobile industry. However, it's extremely pertinent to BPO. This is especially true of strategic outsourcing initiatives, where the outsourced process is complex, impacts competitiveness and shares interdependencies with other organizational processes. Contracts are relatively incomplete for these initiatives - it's difficult to predict contingencies at the outset - and the power equation might well serve as a safeguard against incomplete contracts.

So, although we'd like to believe that the incentive to create value will supersede the threat of misusing power and appropriating value, I don't think that's completely accurate. Firms are not ready to be a part of that benign picture yet.

Don't dismiss power.

Enterprise 2.0

I digress a trifle. Well, Web 2.0 really is about commons based peer production and the outsourcing of production, particularly information production, to the social commons. So, not too much of a transgression here.

An article in the recent issue of Sloan Management Review by Andrew McAfee, a professor at Harvard Business School, points to interesting applications of communication tools of Web 2.0 - blogs, wikis and group messaging software — in modern enterprises. In particular, McAfee states that these tools allow for spontaneous, knowledge-based collaboration and enable efficient organization of knowledge. For example,

It has historically been the case that as organizations grow it becomes more and more difficult for people within them to find a particular information resource - a person, a fact, a piece of knowledge or expertise. Enterprise 2.0 technologies, however, can be a force in the opposite direction. They can make large organizations in some ways more searchable, analyzable and navigable than smaller ones, and make it easier for people to find precisely what they're looking for. The new technologies certainly don't overcome all the dysfunctions of corporate scale, but they might be able to address some of them.

It's interesting that while these characteristics of Enterprise 2.0 technologies - scalability, ease of use, memory and low start-up costs - enable a cumulative approach to knowledge building and efficient organization of knowledge, they also introduce problems of quality control and noise. An integral part of incentives to contribute in Enterprise 2.0 technologies is democratization marked by a lack of unilateral control. The limited ability to control the information that employees generate in the system requires searching through a lot of useless information to retrieve required knowledge. and this, in effect, increases search costs.

McAfee does point to other challenges that these new technologies bring with them. "Busy knowledge workers won't use the new technologies, despite training and prodding," and "most people who use the Internet today aren't bloggers, wikipedians or taggers. They don't help produce the platform - they just use it."

All of which seems to suggest that enterprise 2.0 is not really a knowledge management platform. It's more a means to collect, describe and even organize pertinent knowledge. The extant challenges of knowledge management - retrieval, transfer and context sensitive interpretation still remain.

The search for outsourcing truths

A recent article in the March 2006 issue of Economists' Voice by Diana Farrell, director of the McKinsey Global Institute, describes, at length, the macro benefits that accrue to the US economy on account of offshoring. The study points out that offshoring gives firms access to distinctive skills abroad making them more competitive. In essence, offshoring represents an opportunity to improve operational efficiency and productivity that modern firms cannot afford to pass up on. For example, Farrell quotes past MGI research in support - for every $1 of cost on services that U.S. companies move offshore, the U.S. economy gains at least $1.14. The client reaps 56 cents of these gains, giving them the scope to invest in new opportunities that create jobs both at home and abroad.

However, this statement of benefits is credible only when firms do offshoring right. In the last year, there has been a plethora of studies which suggests otherwise. For example,

• 70% of the participants in a survey (April, 2005) by Deloitte Consulting cited significant negative experiences with outsourcing projects. The survey found that although BPO is largely driven by cost-related objectives, firms experienced hidden costs related to contract administration, profit margins, and in-house management.
• According to a Bain survey (2005), 82% of large firms in Europe, Asia and North America use outsourcing to service one or more business processes. However, almost half the respondents stated that their outsourcing programs fell short of expectations.
• In a study (June 2005) of 200 BPO customers by Information Week and Equa Terra, close to 60% of the respondents expressed moderate to low levels of satisfaction with their BPO arrangements.

So, if these studies be believed, all is not well in the world of offshoring. The benefits reflect a self-selection problem - they're not reflective of all firms but only of firms that ARE IN ACTUAL FACT successful at offshoring.

