Chapter 3
Outsourcing and Alliances
Chapter 2 describes the rise of the Free Agent World. It showed us that getting work done is not just a matter of managing your own employees. When we say “lead the work” (not just employees) we mean leaders should first clearly identify the work to be done and only then decide if it is best done by employees, or by other means such as outsourcing, alliances, free agents, or platforms. It can be difficult to envision these other means, if you are accustomed to thinking only about work done by employees. So, in this chapter and the next, we describe several common ways to lead the work beyond employment.
In this chapter we describe two mechanisms—outsourcing and alliances—that tap another organization to access workers, who in turn are employees or contractors of that other organization. With outsourcing, a client's work is done by the outsourcers regular full-time employees or their free agents. Alliances are similar but it is being done by the employees (or free agents) of the ally, who is not in the business of providing workers, but has a collaborative relationship. For example, Siemens formed an alliance with Disney to use Disney marketing employees to design a marketing campaign for a Siemens hearing aid for kids. The marketing workers at Disney may be working hand in hand with Siemens as part of the alliance, but they will no doubt identify primarily with the mission of Disney. If Siemens had placed the work with a company that provides marketing solutions as its business, that would be outsourcing.
Decisions about outsourcing and alliances are typically made to optimize costs, processes, or financial market indicators, but not to optimize the work. That's often a mistake, but it's easily made when you think of leadership as ending with your own employees. You can avoid that mistake by focusing leadership on the work. When you do that, you realize that even if the work is done through an external provider through outsourcing or alliances, you must still consider how the provider's decisions about leading the work mesh with your own. At the extreme, you may actually need to require that your partner change their approach, and that they lead the work your way. For example if you have a strong emphasis on process compliance/integrity and specific individual accountability and your alliance partner has a very informal culture with more emphasis on getting the job done regardless of specific protocols, then it is a good idea to agree on how the people you share will be managed. Also, if you need to track worker performance in a certain way, then you may need to ask your ally to use that method to track the performance of their workers assigned to your project. You may need to enforce different rules on knowledge transfer and work documentation for your ally's employees. We will see more examples like this later, when we describe how IBM tackled these problems, and how HR processes must change.
Outsourcing and alliances fall into a broad category economists call labor market intermediaries. The term describes a situation where a separate organization takes on a role as go-between connecting the worker to the organization that receives the work. It can be as simple as a job board that does the searching and matching between workers and employers, or a “professional employer organization” which takes on the legal obligations of employment and then provides their legal employees to other organizations. The term labor market intermediary thus covers a variety of quite different roles and services, but they have in common that they take on some aspects of a relationship with workers that had previously been handled through an employment contract, or directly by the employer. We will return to this idea in Chapter 7 when we describe how you can detach elements of the work from the employment relationship.
For now, leaders should simply realize that outsourcing and alliances are two of many ways to engage with workers. It is not simply a choice between regular full-time employment and outsourcing or alliances. You will probably need to create hybrid approaches that fall somewhere in between. Yet, understanding how outsourcing and alliances work today, can help you think more creatively about how you lead the work.
The Rise of Outsourcing
The story of outsourcing is well known, and came into its own in the late 1980s. Robert Handfield described it in “A Brief History of Outsourcing”:
Outsourcing was not formally identified as a business strategy until 1989. However, most organizations were not totally self-sufficient; they outsourced those functions for which they had no competency internally. Publishers, for example, have often purchased composition, printing, and fulfillment services. The use of external suppliers for these essential but ancillary services might be termed the baseline stage in the evolution of outsourcing. Outsourcing support services is the next stage. In the 1990s, as organizations began to focus more on cost-saving measures, they started to outsource those functions necessary to run a company but not related specifically to the core business. Managers contracted with emerging service companies to deliver accounting, human resources, data processing, internal mail distribution, security, plant maintenance, and the like as a matter of “good housekeeping.”1
Manufacturing moved out of organizations to capture the wage differential between the developed and developing world for low-skill work. Call centers moved to India—thanks to cheap and reliable international phone networks that made it practical to locate call centers far away from customers. In India companies found not only an inexpensive English-speaking workforce but a highly educated one as well. The point where companies were actually in touch with their customers, something that one might think would have to stay within the organization, was happily handed over to a third party.
