New Big Ideas in management can generate seemingly irresistible logical power. Take 'outsourcing.' There's hardly a company that hasn't outsourced services formerly undertaken internally or hasn't considered doing so. It makes perfect apparent sense. Specialists in office cleaning, pension administration, legal services, information technology, and anything else the company can separate from its core activity, should be able to perform to excellent standards at lower cost. It makes no apparent sense to do more expensively what others can supply more cheaply - and with no pressure on scarce management resources.
The menu of outsourcing advantages sounds beautifully tempting to Big Idealists. Who can refuse the chance to 'reduce risk by buying experience; improve margins by economies of scale; achieve time targets by using risk/reward; maintain focus on core business by relying on expert partners; heighten flexibility by buying a service and not a collection of immutable technologies.' This list comes from a specialist in information systems, the Sema Group, which adds that in achieving the above results, the client 'can raise standards throughout the IS organisation.' No doubt, that's so.
Given the complexity of information technology, and the multiplicity of choices, this is one area where companies are ill-advised to adopt do-it-yourself policies. The danger of relying on in-house computer experts is that they may become wedded to what exists rather than what is wanted. Equally, no car manufacturer (and certainly no personal computer company) can justify in-house manufacture of most sub-assemblies or most components. The days when Henry Ford I took in iron ore at one end of the plant and produced a finished car at the other, or when IBM made all its computers internally, are gone for ever. But that doesn't make either Ford or IBM a 'hollow' or 'virtual' corporation.
CORPORATE EXTENSIONS
The Big Idea here envisages a business that farms out all activities, even crucial operations such as distribution and service, to outsiders. These become extensions of the corporation, working in such intimacy that they operate much as internal divisons do: except that the core company invests no capital, employs no people and takes no risk. Or does it? What if the outsourcing partner fails to deliver? Or if the promised savings fail to materialise? Or if the outsourced activity turns out to be integral to the core operation?
According to Business Week, these outsourcing disadvantages have been coming home to roost. 'One study found the average savings to be around 9%, though consultants often promise gains of 20% to 40%.' The mighty General Electric had to delay introduction of a new washing machine by three weeks when a contractor ran into production problems. Another company found itself locked into a five-year information processing contract when falls in prices had opened a $36 million gap between going costs and the contract rates. More serious still, though, is the risk involved in turning key operations over to armies of mercenaries - rather than your own dedicated troops.
Sun Microsystems has been mentioned before in Thinking Managers as a prime example of virtual outsourcing. The corporate core is its design capability, both in developing workstation hardware and in generating software, like the brilliant Java program that has helped establish the company as the leading contender to win the battle in cyberspace. On a much smaller scale, Semco, the experimentally managed Brazilian group, retains applications engineering and final assembly as its inalienable core. So far, so good in both cases. But what works for one company, or even two, needn't work for all - and that's one prime problem with Big Ideas.
As noted, the outsourcing question isn't solely one of promised benefits that fail to appear. At issue is the entire identity of the business. What activities contribute to the culture and the Unique Selling Proposition - the reason for customers to buy from this business and nobody else? What constitutes the Unique Employment Proposition - the reason for the best recruits to perform their best work for the company?
There's a depressing litany in Fortune of companies whose bosses swore total devotion to their people while busily laying them off. The Woolworth stores group even called its employees by the fashionable name (another Big Idea) of 'associates' and thanked them for their 'confidence and support' and their 'belief in the exciting future that awaits.' For 2,000 of them, that future lay outside Woolworth. At AT&T chief executive Robert Allen was so 'proud of the job being done' by his people that 8,500 lost that job, with another 75,000 asked to accept being bought out of their employment. And so on.
Author Thomas Stewart acerbically comments that 'your former CEO gave you a superb reference... he called you skilled/talented/expert ... dedicated... hard-working... motivated... confidence inspiring ... outstanding/the best... committed... creative... bright... loyal.' These are, of course, the very qualities that the new Big Idea in human resource management is supposed to promote. Just as the realities of outsourcing don't fit the theory, so the lost jobs contradict the people policies - and outsourcing is one of the factors that have lost many jobs. Do the consequent job reductions 'position our employees to serve customers more effectively', as the BellSouth CEO claimed while dismissing 11,300 workers?
