Subcontract Everything But Your Soul!
My colleagues and I challenged 40 executive seminar participants to try and refute the following pointed statement: "Vertical integration is a failed strategy in today's fast changing environment. To survive, you must seriously and quickly consider subcontracting every task in the enterprise. It is virtually impossible to overdo subcontracting."
To our surprise, banker, travel agent, brewer, and retailer alike supported the notion. Our discussion produced a thoughtful list of subcontracting do's and don'ts.
1. Everyone's affected. Subcontracting is not just an "AT&T issue," as one manager put it. Globalization and U.S. entrepreneurism have created firms of all sizes that are capable of doing most any task. Information technology and growing "information highways" make it increasingly easy for firms to connect with one another. A $10 million company can seek out the best firm to perform a discreet task as easily as a $10 billion firm, although the subcontractor may only be a one-person show.
2. "Network managers." The company will increasingly resemble a shopping mall. The developer (you) thrives or shrivels based on the ability to attract—and hold—the best occupants. Successful big (and small) company bosses from Toledo to Taipei increasingly will be those who best manage networks of relationships with the most effective subcontractors—for plant watering, transportation management, or research.
3. Innovation is priority No.1. Subcontractors are often more efficient (see below). But the chief driver of subcontracting is the ceaseless pursuit of innovation. To infuse constant innovation into every function, you must gather a network of subcontractors/alliance partners from the most imaginative players available anywhere, whether they are large or minute. As one big-firm exec bluntly put it, "You draw on the world as a whole (for innovation), and are not dependent on your own brain-damaged company."
4. Source of efficiency. Smallish subcontractors frequently are the best at delivering a specialized service or product much more efficiently than you can. One line of reasoning says the efficiency results because you can drop the little subs when times are tough, pick them up again when things are OK. Such reasoning is a design for disaster—it's the antithesis of developing lasting and fruitful relationships. The greater cost efficiency of subcontractors usually is a byproduct of size: Because they are small, they are fast (which always saves big dough) and not heaped with overhead.
5. Research and development. Surprisingly, research is one of the most vital areas for pursuing subcontracting. Consider proud Digital Equipment's recent top-of-the-line workstation offering: The brains (the microprocessors) are designed and produced by relatively small MIPS Computer of Sunnyvale, Calif. Then there's MCI: It makes nothing, but its R&D shop is tops at ferreting out and then integrating the most innovative research efforts of the most sophisticated subcontractors of any size, from anywhere.
6. "Insiderization." To be sure, you can lose control of subcontractors. Many do by following our characteristic adversarial ways of dealing with outsiders. The new arrangement demands "insider-ization," to quote a participant. Share virtually all information with subs. Invite them in numbers to strategic and social events. Train them in your habits. Understand their core values and insist that they buy into your core values, not just your legal staff's contract details. Motorola, Baldrige quality award winner in 1988, is demanding that subcontractors apply for the award—even if they provide services such as corporate travel management. British retailer Marks & Spencer has succeeded with the support of a loyal network of quality subcontractors. The subs join the elect when everything including their employee bathroom cleanliness matches M&S's beliefs.
7. "Prove it." Continued assessment of more and more subcontracting opportunities is a competitive necessity. Many firms have looked at "make/buy" choices for years. But they stack the deck with rigged bids. For instance, the in-house departments leave out overhead costs. The requisite new attitude: "I assume we can/should subcontract (whatever). Prove to me that in a fair fight we can't—or we will."
8. No limit. U.S. News and World Report recently claimed that 27 million Americans are working full- or part-time at home. That number is spurting. Subcontracting within subcontracting within subcontracting is the direction in which business is heading fast: "Every person as entrepreneur" is not so far-fetched as it might have sounded five years ago.
9. "Don't sub your soul." That piece of advice came from a senior Federal Express officer attending the seminar. Vision, purpose, core business logic—that is, soul—must stay intact, even though you let outsiders execute most pieces of it.
Many an issue remained unaddressed as our group adjourned. But all of us left with a heightened awareness of how much can be (and ought to be) subcontracted to the very best outfit for task. We also left with an awareness that there's a brand-new game to be played—a game that has no certain rules, but big stakes and big penalties for laggards.
(C) TPG Communications.
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