Understanding the truths behind these paradoxes in offshoring is critical because not only is the use of BPO rising across industries, but also firms’ boundary choices are increasingly shaping their competitive positions. If the value proposition of BPO is relatively difficult to attain, a large number of firms that have restructured their value chains to take advantage of BPO must question their investments and rethink their outsourcing strategies.

Flying high with outsourcing

The stakes are big with the Boeing 787. An article in the recent issue of Forbes magazine points out that for the first time, Boeing is outsourcing more than half the structure of the plane, pieces of which will be manufactured in six different countries. The Chicago aerospace company is billing itself as a systems integrator, the way Dell Computer integrates components into a mail-order computer. Except that an airplane is trickier to put together. Not to scare you, but here's why:

Vertical tail
USA
Boeing Frederickson

Horizontal stabilizer
Italy/USA
Alenia/Vought

Fixed trailing edge
Japan
Kawasaki

Movable trailing edge
Australia
Hawker de Havilland

Center fuselage, aft fuselage
Italy/USA
Alenia/Vought

Wingtips
South Korea
Korean Air Lines

Wing-to-body fairing
Canada
Boeing Winnipeg

Cargo doors, access doors
Sweden
Saab

Leading edge
USA
Spirit AeroSystems

Wing box
Japan
Mitsubishi

Center wing box
Japan
Fuji

Nacelles
USA
Goodrich

Engine pylons
USA
Spirit AeroSystems

Passenger doors
France
Latecoere

Engines
USA
GE

Engines
UK
Rolls-Royce

Fuselage, wheel well
Japan
Kawasaki

Forward fuselage
USA
Spirit AeroSystems

Landing gear
France
Messier-Dowty

IS Education - The Competitive Advantage of Nations

So, I am at Baylor University for an annual conference in Information Systems (IS). One of the panels in the conference today was titled "Declining Enrollment in MIS Programs and Implications for New PhD’s". The panel discussion was less pessimistic than its title. Many department Chairs said that enrollments were picking up and that the paranoia in the field was akin to the Gauls' fear of the sky falling on their heads. However, even the optimists expressed caution and the need to do more.

First, the decline in enrollments is paradoxical because of the growing strategic importance and ubiquity of IT. The panelists also pointed out that the IT sector is booming with several firms contacting the universities with a strong desire to potentially hire graduates. Therefore, there is a need to educate students and the population at large regarding the new opportunities for IT-based jobs in the marketplace. This includes allaying fears about outsourcing and highlighting its broader benefits to the economy. Irving Wladawsky does a great job at addressing dimensions of fear vs. reality in this post. To quote,

For every chip and semiconductor engineer out there, we need, say, five times the number of engineers designing products based on those chips, including hardware and systems software. We then need to design and build the many applications in a variety of industries that take advantage of these new products. And that results in another large multiplier for application engineers, perhaps another factor of five. Finally, we need another large number, say another factor of five in new jobs working with every business and institution to help them integrate IT into everything they do -- designing, building, operating and supporting their IT and business infrastructures. While the exact "multiplier" at each level varies, the number of marketplace-oriented jobs in the last two categories is probably one or two orders of magnitude higher than the number of lab-based jobs in the first two
categories. That is where the jobs growth lies.

In this post, I refer to an ACM study which emphasizes that to stay competitive in a global IT environment and industry, countries must adopt policies that foster innovation. To this end, policies that improve a country's ability to attract, educate, and retain the best IT talent are critical.

Therefore, not only must we work on allaying fears and concerns about the future of IT (jobs) to draw more people in the workforce, we must also work to increase incentives for talented professionals to contribute to technology initiatives and eliminate barriers to the free flow of talent. As Wladawsky says,

Young people in the developing world, in countries like China, India, Brazil and Russia do not seem to share the same views and are rapidly embracing the opportunities IT presents. Universities, businesses and governments, especially those in the developed world that aspire to leadership in the 21st century must do everything possible to address this challenge of perceptions and turn them around.

We have nothing to fear but the fear of competing itself. Can you believe the New York Times said that?