New Study Finds That Firms That Are Outsourcing Seek Fresh Leadership Skills
(Republished with permission from both A.T. Kearney Executive Search and Useem/Wharton.)
American firms continue their rapid expansion of service and product outsourcing.† Companies signed major new contracts for information outsourcing alone in 1994 worth $11 billion; in 1995, $20 billion; and in 1996, $33 billion, and all signs point to vigorous growth ahead. More than nine out of ten large U.S. manufacturing companies already source at least one activity, and the typical company sources nine. More than half outsource in the areas of marketing and manufacturing, and more than three-fifths in information systems, human resources, transportation, and general administrative services, including property and inventory management. Outsourcing is estimated to constitute $164 billion in the U.S. economy, and it is forecast to nearly double to $318 billion within the next three years.
Firms that outsource their products or services are discovering that they need managers with a new blend of leadership capabilities to create and oversee the work. The management style that comes with issuing orders is giving way to one of negotiating results. The skill for sending work downward is being replaced by a talent for arranging work outward. Sourcing services necessitates distinct ways of assuring results, and lateral leadership † leading out instead of directing down is the capacity now required.
We have reached these conclusions through intensive discussions in 1997-98 with senior managers of 25 major companies in the U.S. and abroad. With the assistance of colleague Joseph Harder, Michael Useem interviewed directors of strategic sourcing, managers of shared services, information directors, division managers, chief financial officers, and chief executives. In early 1998, he also surveyed 423 American company managers concerning their outsourcing experiences, and what emerges from both the depth interviews and broader survey is a picture of a more demanding leadership environment even as day-to-day management tasks are streamlined by the sourcing.
A. T. Kearney Executive Search has sponsored the project.† The Wharton School’s Center for Leadership and Change Management has supported the project through its Leadership Council, of which A. T. Kearney Executive Search is a member. Michael F. Corbett & Associates has contributed additional resources for the survey on behalf of the Outsourcing Research Council.
What Outsourcing Requires of Managers.
The lateral leadership that companies are building requires a combination of four capabilities:
Strategic Thinking.
Within the outsourcing framework, strategic thinking is being clear- headed about whether and how to outsource in ways that add to competitive advantage;
Deal Making.
Outsource process managers must broker deals in two directions at the same time securing the right services from external providers and assuring their use by internal managers;
Partnership Governing.
Once the areas of outsourcing are identified as a result of strategic assessment, and once a deal is clinched, making it work depends on effective oversight of the relationship;
Change Managing.
Effective spearheading of change is especially important because much employee resistance is sure to be encountered.
The survey of managers with 423 companies corroborates the importance of each of these components of lateral leadership across a broad array of industries and company sizes. We asked the managers to specify the pay premium that they would give an individual hired to manage an outsourcing contract who brings these qualities. Two-thirds report that they are ready to pay a premium of at least 6 percent for each of the four capabilities, and two-fifths are prepared to provide 11 percent or more (Figure 1).
Moreover, the four leadership elements constitute a bundle: Managers that place a pay premium on one tend to place it on all. And, companies large and mid-sized whether their annual revenue is below $500 million or above $2.5 billion place similar value on the four qualities. Deal making, which carries the largest premium of the four, is seen, for instance, to be comparably valued regardless of company size (Figure 2). All four elements of lateral leadership carry a pay premium across most industries, though modestly more so in consumer products, slightly less so in financial services, and least the utilities industry.
Prior Experience for Lateral Leadership.†
The four leadership qualities we have identified are not explicit on most managers’ resumes.† But several distinct work experiences that foster such qualities often appear on resumes, and here too the responding managers report a willingness to pay substantially more to get them.† More than three-fifths of the surveyed managers are willing to pay a premium of 6 percent or more for (1) prior outsourcing management, (2) prior work in the activity being outsourced, (3) leadership of multi-skilled or cross-functional teams, and (4) joint venture management.† For such backgrounds, two-fifths of the managers are prepared to offer more than 10 percent extra (Figure 3).
The responding managers, seasoned hands at outsourcing, affirm the importance of the same set of work experiences for their own outsourcing management now.† Better than 80 percent say that prior outsourcing management, prior work in the same area, team leadership, and joint venture management are of significant value to them now (Figure 4).
Organizational Leadership for Outsourcing.
