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As service and product outsourcing become more commonplace, new organizational forms are emerging to facilitate these relationships. Chase Bank has created “shared services” units that compete with outside vendors to furnish services to the bank’s own operating units. Delta Airlines has established a “business partners” unit to oversee its relations with some 250 vendors and 2,600 contracts for ground crew and customer services at 186 airports around the world. Microsoft out-sources almost everything — from the manufacturing of its computer software to the distribution of its software products, thereby focusing the organization on its primary area of competitive advantage: the writing of software code. Still other firms are creating “strategic service” divisions in which activities formerly decentralized into autonomous business units are now being recentralized for outside contracting. As these various approaches suggest, the best ways to structure out-sourcing remain the subject of ongoing management debate and media coverage.1
As companies devise new forms of organization to assure that outsourcing works as intended, those responsible require a new blend of talents. Rather than issuing orders, managers must concentrate on negotiating results, replacing a skill for sending work “downward” with a talent for arranging work “outward.” Thus, the outsourcing of services necessitates lateral leadership.
We have reached these conclusions about the leadership capabilities required for outsourcing through intensive interviews conducted from 1997 to 1998 with 54 senior managers of twenty-five large firms in the United States and abroad and from a subsequent 1998 survey of 423 managers in U.S. companies (see sidebars about participants). What emerges from the in-depth interviews and the broader survey is a picture of a more demanding leadership environment, even as day-to-day management tasks are streamlined by outsourcing.
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1. M.C. Lacity and R. Hirschheim, Information Systems Outsourcing: Myths, Metaphors and Realities (New York: Wiley, 1993);
M.C. Lacity, L.P. Willcocks, and D.F. Feeny, “The Value of Selective IT Sourcing,” Sloan Management Review, volume 37, Spring 1996, pp. 13–25;
C. Saunders, M. Gebelt, and Q. Hu, “Achieving Success In Information Systems Outsourcing,” California Management Review, volume 39, Winter 1997, pp. 63–79; also see:
R. Klepper and W. Jones, Outsourcing Information Technology, Systems, and Services (Englewood Cliffs, New Jersey: Prentice-Hall, 1997).
2. Lacity et al. (1996);
Saunders et al. (1997);
J.H. Dyer, “Specialized Supplier Networks as a Source of Competitive Advantage: Evidence from the Auto Industry,” Strategic Management Journal, volume 17, number 4, 1996a, pp. 271–291; and
J. H. Dyer, “How Chrysler Created an American Keiretsu,” Harvard Business Review, volume 74, July–August 1996b, pp. 42–56.
3. For more about the value of leadership skills for working across boundaries in joint ventures, see:
J.D. Lewis, Partnerships for Profit: Structuring and Managing Strategic Alliances (New York: Free Press, 1990);
J.D. Lewis, The Connected Corporation: How Leading Companies Win Through Customer-Supplier Alliances (New York: Free Press, 1995); and
M.Y. Yoshino and U.S. Rangan, Strategic Alliances: An Entrepreneurial Approach to Globalization (Boston: Harvard Business School Press, 1995).
4. F. Casale, The Rise of the Chief Resource Officer (New York: Outsourcing Institute, 1999); and
J.B. Quinn, J.J. Baruch, and K.A. Zien, Innovation Explosion: Using Intellect and Software to Revolutionize Growth Strategies (New York: Free Press, 1997).
5. M. Corbett, Best Practices in Managing the Outsourcing Relationship (Poughkeepsie, New York: Outsourcing Research Council, 1997);
J. Cross, “IT Outsourcing: British Petroleum’s Competitive Approach,” Harvard Business Review, volume 73, May–June 1995, pp. 94–102;
J.H. Dyer (1996b);
F.W. McFarlan and R.L. Nolan, “How to Manage an IT Outsourcing Alliance,” Sloan Management Review, volume 2, Winter 1995, pp. 9–23; and
J.B. Quinn and F.G. Hilmer, “Strategic Outsourcing,” Sloan Management Review, volume 4, Summer 1994, pp. 43–55.
6. S. Domberger, “Public Service Contracting: Does It Work? Australian Economic Review, third quarter, 1994, pp. 91–96;
R.D. Wertz, Privatization Survey Summary (Staunton, Virginia: National Association of College Auxiliary Services, 1997); and
R.D. Wertz, Outsourcing and Privatization of Campus Services (Staunton, Virginia: National Association of College Auxiliary Services, 1997).
7. J. Gardner, On Leadership (New York: Free Press, 1993);
N.M. Tichy, The Leadership Engine: How Winning Companies Build Leaders at Every Level (New York: Harper Business, 1997); and
W. Bennis, On Becoming a Leader (New York, Perseus, 1994).