Not all outsourcing was about moving jobs to other countries. Companies have long been outsourcing functions like payroll to specialist providers. Payroll is particularly suited to outsourcing because it can be cleanly disconnected from other activities in the organization; in essence, the interaction between a company and a payroll outsourcer can be limited to the exchange of a data file once a month. Furthermore payroll processes are very similar from one company to another, allowing an outsourcer to develop economies of scale.
And there is no reason to think that innovation in outsourcing services has stopped. For almost any function, methods currently exist or are being invented to do it outside the firm, and this changes the job of a leader. If you use an outsourcer, you are leading the work through that outsourcer, which means new decisions. Will you treat the outsourcer simply as an arms-length vendor, with little concern about how they lead their employees? Many global companies have learned the dangers of treating their outsourced factories that way, when labor conflicts, fatal fires, or safety issues in some factories affected the client company. It obviously is not possible to say, “please don't hold that against us because those are only our outsourcers, and not our employees.” So, leading through the work means understanding the work practices of the outsourcer, to ensure that they approach the work and workers in ways that support your leadership mission. Issues such as training, safety and identification of pivotal talent may extend far beyond your own employees.
The Rise of Alliances
Alliances shine a spotlight on a potentially radical change in what an organization is. Most broadly, they show how the boundaries are breaking down and it's becoming more natural for organizations to be interlinked and collaborative. In many cases, alliances are also a means of moving big chunks of mission-critical work outside the organization.
One of the age-old decisions in management is “build or buy.” If you need a computer application, do you build your own program or buy a program already on the market? Alliances change that decision to “build versus buy versus collaborate,” and often collaboration is the way to get the best of both worlds.
Consider the research of Dr. Ard-Pieter de Man, a professor at the VU University, Amsterdam. He argues that alliances have gone from a fringe phenomenon in the 1970s to a massive engine of value creation today.2 How massive? In 2009, the Association of Strategic Alliance Professionals surveyed its member companies, asking about the impact of alliances on market capitalization.3 More than half of the 431 organizations that responded (mostly U.S. and European firms with more than 1,000 employees) forecast that by 2013 (four years from the time they were surveyed), alliances would generate more than 40 percent of their company's market value. And to illustrate how big and successful alliances can be, the Sky Team Alliance—which includes Air France/KLM, Delta Airlines, and Alitalia, among others—yields gross revenues of $10 billion, which is then shared between its partners.
Alliances came to the world's attention in the 1980s thanks to the success of joint ventures, particularly in research and development. Joint ventures, though, are relatively inflexible. The 1990s saw the emergence of contractual alliances, which can be designed to be more flexible and to serve an enormous range of purposes. For example, the coffee machine manufacturer Philips partnered with Sara Lee/DL, which sells coffee, to create the Senseo product line. Senseo offers single-cup coffee makers that use a pod containing both ground coffee and a filter. The capabilities of both companies were needed to launch the product, but there was no need to create a stand-alone joint venture; they simply created a contract with an appropriate governance structure to enable collaboration.
The phrase “simply created a contract with an appropriate governance structure” actually underplays the difficulty of the task. The management of alliances is complex, especially since there are so many possible forms. A glimpse into that complexity comes from the Australian government's Department of Infrastructure and Transport “Guide to Alliance Contracting” (2011); it's a whopping 168 pages long and addresses the many issues—from governance to risk to key roles—needed to make alliances work.
The success rate of alliances seems to be on the rise. In the aforementioned 2009 survey conducted by the Association of Strategic Alliance Professionals, 57 percent of member respondents rated their alliance as successful, up from 50 percent of respondents who answered the same question in 2007. They also reported that management investment in alliances was strong and steady. Alliances have arrived as a major force in management and are continuing to get stronger as companies learn how to handle these arrangements.
Alliances are a means for handling undertakings that would be risky, difficult, or impossible for a single company to do on their own. For example, the aforementioned airline alliance creates a set of global routes in a way the individual airlines could never have done. Senseo would have been difficult for Philips to pull off on its own. ASML Holdings certainly has the know-how to make the equipment that makes computer chips, but the risk of funding research and development on its own would give the board sleepless nights. The solution was to embed ASML in an alliance with Intel, Samsung, and TSMC.
