Capabilities, Caring & Contracts

This week, Lee writes about the limitations of outsourcing as a strategic tool, and how we need more sophisticated approaches to capability development and partnering in uncertain times

Efficiency considered harmful

In the current crisis, the problems created by the pursuit of efficiency over resilience and capability development are becoming painfully obvious for many companies, especially those that have been cut to the quick and loaded with debt.

In the Financial Times this week, Andrew Hill interviewed Prof. Roger Martin about his book When More is Not Better, and they discussed the need for greater resilience, capacity and slack in today’s organisations:

The pandemic has exposed the stretched just-in-time supply chains of companies that tried to eliminate slack altogether. Prof Martin hopes it will prompt those efficiency-driven leaders to say: “It ain't working, I've got to do something different.”

A key feature of this form of management has been the use of outsourcing as a blunt approach to getting costs off the books, but in both private and public sector organisations, this shedding of capabilities not regarded as “core” has become a key reason for their inability to respond to change. Perhaps we should look to smarter forms of collaboration and hybrid delivery.

Caring over contracts

Since the 1980s, specialist outsourcing firms have sprung up whose core competence is contract negotiation, rather than any particular form of service delivery, and they have learned that for as long as they are better at writing contracts than clients such as government agencies, they rarely lose out, even when they do not deliver as expected.

But contracts that govern mutual obligations are not the problem. In an interview I have shared previously, Haier’s visionary CEO Zhang Ruimin talks about how his Rendanheyi model takes the basic idea of mutual contractual obligations and extends this to the individual and the team. This idea of mutual peer contracts or promises is not new, as it was a feature of the Californian firm Morning Star (a pre-internet case study in self-management); but using a technology platform to mediate and scale these relationships seems to be an important innovation.

The real issue here is not contracts but caring (or ‘giving a sh*t’ in the vernacular).

The UK government has been rightly criticised for its mis-handling of almost every aspect of COVID testing, which seems to be due in large part to an ideological bias towards rapid, scaled private sector responses that generic outsourcers promise, at the expense of working with the excellent existing labs that already existed to scale up a de-centralised system, as was done in other countries.

If you get a COVID test in Portugal or Germany, it might be performed by private labs working for the health service, but you will meet probably health care professionals who take pride in their work, care about the outcomes and have a stake in creating a national capability that is needed to address the crisis. In the much more expensive but less functional UK model, you are more likely to be dealing with low wage temporary workers, in a converted car park, employed by a generic outsourcing firm who have little experience or training and are not empowered to treat you as a person, rather than just a box to be ticked. And when the crisis is finally over and the temporary facilities are torn down, there will be nothing left to show for this outsourcing expense as these workers move on to other projects - very little retained value, learning or experience. 

This approach is not only denuding the capacity of front-line health services, which creates a logic of its own for more outsourcing to fill the gaps, but also at the level of government itself. Lord Agnew recently delivered a stinging rebuke to the increasing reliance on expensive consultants (latest figures suggest an annual spend of £1.5bn), which he claimed is "infantilising the civil service" and reducing its capacity to tackle the challenging projects and services it used to be responsible for in the past.

Key capabilities, not just core competencies

In the old 'predict and plan’ management model, it seemed simple enough to define the core competencies of a company, double down on those and outsource the rest. But even then, there was an argument for a more integrative approach to products and services, as demonstrated in the Mac vs generic PC debate, and latterly iPhone vs Android - products designed as an integrated whole often provided a superior result.

But when markets and technology change rapidly, companies can suddenly find themselves lacking important capabilities that were previously not seen as core competencies. In the European automotive sector, OEMs have relied on Tier 1 suppliers to design and produce key components of their vehicles. Whilst cabin styling was seen as core, software and batteries were not, and so at the start of the electrification shift, these were outsourced through the supply chain.

If you read reactions to Tesla’s recent Battery Day announcements on battery cells - the company has gone from being a buyer of batteries to a leading innovative producer - the strategic error in this approach becomes clear. Integrative thinking across all aspects of the car has given Tesla what looks like an almost unassailable lead for the near future, and enabled innovations such as the battery pack forming part of the structure of the car itself, which would be impossible to achieve by assembling third party components.

By defining key capabilities rather than core competencies as the starting point for deciding what muscles to develop and which other organisations to partner with, the picture looks different.

If customer experience matters, then outsourced call centres may look good on the accounts, but not so much on top line revenue. If employee experience is important, then perhaps the outsourced HR, benefits or corporate travel system is a net negative if the experience is frustrating.

It is entirely possible to find third parties who care deeply about what they do, and where they have specialist capabilities, there are still strong arguments for partnering with them, but the modalities of how this works can be more sophisticated in the modern organisation: shared risk and responsibility, rather than adversarial contracts, a common ecosystem, rather just handing off the whole customer experience, and retained value and learning as a goal for the relationship.

Ecosystems, platforms and skin in the game

In our work, when we are helping an organisation develop new digital business capabilities and deciding what to build, buy, rent or outsource, the most important considerations are rarely the nature of the contract - that is just a hygeine factor at the end of the process - but all the ways in which the organisation can continue to own and define their key relationships and experiences, usually more along the lines of a connected ecosystem rather than an old-fashioned supply chain.

By moving beyond the old blunt instrument of outsourcing, organisations can discover a variety of ways to bring in talent and create important new capabilities, but instead of starting with a reductionist view of their core competencies, they should perhaps start with an integrative view of their purpose and mission, customer pains, gains and experience.