The emergence of the new economy is likely to drive outsourcing in new directions. The ability to manage alliances may be the key to outsourcing success in a knowledge-based economy. That’s how Robert Klepper reads his crystal ball. Klepper, a professor at the School of Business at Southern Illinois University’s Edwardsville campus, and Wendell Jones authored Outsourcing Information Technology, Systems and Services(Prentiss Hall).
If corporate America puts its money where its future is, then it believes information technology is crucial to its survival. Last year IT accounted for 35 percent of capital spending, “triple what it was when I was in college in the late 1960’s,” says Klepper. Last year $50 billion in venture capital flowed to U.S. companies, up from $2 billion in 1990. “Information technology is a big enabler,” continues the professor.
One characteristic of the new economy is that the knowledge a buyer needs to survive and thrive in the new economy is not available at one firm. To craft the solutions buyers need, they must work with many firms with differing competencies and strengths. Klepper defines the business challenge as finding a way to bring all these players together to work as a harmonious whole.
He predicts the answer is to build outsourcing relationships using alliances, partnerships and joint ventures. He believes these kinds of relationships will dominate the higher end of the outsourcing spectrum.
Dell, Cisco Examples of the New Outsourcing Paradigm
The professor mentions Dell and Cisco Systems as two companies that have embraced this business philosophy. Both companies are building a brand. “What they are selling is customer satisfaction,” he explains. They have chosen not to own much of the physical assets they need to produce their products. Instead, they partner with other firms to do that.
Study their supply chains; both companies have built and nurtured really strong relationships with their outsourcing suppliers, who are the ones who actually develop, manufacture and service their products. Dell and Cisco provide the ideas, using their outsourcing relationships “to deliver a superior customer experience.”
Klepper believes that will be a powerful outsourcing paradigm in this new knowledge-based economy. Companies must create supply chain partnerships with complementary companies.
Outsourcing is changing on the vendor side, too. The Internet has also given rise to vertical service providers. These suppliers have a deep knowledge of one industry and can deliver a range of services to this specific market. Klepper believes at the high end vendors will have to become more specialized.
The SIU professor also predicts vendors will move toward more alliance-type relationships. These joint ventures will end up blurring corporate boundaries. Historically, outsourcing vendors had a clear idea of where their firm ended and the buyer’s began. But the boundaries will bleed together in these new outsourcing alliances.
Buyer, Supplier Boundaries Will Blur
He predicts companies will blend together on four levels:
Allegiance will be to the team as people contribute according to their competency and knowledge. The two companies will combine structures as they share a joint vision.
A major key to success is shared cultural values. “Things can fall apart if there’s a cultural mishmash,” predicts the professor. “Culture is critical to make this happen.” And everything is based on trust between the two parties. “Trust is the glue that holds these relationships together long term,” he believes.
Pier review and performance monitoring guide the day-to-day execution of the joint venture. Klepper says the old world paradigm of a boss managing workers won’t fit in a joint venture environment.
Dispute resolution has to happen at the lowest level between the two disputants. Klepper believes a supervisor should only get involved when the issue become intractable.
In addition, Klepper insists the alliances must be a win-win situation for both parties. There must be a reciprocity and sharing of benefits. “One party can’t win all the time. There has to be a mutually supportive situation,” the professor says.
In the new knowledge-based economy, both sides must face a great degree of uncertainty. Therefore, the pay-off has to be substantially higher to compensate for the added risk. In fact, the outsourcing contract has to reflect this “tremendous uncertainty.” Since neither party knows what will happen, the contract can’t spell out distinct roles. “All you can do is write a direction of travel,” he says.
Klepper says the best purpose of any outsourcing contract in these situations is to guide the parties if they decide to dissolve the relationship.
Long Term Relationships Required
These alliances have a longer life than the standard outsourcing relationship between buyer and supplier. The professor says it’s impossible to develop the working relationships required if the term is short. And, in most cases, results won’t happen in 12 months. This runs counter to the current trend of ever-shorter outsourcing contract terms.
Lessons from the Outsourcing Primer:
- Strategic alliances may be the best way to outsource in a knowledge-based economy.
- Both companies must have a similar corporate culture.
- Trust is the glue that holds these relationships together.
- The boundaries between the partners will blur as the relationship works toward a clear goal.
- The outsourcing contract should just state a direction of travel since the outcomes have a high degree of uncertainty.
Klepper believes the Internet has:
- Created a knowledge-based economy.
- Added tremendous flexibility so companies can respond to rapid change
- Forced a real time focus.
- Placed more attention on the customer.
- Expanded the marketplace to include customers anywhere on the planet.