Put simply, alliances are often just a better avenue of bringing specific concepts to fruition. A good example is the Dutch government-owned railway company ProRail, which creates alliances with construction firms. This motivates the firms to find creative ways to minimize delays and cost overruns in rail construction.
According to the 2009 survey by the Association of Strategic Alliance Professionals, alliances break down into five basic types:
- Comarketing alliances (45 percent of all alliances). For example, for eight years Cisco and HP ran an alliance that helped them sell each other's products.
- Research alliances (16 percent). A good case study is TransCelerate BioPharma, an alliance of leading pharmaceutical firms collaborating to improve the very expensive process of clinical trials.
- Distribution alliances (13 percent). Rolls Royce has created an important alliance with three logistics companies to transport expensive and urgently needed jet engine parts around the world quickly.
- Supplier alliances (11 percent). The classic example is Toyota, which has long-running collaborative relationships with suppliers, working together to improve productivity and share gains. The suppliers almost feel like a part of Toyota. This is quite a contrast to a focus simply on the lowest price.
- Coproduction alliance (10 percent). The oil industry majors will often ally on drilling projects and even refineries.
- Other (5 percent).
Of all the different forms of alliances, we are most interested in the ones involving firms that might have done the work in house with their own regular full-time employees, but decided instead that the work was optimally done through an alliance.
One particularly bold alliance was started by Metro AG, the world's fifth largest retailer. In 2002, the company launched an ambitious effort to invent the store of the future. The “Future Store” was set up as a real, functioning supermarket where the alliance could try out new processes and technologies, set standards, and resolve integration issues. The best minds would get to work on it, it would have a substantial budget, and fantastic discoveries could be made along the way. It would be a big endeavor, but Metro is a big company.
Yet, even with Metro's size and scale, questions arise: Are Metro's employees always the best talent for every piece of work? Even if they are, can Metro afford to pull them all away from their regular work onto the project? With so many things to learn to keep pace with technological innovation, could Metro learn fast enough, relying only on its own employees?
Metro decided the best way—maybe the only way—for the Future Store Initiative to achieve its potential was to open up, interlink, and collaborate with a broad alliance of partners from the retailing, consumer goods, IT, and service sectors. The alliance included 75 partners including well-known giants like SAP, Visa, IBM, Intel, and smaller specialists running across the alphabet from ADT Sensormatics (security) to XPlace (retail self-service). Many of the innovations developed at the Future Store have already been implemented at other stores. The Future Store itself returned to its role as a normal Metro supermarket in December 2012.
Metro does not own all the knowledge and information that flowed from the Future Store Initiative the way it would if the company had kept everything behind the walls of the corporation. But Metro is on the field playing with the best in the world and is now in a better position to stay at the cutting edge of retail.
We pointed out that Metro is large enough to build a Future Store on its own. Doing everything on your own is the sort of approach that an organization takes when it thinks about leading the work only as managing its own regular employees. Instead, Metro's alliance blends the work of workers that are regular employees of 75 partners. Certainly, the partnership encompasses information, products, and processes. Yet, at its heart, it is an alliance of workers. Metro's leaders can no longer presume their leadership of work stops with their employees, or even the free agents with whom they directly engage. In a very real sense, Metro's leaders are now in partnership with the leaders of the Future Store partners, to lead the combined work of all of their workers. It is that combined set of work and workers that must be considered when Metro and its partners craft their vision, establish their culture, and design the work, organization, and rewards that affect those combined workers.
De Man says that most alliances are full of ambiguity. To be successful, it's necessary to develop trust and to take risks. How best to make the alliance successful? That needs to be discovered over time, and the areas of opportunity may not be what the leaders originally foresaw. This takes a different kind of manager and a different culture from one that emphasizes control.
An Ecosystem for Augmenting Reality
Meta is a startup that is developing the technology for augmented reality glasses, display devices worn on the head offering a small, computer-generated display in front of the eyes. We can probably expect it soon to be quite normal to walk around and see computer images imposed on the real world.
Meta's ambitions to change the world are stunning. Their goal is to replace the hardware you use today (desktop, laptop, phone) with Meta glasses that enable you to layer digital content on the world so that people can interact with the real world and computers simultaneously. How can a 70 employee company change the world? Certainly not on their own, they need allies.
