Process Excellence Can Inject New Vitality into Ailing Manufacturers

Picture this: you are the CEO of a venerable manufacturer that has been besieged by price pressure, increased imports and high capital costs. Revenue has been barely edging up, and profits have been negative three of the last five years. You have had to lay off a significant portion of manufacturing personnel, many of whom had been with you more than a generation. Your ship is still taking on water despite best efforts, and you do not know where to turn.

This was precisely the situation of several U.S. firms that took the unusual route of selling themselves to Indian firms that turned the companies around very quickly by applying sophisticated process and management expertise. In many cases, local employment increased because the companies became much more competitive. Here are two examples:

Part of the IDC Outsourcing Forum Midwest Report

The Williams Companies is a Fortune 200 energy company that currently distributes 12% of all the natural gas consumed in the United States and is a major employer in Tulsa, Oklahoma. Marcia MacLeod, Vice President of Business Process Outsourcing, and Karen Caldwell, Director for Energy & Utilities at IBM, explained how the company pulled a Houdini in the early 2000s, using outsourcing to survive a near-death experience in which its stock dropped from $48 to less than one dollar. This case reflected outsourcing's potential in dramatic turnaround situations while confronting some outmoded stereotypes about its impact on local employment.

Part of the IDC Outsourcing Forum Midwest Report

Part of the IDC Outsourcing Forum Midwest Report

Clear Outsourcing Adoption Curve Emerges

The IDC Outsourcing Forum Midwest convened sourcing thought leaders from global enterprises, world-class outsourcing providers and IDC's leading analysts in Chicago September 11-12, 2006. They shared pioneering experiences that are pushing the transformational boundaries of outsourcing, one of the most important management practices to emerge in the 21st century. Case studies from the Williams Companies, AOL, Lucent, Barry-Wehmiller and Procter & Gamble explained how to use outsourcing to satisfy multifaceted business objectives, and a clear adoption curve is emerging that describes how outsourcing is reshaping the world's largest organizations.

The Current Role of Transformation in Outsourcing

The Forum revealed how outsourcing is transforming the world's organizations at an evolutionary pace—gradually and steadily—notwithstanding dealmakers' penchant for overusing the term. Organizations are clearly becoming more networked and collaborative, but most are doing it by managing to near-term business objectives rather than long-term strategic objectives. Conference chairman Bob Welch captured the current state of adoption:

"Transformation is a misnomer because companies aren't using outsourcing to change their businesses," Welch remarked. "Rather, they are changing the way they operate their businesses. For example, companies have focused their outsourcing activity in the 'back office' for the past five years, and now we're seeing them expanding their use of outsourcing in the so-called 'front office,' closer to customer facing activities, from call centers to product engineering."

Part of the IDC Outsourcing Forum Midwest Report

Part of the IDC Outsourcing Forum Midwest Report

Accelerating Forces Buffet the Enterprise

Volatility of customer wants and diversity of markets around the world will increasingly demand that enterprises innovate if they want to remain relevant because their current product introduction and innovation processes are woefully insufficient. In addition, several "structural enablers" are driving down the cost of collaboration—globalization, enterprise software maturation, e-collaboration tools and BPM solutions. I think it's beyond dispute that "emerging" markets around the world look at India as a model, and there will be a cascading wave of new outsourcing providers entering the market in the years ahead, keeping downward pressure on supplier prices and forcing increased innovation across the supplier value chain. For example, many educated young people in these markets are native with e-collaboration tools, which should lead to new models of collaboration. SOA and Web services are increasingly ingrained in enterprise software, opening up legacy and new solutions to web-based, granular sharing of information. BPM, because it digitizes an increasing spectrum of the business process, is an enabler of outsourcing.

Reposition Outsourcing as Iterative Transformation

Outsourcing in 2006 is where e-business was in 1998, when the Internet was a tech playground in the mid-late 90s. The mission of "e-business strategy" was repositioning the Internet in the C-suite, explaining the vision, helping to create a future state and working with clients on their adoption processes. A similar repositioning needs to be done with outsourcing in the next 2-4 years, and early adopters will begin now. Outsourcing is not currently practiced at the enterprise level as a transformational activity. There is an opportunity to reposition it for the CEO agenda. Outsourcing can be an iterative approach to achieving agility by harnessing the drivers listed above to increase innovation, efficiency and responsiveness.

The current revolution in enterprise software is only a preview of a much larger, more pervasive shift that will transform the global economy within the next decade.  Service-oriented architecture and Web services are two of the more well-known elements of the maturation of distributed computing, which is changing the rules of the vaunted software development life cycle.

In short, we are on the way to becoming a real-time market for global human capital whose ascendancy will increase with the growth of the knowledge economy and global standards for work processes.  If we classify economic value according to knowledge/information, manufacturing and agricultural products and services, the knowledge portion has been steadily increasing its share of the value chain, and this trend is accelerating.  Of course, information technology facilitates the creation, distribution and sharing of knowledge.

When the U.S. saw manufacturing companies move significant operations offshore during the 80s and 90s, most people were unhappy, but many understood that certain industries were maturing, facing global competition and price pressures. Consequently, they were forced to remain competitive through lower labor costs. However, as awareness of IT offshoring spread in the context of the Tech Bust in the early 2000s, it sent a chill of fear up and down the collective spine: "How could the high tech juggernaut be outsourced and offshored? Would this development prevent its recovery?" Noisy gnashing of teeth, protectionist legislation and demonstrations. The longer term question was:

• As "the world" graduates many more engineers, MBAs and scientists than does the U.S., will they threaten the employment of U.S. high value professionals?