Monday, December 19, 2005














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Life beyond outsourcing: Customer service comes home
Morgen Witzel

          The recently announcement that productivity is on the increase in American businesses raises an important point. Is this just a blip or is American productivity genuinely rising? And, if so, does this mean we are seeing the beginnings of a strategic reversal? Instead of outsourcing to cut costs, so often the pattern of the past decade, are companies now beginning to invest more in their own productivity and core competencies?
Recent research from the consultants McKinsey suggests this may be the case. The research points to a shift away from eliminating jobs, through downsizing or outsourcing, to improving employee productivity.
"For many companies today," says James Manyika, senior partner in McKinsey's technology practice in San Francisco, "and for most companies soon, the biggest pay-off in productivity improvement will come from making their most talented employees even more talented, and not from automating and outsourcing clerical or production jobs."
Could this be the beginning of the end of outsourcing? Mr Manyika feels businesses definitely should be starting to look at life beyond outsourcing. "Some companies are already at the limits of what they can outsource, given current technology and current costs. Manufacturing has been outsourced. Call centres and other transactional work has been outsourced. Most of the employees that remain are now doing complex work in areas such as sales, research and development and design," he says.
However, there are some sectors where companies "still have quite a lot of outsourcing to do".
Computer and software companies are among those that might seem to be reaching the limits of outsourcing. Dell, for example, has famously refused to outsource its IT infrastructure, believing that its information systems are a source of competitive advantage.
Michael Mol, research fellow at London Business School, offers the same view, believing that every business has an optimum level of outsourcing beyond which it should not go.
"Over the past 15 years, firms have been outsourcing at a quicker pace than they can manage," he says. "Many firms have been outsourcing a host of activities in the belief that these are not core activities. But what counts is not whether an activity is core, but whether it draws, directly or indirectly, upon the company's core competencies."
Mr Mol cites the recent problems between British Airways and its catering supplier, Gate Gourmet, as an example of an outsourced activity that is in fact very closely related to the core business and where the breakdown of relationships with the outsource supplier has led to wider business problems.
Others are less certain that a turning point has been reached. Phanish Puranam of London Business School also believes that, while every company has core activities that should never be outsourced in most companies, there is still a long way to go before this core is reached.
Ben Kedia and Somnath Lahiri of the University of Memphis feel that "at present, there seems to be no end to the growth of outsourcing" and point out that some companies are even outsourcing complex functions such as research and development. Whether such outsourcing will be good in the long run is open to question, but as long as short-term gains can be realised, it is likely to continue.
If Mr Manyika and Mr Mol are correct, and there are optimal levels of outsourcing and those levels are starting be reached, managers must start considering their strategic options for the future.
According to new research from McKinsey, which is ambitiously titled The Interaction Revolution, the next big thing will be individual employee performance improvement. The most important potential source for new value, says McKinsey's Mr Manyika, lies in the interactions and exchanges between employees and customers.
These interactions fall into two categories. The first are transactions -- simple, easily routinised operations such as call centres and help desks. These lend themselves well to being automated or outsourced. In other cases, such as bank tellers, part of their functions can be automated -- such as dispensing cash, now routinely handled by ATMs -- while the tellers handle more complex customer needs.
The second category, which Mr Manyika calls tacit interactions, is precisely these more complex relationships, where individual customer needs must be addressed and long-term relationships built.
"Personal experience and judgment are required," he says. "Employees have to deal with highly specific questions that require interpolation and problem solving. They don't create products or consumables and cannot be easily automated."
He believes the importance of these employees is growing, not only in high-intensity service sectors, such as healthcare, but even in more traditional sectors, such as manufacturing.
Mr Manyika points out that three-quarters of all new jobs created in the US since 1998 -- nearly 5.0m have been "tacit-intensive", usually involving direct customer contact.
The McKinsey data suggest that companies with large numbers of "tacit-intensive" employees tend to be more productive and more profitable, and those employees earn higher wages than the norm.
The challenge, says Mr Manyika, is to learn how to manage these employees effectively and make them still more productive. "Over the next 20 to 30 years, the Holy Grail of innovation is going to be around how you organise and manage tacit-intensive activities."
Among other things, this means more and better technology support, as companies turn away from using technology to simply replace employees, and towards systems that improve employee skills and personal productivity. These new "tacit-intensive" employees tend also to be more skilled and more intelligent, and bring greater experience and emotional depth to their work, meaning that human resource management will also need to adapt.
Mr Mol believes the next big innovation may be within management itself. There is a need, he says, for "new processes, structures and practices that govern the work of management".
He points to the examples of General Electric, with its radical approaches in areas such as training, and Toyota, a consistent innovator not just in production systems but in management more generally. "We see in companies like these a capacity for management innovation that allows them to improve their productivity over time, more so than through product or process innovation," he says.
The conclusion, then, is that we are seeing the end of the beginning. Outsourcing will go on, but tomorrow's winning companies are likely to be those that look beyond cost-cutting and towards performance enhancement. Better management of complex relationships with customers and innovations in management itself are two fields where those winners may be able to find competitive advantage. Other options will probably emerge as time passes. But the post-outsourcing age is drawing closer, and the time to begin preparing for it is now.
Under syndication arrangement
with FE


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