MANAGING BY NUMBERS
My work with retail groups strongly suggests the contrary. To maintain margins, retailers try to 'manage by numbers'. Like painting by numbers, that won't create a masterpiece. Cut down excessively on the staff and you reduce the level and quality of service as over-stretched personnel attempt to cope with under-served customers. The result is a rise in complaints and a loss of custom to anybody who is making better provision. Outsourcing carries similar risks. Where a vital customer activity - like after-sales service - is farmed out, bad performance will damage the retailer, not the company that bid for the business, and probably won it by bidding low.
That goes to the heart of the issue. The Big Idea must pass more than the test of simple economics. What is the business trying to achieve? What policies offer the best promise of reaching those objectives? The Sema consultancy lists 'key competitive factors' which translate into five powerful questions:
1. Are we achieving superior customer relationships?
2. Do we know what we are really good at, and how to obtain the utmost mileage from that excellence?
3. Are we sharing the rewards among those who created the achievement?
4. Can we respond flexibly to political, economic, sociological and technological change?
5. Do we make expert use of external 'expert partners'?
The actual words used by Sema in relation to the second question are 'highly leveraged core competence' - another piece of Big Idea jargon. Reduced to simple terms, the idea doesn't sound so big. But there's nothing wrong with simplicity. To quote Jack Welch, the CEO of General Electric, 'For a large organisation to be effective, it must be simple.' The observation is, of course, just as true of small companies. Welch continues: 'For a large organisation to be simple, its people must have self-confidence and intellectual self-assurance. Insecure managers create complexity' - which is another argument against the large-scale redundancies that have made vulnerable managers as edgy as other employees.
THE FLAT ORGANISATION
For the sake of simplicity, GE thus favours 'The Flat Organisation' - one of seven Big Ideas which the management consultants at Price Waterhouse put forward in 1992 as answers to the question, What's going on in organisations? In addition to being Flat, you can choose between The Benchmarking Organisation (with Rank Xerox as examplar), The Innovative Organisation (3M), Business Process Redesign (Ford), The Networking Organisation (BP), The Learning Organisation (Rover) and The Hollow Organisation (Benetton). All these were described as 'striking ways in which organisations are transforming themselves to keep pace with their competitive environment.'
The passage of the years provides an interesting test of the validity of the approaches. GE and 3M have broadly sustained their performance, thanks to a pragmatic attachment to backing whatever works and dropping whatever doesn't. Rank Xerox has maintained its recovery from the Pearl Harbour-like impact of the Japanese, but has neither approached its previous market strength nor kept pace with the astonishing leaps forward of the IT industry. Nevertheless, it's impossible to argue against the case for flat organisations with small central establishments and minimal bureaucracy that place a premium on new ideas and constantly seek to match or surpass the best standards in all significant activities.
For all its efforts to encourage learning, however, and despite the real improvements obtained in productivity and quality during its association with Honda, Rover has never broken fully clear of its past. This was highlighted when the new German owners, BMW, reported on a year when Rover thought it had made £91 million of profit. The stricter standards of valuation applied by BMW turned that into a loss of £157 million. Given that Anglo-Saxon accountancy criteria are thought to be tougher, that's dramatic evidence that Rover's managers were deceiving themselves about the extent of their achievement. Indeed, when identical cars were being made on adjacent lines at Cowley, the Brits assembling cars for Rover never quite achieved the quality standards of the Brits working for Honda.
Part of the explanation is that the Japanese company's far greater worldwide volumes gave it stronger bargaining power against its outsourced suppliers. In other words, the business economics were more favourable. Whatever improvements Rover achieved in detail, they were offset by the fact that too small an output was being spread over too many models.
Similarly, the business re-engineering case at Ford, however wonderful its outcome in local productivity, couldn't contribute much to the overall performance of a multinational giant. Ford was using 400 accounts payable clerks where Mazda, its Japanese associate, needed only four. Because no invoice ever arrives unless a purchasing order has been issued first, the solution was simple: pay the supplier according to the purchase order, on certification of receipt. Three-quarters of the clerks lost their jobs. But that saving to Ford was a drop in the Pacific Ocean compared to the damage suffered from over-pricing the new Ford Taurus. That in turn reflected inadequate progress in reducing Ford's manufacturing and development costs to best Japanese levels.