For companies that do outsource their services and products, this new blend of capabilities requires novel ways of recruiting and developing managers. Companies also require top management support and an implementation of well-honed systems for measuring performance and accountability. Two key elements are required of the companies themselves for lateral leadership to be effective: (1) executive backing, and (2) performance accounting. Without these elements, individual initiatives are made difficult; with them, organizations are able to make the most from their outsourcing contracts.
Support by top management is in fact widespread: The vast majority of the surveyed managers better than 80 percent report that their top management supports the sourcing agenda. By contrast, only half viewed middle management ranks as supportive, and virtually all deemed hourly employees as unsupportive (Figure 5).
The Sources of Outsourcing Leadership.
Outsourcing is a relatively new terrain at many companies, and few managers boast resumes with more than a few years of experience in making deals or governing partnerships. Prior experience in leading cross-functional teams or overseeing joint ventures can provide useful background. But companies with little work-teaming or joint-venturing cannot find even this collateral experience in the ranks. As a result, many companies are both buying and making the leadership skills required. Three-fifths of the surveyed managers report that their company has recruited at least some of those managing their outsourcing contracts from outside the firm. And, in their view, the company must invest far more in the under-developed skills during the year ahead (Figure 6).
Implications for Leadership Development.
For companies sourcing their services and products, the novel blend of requisite skills requires novel ways of recruiting, grooming, and promoting. And for institutions responsible for educating those who will lead the reconfigured activities whether outsourcing, joint venturing, or work teaming the new demands dictate new forms of management training as well.
Joe Haberman, Vice President, A.T. Kearney Executive Search-New York, observes: “In our experience, individuals who have been successful in managing large outsourcing entities of organizations require an unusual combination of `general management’ skills. While many companies still view a functional or technical aptitude to be of greatest priority, the Wharton study confirms our belief in `lateral’ leadership skills for ensuring long-term success.”
Mastery of lateral leadership is required not only for the emerging world of outsourcing. Strategic alliances require persuading others to collaborate when consent is discretionary. Teamwork for developing products and focusing on customers also places a premium on working well with those you cannot command. And top management whether of a division or a company demands much the same set of skills for managing relations with major customers, primary investors, and regulatory agencies. Building the four personal capabilities identified here strategic thinking, deal making, partnership governing, and change making and the two organizational capacities executive backing and performance accounting should thereby facilitate not only outsourcing but also joint venturing, team building, and, more generally, executive-style leadership throughout the firm.
Who Participated in the Interviews?
We conducted the interviews with managers at 25 companies that had opened their doors to us in 1997-98. Client managers at A. T. Kearney and its parent, EDS, contacted managers at client companies that had sourced out one or more functions, and through these contacts we interviewed those who have been at the forefront of their firms’ outsourcing.
The participating companies vary in size, product, and location. One employs a thousand, another several hundred thousand. One is a major commercial bank, another an auto maker, a third a well known express delivery service. Most are headquartered in North America, but five are based in Asia or Latin America. They are a relatively typical blend of major companies in a variety of markets, and most are multinational.
Who Participated in the Survey?
The data base for the 1998 survey is U.S. company managers who are personally involved in outsourcing. They make or manage outsourcing decisions for their firms, and their identities have been compiled by Michael F. Corbett & Associates over the past ten years. The Survey Research Center of the University of Maryland conducted the survey.
The outsourcing experience among the responding managers is extensive. During the past three years, majorities have recommended outsourcing, reviewed outsourcing options in strategic planning, negotiated and overseen outsourcing contracts, and supervised outsourcing managers. Half have personally restructured or downsized a unit or division by outsourcing.
The companies represent a diverse cross-section of American business. The annual revenue for two-fifths is $500 million or less, for three-fifths more than $500 million. Slightly under half have 2,500 or fewer employees; slightly over half have more than 2,500 people on payroll, and nearly 30 percent employ more than 10,000. A third of the companies employ more than 10 percent of their workforce at locations outside the U.S.
For additional copies of this summary report, copies of the full report, or other information, contact Michael Useem at useem@wharton.upenn.edu or write him at the Center for Leadership and Change Management, Wharton School, University of Pennsylvania, Philadelphia, Pa. 19104-6370.† Tel. 215-898-7684. Fax 215-573-2122.