Beware the perils of outsourcing!

Outsourcing is the flavour of the decade; companies commonly believe that it can lead to cost savings. However, it can have some terrifying quality consequences, too, warns CHARLEEN CLARKE…

The collapse of the Rana Plaza garment factory in Bangladesh was the worst-ever accident within the global clothing industry. On April 24, 2013, the building came crashing down, killing 1 134 people and leaving thousands more injured. People all across the world looked on in shock and horror as the death toll mounted. There were harrowing stories of survival, and of people who had no choice but to amputate their own limbs in order to be freed from the rubble and survive.

The collapse of Rana Plaza brought worldwide attention to deathtrap workplaces within the garment industry, and, according to Professor Ranjay Gulati, chair of the Advanced Management Programme at Harvard Business School, it should also serve as a warning to companies that embrace outsourcing.

“The collapse of the eight-story Rana Plaza garment factory in Bangladesh was a red alert for every company that has embraced the ‘virtual organisation’ model and the outsourcing that goes with it,” he points out.

The lure of the model is obvious. “Virtual corporations shrink the core activities they pursue internally, while relying heavily on outsourcing many of those activities to strategic partners. At the same time, they seek to increase the number and nature of product offerings, many of which are also offered by their partners.

“As a result, traditional corporate boundaries disappear. Staffing, risks, benefits and regulatory compliance are all increasingly externalised, most often to parts of the world where need routinely trumps prudence,” Gulati notes.

Rather than manage their own corporate assets, CEOs and other top executives of such corporations are confronted with the seemingly easier challenge of managing relationships with “partners” or “associates”.

“Yet, as the Rana Plaza disaster and too many other examples show, every outsourced stop along the supply and production chains holds the potential for tainting the mother ship, exposing it to litigation and diminishing the quality and even viability of its offerings,” the Harvard professor warns.

The Rana Plaza incident is, of course, not unique. “Just ask Boeing,” notes Gulati. “No firm placed a bigger bet on the virtual organisation model. Its new 787 Dreamliner was going to be the United Nations of manufactured goods: German-made cabin lighting, Swedish cargo doors, South Korean wing tips, and on and on … a coalition of associates that spanned the earth and, in the end, proved nearly as dysfunctional as the real United Nations often seems.”

We all know the mess that resulted. “Outsourcing woes cost the 787 an estimated three extra years of development, required Boeing to bring numerous suppliers inside the company, and culminated in a lithium-ion battery so deficient that the entire nascent fleet of 787s had to be grounded shortly after launch!”

Boeing’s scale was epic, but these problems are far from new. “Nike, Foxconn and a host of others have suffered similar public embarrassments. Such incidents, though, are rising in frequency and complexity as the virtual model spreads and takes root. Apple was recently in the extraordinarily uncomfortable position of suing one of its major suppliers, Samsung, for alleged patent infringement.”

Those examples pale into insignificance when compared with Rana Plaza, though. “With that incident, we reached a high-water mark in the human cost of rampant outsourcing,” says Gulati.

He warns that, with outsourcing, every step in the supply and production chain holds worrying potential. “As such, if firms are going to continue to operate in an outsourced world – and there’s no inherent reason they should not – they need to find a more systematic way of thinking about when to move business beyond their own boundaries and when not to, and how to more carefully monitor the partners on whom their virtual model depends. And they need to drive this process deep into their supply and production chains,” Gulati advises.

One useful framework for accomplishing this, he says, can be found in a surprising place: the seminal work of psychologist Diana Baumrind on parenting styles. (Baumrind, a leading clinical and developmental psychologist, published ground-breaking studies on the effects that different parenting styles have on child rearing in 1966, 1967 and 1971.)

“Her research highlights four parenting ‘prototypes’ oriented along two dimensions: the level of direction parents demonstrate to their children and the levels of warmth and support. Low levels along both dimensions result in what Baumrind calls ‘neglectful’ parents. High levels of direction, coupled with low levels of support, produce ‘authoritarian’ parents,” explains Gulati.

High levels of support coupled with low direction, on the other hand, lead to very lenient, “permissive” parents who demand little from their children and bestow too much freedom. “This is analogous to the see-no-evil approach so prevalent with global outsourcing,” he notes.

Baumrind’s fourth prototype, “authoritative,” offers organisations a valuable path between the traditional top-down, inside-the-tent corporate structure and unbridled license to suppliers to do as they please. “Marked by high levels of direction and support, this approach offers children – and by extension corporate partners and associates – freedom within a well-defined structure,” Gulati explains.

The authoritative style is both demanding and responsive. “It encourages, in equal measure, entrepreneurial action and healthy self-regulating behaviour. Like authoritative parents, authoritative virtual corporations resist the temptation to micromanage relations with their associates. At the same time, they never leave responsibility for work conditions in the hands of their partners or cede decisions on quality control,” he reveals.

Implemented with care, this freedom within a framework sharpens and transforms value creation and innovation. It sets the rules that let outsourcing partners be more creative, efficient and customer focused. It also enables faster response to shifts in the market – something especially important as innovation continues to flow globally, rapidly and often from unknown sources.

Most importantly, says Gulati, this framework helps assure that virtual corporations will be anticipating crisis moments instead of responding to them. “Stakeholders at either end of the spectrum, from seamstresses to stockholders, deserve no less,” he concludes.