In Meta's case the most important allies are those software developers who have the vision to see how augmented reality computing could work and the skill to make it happen. One such ally is SimX (simxar.com) which is working to revolutionize how doctors are trained. In today's hospitals an important training tool is the physical simulation mannequin; these are expensive and typically modelled after a fit white male. SimX replaces the physical mannequins with a customizable, high-definition, 3D virtual patient. Doctors won't need a million dollar simulation room; they will be able to practice on a virtual patient on any empty bed or gurney.
Alliances are not easy to manage. Todd Revolt, director of strategic alliances for Meta, says he looks for companies that share the same mindset. His role is to evangelize Meta to the developer community, help support them to develop apps, and showcase their successes. The capabilities of an ally matter, however what Meta really needs is to find developers who can imagine how to layer content into a 3D world in a way that will change how we interact with computing. A leader who is skilled in managing the relationships brings an immense amount of power to an organization. An organization without leaders who can manage these relationships is hobbled because they miss out on one of the most powerful ways to get work done.
In the case of SimX, Meta has helped by giving their ally early access to technology and marketing support. Meta and SimX attend conferences together and share useful contacts. Generally no money changes hands.
We refer to the relationship in terms of “allies” and “an ecosystem”; however Revolt talks about “a part of the family” and “a community.” Meta and its allies are independent firms, but as a community they share a mission and a culture that may be more coherent than that found in most large firms. The relationship between Meta and its allies may be more cooperative than two divisions in a typical multinational.
Meta's leaders cannot look inward and think of their organization as an isolated unit. It is one node in a dynamic ecosystem that they think will change the world. Success will come from surfing through that ecosystem, interlinking with other players, and collaborating with skilled developers. They can't succeed unless the ecosystem succeeds, and they can't succeed if they don't continually evolve their own niche in that ecosystem.
What does leading the work mean for Meta's leaders? Obviously, it doesn't end with leading Meta's regular full-time employees. Everyone working in the community matters to Meta, and Meta's leaders will do everything in their power to ensure the right people are attracted to that community, that they are developed, supported with the right tools, and motivated. Their resources are limited, but the passion in the community is one of their greatest assets.
Microbusinesses
It gets even more interesting when we look at alliances of small businesses. De Man discusses how a number of Dutch tomato farmers, who ran small family businesses, were facing a crisis because the quality of the tomatoes had become so poor. As a single family, already working long hours to run the farm, how can you possibly deal with the R&D, production, and marketing demands involved in trying to orchestrate a turnaround? You cannot do it on your own, but you can if you ally with other small farms. That's exactly what the farmers did. Six of them created a cooperative in 1994 that had, by 2013, grown to 23 members owning 206 hectares of tomato greenhouses. The cooperative has working groups that look at common issues like marketing, purchasing, and all the other noncore activities (that is: everything other than growing tomatoes). The mechanisms for successfully running this cooperative are many, and that is a discipline in itself. The alliance developed new means of efficiently growing high-quality tomatoes and in doing so rescued their businesses.
For the Dutch farmers, leading the work means leading the workers within the microbusiness ecosystem. If each farmer defines leadership to apply only to their own employees, the entire idea collapses. Alliances of free agents and microbusinesses are potentially more flexible and efficient than hierarchies of employees. This economic form brings to mind an analogy from the world of nature: coral. A single coral organism is insignificant as an individual, but corals collaborate to build a reef that becomes the dominant structure in an ecosystem. The Dutch farmers with their collective of small farms managed to become a powerful entity in their ecosystem, dramatically improve tomato quality, and save their businesses. However, it required that they redefine what it means to lead, leading means getting work done by whatever talent can do it best, not presuming it must be done by your own employees.
Bharti Airtel: A Demonstration of the Market-Moving Power of Alliances
Bharti Airtel's rapid growth to become the second-largest telecommunications provider in the world in a short 15 years has made the company very interesting to study. In fact, eight Harvard Business Review (HBR) cases have been written about it. Akhil Gupta, Bharti's vice chairman who orchestrated its alliances with IBM, Siemens, Nokia, and Ericsson, laughs when he recalls the Wall Street Journal front-page article with its “reverse outsourcing” article. “These were actually alliances where we shared the risk associated with growing our business with strategic partners,” he explained. It might have sold more newspapers to tell the story as one of an Indian company achieving market dominance by outsourcing its operations to Western multinationals, but the fact remains that Bharti achieved its exponential growth by wisely tapping the mission-critical capabilities, talent, and scale of a select group of world-class partners—not by merely shipping off a series of ancillary processes and activities to be executed at a lower cost somewhere else in the world.
