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The Dark Side of Outsourcing.

Farming out the best work will hollow out your organization.

Many organizations are a shell of what they once were or a shadow of what they could be, because they give the best work to outsiders. I don't think anyone intentionally out sources the best work—that is, the most important projects and the critical business relationships—but it happens all too often.

Correctly applied, outsourcing is a lifesaver in navigating the changing seas of business and technology. Fortunately there seems to be an endless supply of contractors and consultants. The clients have plenty of experience in outsourcing. In fact, about half of their personnel work for somebody else, on average.

That last thought always gives me a chill. At the end of the day, half of their people don't work for them—they work for somebody else. Those employees are working to achieve another company's long-term vision and are part of somebody else's culture and career development plan. This reality hit home years ago when, as an executive at PepsiCo, I hired a consultancy to manage a PeopleSoft implementation. The software was new and the market demand for experienced project managers was high. At a critical point, one of the consultancy's partners informed me that he needed to reassign the project manager to an apparently more important or better paying client. I pulled out my PepsiCo card, but the partner didn't seem to care. In the end I won but only by hiring the contract project manager away from the consultancy.

The incident taught me that a leader's success rides on the back of a few key employees. Those are the people who know your business and your systems, who have formed good relationships with your customers and vendors, and who are disciplined enough to see things through. To do outsourcing right, you had better know what you wouldn't give away. You need to define an "insourcing" plan that identifies the work critical to your company's strategic intent.

Insource the Important Work Most of us would agree that subject to real-world constraints, the following roles and capabilities should not be outsourced:

  • Strategic applications and technology planning.
  • Investment, financial, HR, project and vendor management.
  • People with in-depth knowledge about existing business, applications and technology infrastructure.
  • Senior, customer-facing relationship managers.

The real-world constraints that force us to outsource more than we would like include missing skills, inadequate resources and a lack of organizational mass necessary to maintain a capability internally. The critical mass problem forces some companies to outsource virtually all IT functions. But in compensating for limited resources, many managers go further than is healthy for their organizations. Project work, which is variable by nature, goes to contractors, while internal people end up doing only support work. Since project work is generally the best work, in terms of strategic impact and creativity, employees who value this work will leave. Those who remain will do a good job running the day-to-day tasks but will be unable to lead a major change.

When consultants are running the show, you've reached the dark side of outsourcing. When the interests of your company and the service providers diverge, you'll pay the price. To find out whether you're entering the dark side of outsourcing, look for the following clues:

Most of your employees are performing maintenance and support work.

  • Strategic, risky and large projects are consultant-led.
  • Your employees are being managed by consultants.
  • Consultants are driving one or more of the critical governance processes—strategy, architecture planning and investments.
  • Your customers are interacting with consultants more often than with employees.

Companies get into trouble when they do not draw hard lines around work that should not be contracted out. An insourcing plan will ensure that your folks remain in charge, while contractors will be used only as additional arms and legs or for expertise when your organization is too small to hire and retain the best.

There are many ways to outsource safely. If you are missing important technical expertise, ensure that your people work side by side with the consultancy's technical gurus. If your group lacks management expertise, partner the contract project manager with the employee whom you want to lead the function in the future. Be sure to explicitly identify skills transfer as a key objective of the relationship with your outsourcer.

Short-term needs can be a staffing nightmare, but don't take the easy way out. Rather than viewing contingent labor as a stopgap, use outsourcing to free up your people for development. If you need to staff a critical project quickly, transfer one of your workers from a less important project to lead the new one. Give the less important task to a consultant—teamed up with a rising star whom you wish to develop. Set a date by which the consultant will leave or transition to a purely coaching role. If you are (rightly) outsourcing support work, such as maintenance, ensure that the contractors report to one of your analysts. Supervising support workers is a wonderful developmental opportunity for analysts who want to move into a project management role.

Concentrate on the Core Employees Once you have decided what work should not be outsourced, give some serious thought to how you will retain (or, if necessary, attract) your best talent. In The Age of Unreason (Harvard Business School Press, 1991), management philosopher Charles Handy identifies three groups of people in organizations. The first is the professional core, essential to your company's success. The second group, the flexible labor force, performs essential activities on a part-time or temporary basis. The third group is the contractual fringe, which does all the nonessential work. Each of these groups has different expectations and should be managed differently.

Members of the professional core are motivated by working in flat, collaborative organizations where they are compensated based on the group's results and given some kind of career promise. These are the people you want to retain. This is where you should invest your leadership energies.

In my executive coaching practice, I am amazed at how often I know more than my clients about the interests and goals of their key employees. One of my clients was considering a transfer of one of his rising stars to a new position, but he was unaware that she ultimately wanted to start a small business in an area entirely unrelated to IT. With this knowledge, he was able to identify internal positions that would help her develop the skills necessary for success in a small startup. The concept of matching responsibilities with interests, known as job sculpting, requires that managers do more of what I do as a coach. Managers need to spend one-on-one time discovering what their people like and dislike about their jobs, helping the employees become aware of their underlying interests, and understanding how to align the interests of employees with that of the company.

Managers should spend less time on the other two groups, according to Handy. The flexible labor force is motivated by fair pay and the flexibility to balance work with other interests. Members of this group may have transitioned from the professional core and may move back to the core if their priorities change. You can use skills training to keep this group up to speed. The contractual fringe is paid for results. It is important to compensate members of this group fairly and specify up front the mutual expectations for the relationship. Don't bother trying to get them to affiliate strongly with your organization; they work for somebody else.

Focus your insourcing plan on the critical work and key employees in your organization. Think about how to deepen your relationship with these few people—to touch their hearts as well as tap their skills. In Handy's words, "These are the people who are essential to the organization. Between them they own the organizational knowledge which distinguishes an organization from its counterparts. Lose them and you lose the organization."

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