As for BP, the oil colossus suffered a violent hiccough, culminating in the removal of its chief executive, Bob Horton, because its effort to embrace collaborative working ran foul of unclear business objectives and unfavourable business economics (the oil price was much lower than BP had anticipated). Once the new top management had decided clearly on its business priorities, however, abandoning the matrix structure for a simpler set of operational responsibilities paid off handsomely - BP's performance has since been outstanding.
THE HOLLOW FORMULA
That leaves the Hollow Corporation, Benetton. Its performance has in fact deteriorated since 1992, when PW was deeply impressed by 'sales growth from nothing to $1 billion in twenty years... competitive superiority in flexibility, costs, customer service and feedback links... strong global brand image and reputation.' Growth has slowed down, however, and both American and German franchisees have been complaining loudly and litigiously. A large British franchisee has gone into receivership. The formula of 'direct control of purchasing, design and marketing only' still works, but not so marvellously that it can offset errors like tasteless ads or proliferation of franchisees.
The trouble is that riding high deceives both a management and external admirers, even consultants who have been close to the corporate heart. That gives rise to the myth of the Big Idea. The hero company's success sanctifies the Idea: when success turns to relative failure, by the same token, the Big Idea is rubbished - as has happened to both Total Quality Management and Business Process Re-engineering. The truth, as Thinking Managers has often emphasised, is that corporations are indivisible. You can major on one or two elements, but unless all the elements are in place, the business results must eventually disappoint.
Sema has a neat model which lists six elements surrounding the core of strategy. The six are people, processes, money, information, technology and time - and only the last, argues Sema's Jacques Roure, is inelastic. Within the corporate system, however it is described, the strength of the whole is that of its weakest part. The organisation must be a Flat Network that Learns, Innovates and Benchmarks as it continuously improves its Processes. As for outsourcing, go Hollow only to the extent that outsiders improve your ability to achieve business objectives.
If those aren't also human objectives, they won't be achieved in anything beyond the short run. Circumstances may conspire to force companies to reduce the input of labour in relation to a desired level of output. But the more the output rises, the more the company can find new employment for the people it should have recruited with care, trained with skill and motivated to make the business succeed. To follow all that effort by dispensing with their services is a waste of resources. Against that background, in-sourcing could be the next Big Idea - and like all Big Ideas, it enshrines valuable general truth.
Specific truth, however, will differ from company to company. The Big Idea is worth very little unless it is applied successfully. That's one lesson of Japanese management which Westerners forgot as they plunged into kaizen (continuous improvement), hoshin kanri (policy deployment), and so on. Like GE and 3M, the best Japanese managements are essentially pragmatists. If an idea doesn't work, they try another. There's a time and a place for everything. If conditions change, so must policies.
SECRETS FROM JAPAN
The arresting headline on a Fortune story - 'New Management Secrets from Japan' - is thus misleading. The secrets turn out to be neither secret nor new. Most of them revolve around the age-old principles of production engineering. Simplify the product: reduce the number of components: keep down variety. Disregard of these principles is bad management - and poor business economics. The world's largest supplier of small electric motors, Mabuchi Motor, offers 300 varieties: but by liaising with customers and using common parts, it has succeeded in serving 70% of its clientele with only 20 different products. The Big Idea? It seems that 'most customers care more about price than selection.' So what else is new?
Another example is Yokogawa Electric, which makes industrial testing and measuring equipment. Its 'telling discovery' is again old news; 'How a product is designed, not how it is manufactured, can account for an extraordinary 80% of total production costs.' If you're making a simple plastic cover for an industrial recorder, and employing 31 separate components, when a single die-casting can do the job, you're offending against basic engineering criteria. Yet, enthused by this 'bullet-train thinking' (named after the revolutionary design approach which created Japan's famous high-speed trains), GE's Welch introduced the concept back home: so one jet engine has eliminated 24 brackets, five valves, 33 feet of cable, 24 tubes and 70 fasteners. But why was the design so uneconomic before?
As a top executive confesses, 'we never, shamefully, even discussed' the issue. Shame is the right word. The ultimate, underlying Big Idea is always the same: LIMO - Least Input for Most Output. Top LIMOists win big by cutting input while raising output and sustaining jobs. Thus, Yokogawa 'has successfully pushed teams of workers to meet seemingly impossible cost-cutting goals in short periods... without... the normal American expedient of mass layoffs.' The latter policy should also arouse shame - for the non-secret is that there are winning alternatives.