In Gupta's mind, the deals were done out of sheer necessity, as there was no other way for them to grow. Bharti had acquired the numerous telecom licenses to provide coverage all across India but recognized that it did not have the human or financial capital needed to fully deliver on its vision. It had two choices: Give up the licenses, or curb its ambitions. The company chose neither. By moving to share its stake in the rapid growth of the Indian telecom market with partners who provided them with the infrastructure needed to power their growth, the company also shared the risk associated with that growth.
“In the case of our IT infrastructure,” he continues, “IBM could do it all. IBM's legacy in technology, its global scale, and its ability to attract the best talent made them a logical choice. With all four of our partners, we chose organizations who could not afford to fail us. The sense of shared destiny was essential to the success of the alliances.”
The trick was structuring an agreement that worked for both parties. Bharti and IBM struck a 10-year agreement covering hardware, software, and services. IBM would ensure that all three elements were in place, so the Bharti enterprise could run seamlessly. In return, it was paid a percentage of Bharti's revenue. The relationship involved trust and shared risk and was predicated on the two parties' shared belief in the continued growth of the telecom sector in India.
“We allied on the activity—not the strategy,” Gupta says. “You can have a permeable organization when it comes to activities, but not strategy. Nor did we give up accountability for the results. We asked ourselves three questions in deciding whether we should partner or keep an activity in-house: ‘Who has better domain knowledge? Who has better economies of scale? Who can attract better human capital?’” Bharti had 220 people in its IT department prior to forging the relationship. All this staff was transferred to IBM with the promise that anyone who wanted to come back within two years would be able to do so.
Thus, for both IBM and Bharti, leading the work went well beyond each organization managing its own employees. True leadership meant a nuanced combination and interaction between the workers involved from both organizations. It meant deconstructing the work so that the alliance could be based on activities without compromising the strategy. It meant designing the performance and rewards of the integrated workers from each company so that accountability was properly assigned. It meant deciding exactly where the work would flow across organizational boundaries and where it would stay within boundaries. It meant deciding who could attract better human capital when considering each organization's unique advantages, and then optimizing their combination.
The Future of Alliances
Alliances are potentially important anywhere your organization is not the best in the world at what it does. Just as it makes sense to engage a Topcoder to handle a specialist programming language that your own staff is not familiar with, it makes sense to engage allies for parts of the business that are not strong. In Chapter 1, we mentioned the case of Siemens partnering with Disney to reach children. An early step for organizations is to look around at where they truly are world class and where they are not, then start identifying potential allies.
A second step is to look inside and see what alliance-building skills the company already has. Leaders are often surprised to discover how many alliances of one form or another already exist within their firm. After that, one has to develop various capabilities, from selecting partners, to setting up systems that measure progress, and from a focus on internal hierarchy, budgets, and power, to looking outward.
De Man says he believes the next generation of open alliances is being born now, and that this generation is steeped in the idea of flexibility and relationships, rather than contracts that try to nail down every eventual possibility. Alliances work best when they are designed to evolve, and that means creating means for developing and maintaining trust. Another aspect of this next generation is a perspective that looks beyond the alliance itself to the broader ecosystem. For example, there are application development companies with no relationship to Google that nevertheless play a role in supporting the Android ecosystem. Google needs to keep these companies in mind as they develop Android. A significant factor is how the work of this ecosystem of companies fits with the work and the goals of Google.
As alliances move forward, all kinds of interesting questions arise. For example, we think of the CEO as responsible for resources in the company, but what is the CEO responsible for when half the resources are outside the company? And, how do you articulate the value of alliances to shareholders? And, to what extent will alliance management be an essential part of any leader's career path? Thinking in ecosystem terms is a natural next step for organizations committed to open alliances, and when the ecosystem must change rapidly, that means relationships based on trust. Trust is built through relationships, worker to worker. Thus, the new world of alliances will be built as much upon leading the work as on leading technology and information.