Beyond Outsourcing To Smartsourcing

With outsourcing increasingly becoming a way of life in the global economy, the key question for many businesses is how a well managed outsourcing process can translate into business improvement across the board.

Forbes.com spoke with Tom Koulopoulos, founder and CEO of the Delphi Group–the management and technology arm of Perot Systems –and author of the recently published book Smartsourcing, from Platinum Press. He has an incisive view of world trade and the part played by suppliers and manufacturers as they move from bringing workers to the work to taking work to where the workers are.

Forbes.com: What are your views on global trade in the context of major trends by businesses in the use of outsourcing?

Koulopoulos: Globalization involves much more than just the popular misconception of cheap labor. There are three trends at play driving global outsourcing–cost, education, and mobility. Everyone understands the process of wage arbitrage through which disparity in global pay can be used to reduce costs of a service or product. Yet this is only the smooth tip of the iceberg.

What we often underestimate is the degree to which secondary and post secondary education has accelerated in providing a skilled base of knowledge workers in other less developed economies. In Japan, for example, less than 1% of the population eligible for university actually attended in 1950. Today that number is greater than 25%. The same sort of shift is occurring today in India and China. This is having a profound impact on the availability of qualified workers for jobs that we would never have considered outsourcing.

The even greater shift is in how easily work can be moved to wherever it makes the most sense. Mobility of work is at least as great a factor in the changing landscape of global trade as the migration of immigrant workers to the new world was in the 19th and 20th centuries. When you combine these three very significant dynamics, it becomes clear that the depth and impact of outsourcing is far more than a passing arrhythmia on the global economic landscape.

How do you differentiate between smartsourcing as a process and the benefits from outsourcing?

When we raise the specter of work mobility, the first thing that most people think of is outsourcing. Smartsourcing is not synonymous with outsourcing. Outsourcing is only one part of smartsourcing. Outsourcing is meant primarily to reduce costs and transfer the risks of a defined process to a third party.

I have found that 61% of all organizations that undertook an outsourcing initiative did so, initially, for only cost objectives. The term I use for this sort of outsourcing is “lift and shift,” meaning an existing process is lifted out of its current organization and shifted over to the third party. The third party may achieve economies of scope through shared services, technology or international wage arbitrage, but such a relationship will rarely lead to higher levels of innovation. This innovation deficit in current outsourcing relationships represents a huge opportunity lost. I believe that this is one of the most limiting factors in the acceptance of outsourcing and offshoring.

Organizations need to focus their precious resources on what they do best in order to innovate on their core competencies. But, they also need partners who can continue to innovate on the non-core processes that they outsource.

Smartsourcing advocates using partners who can help a company to focus on its core, balance risk and opportunity, lower costs, increase innovation across all of its processes and finally, put in place attitudes to optimize all of these factors, socially and politically. Outsourcing and offshoring are essential components of this but only if they pave the way for organizations to free up resources so they can focus on core competencies that lead to greater innovation.

To what extent is smartsourcing dependent upon intelligent knowledge of a company’s core competency?

Simply put, you cannot smartsource without an explicit and well understood definition of a company’s core competency because you will not have a solid foundation for partnering on what is non-core. It is amazing how often a senior exec at an organization will be stumped by the question of core competency. Far too many people define a core competency as a product or service. Core competencies are rooted much deeper in an organization’s culture, brand, and behaviors than any product or service. Understanding your core competency is essential if you are to identify where you should focus your energy and resources. It is also key in accepting those things that detract from, dilute or otherwise compete for your resources.

Once a company understands its core competency, what are the next moves?

Knowing what you are best at is a start. But then you need to objectively understand the metrics of performance in both your core and non-core areas. In a smartsourcing analysis, you will actually rate your processes on two dimensions: from core to none- core; and then from high performance to low performance. The result will be a set of four categories of process, those that you Optimize, Reengineer, Outsource and Offshore. This is a rigorous process that takes much of the guesswork out of an outsourcing and offshoring decision by making it objective and methodical. As amazing as it may seem, to date most outsourcing and offshoring decisions have involved much more seat-of-the-pants and intuitive decision making than methodology. Smartsourcing is about moving the decision from art form to science.

Can you explain how technology fits into the enterprise process of smartsourcing?

Smartsourcing is a business decision but, like so many business decisions in today’s organizations, you cannot separate the business from the underlying technology. Doing so would be like a pilot trying to maneuver a plane without understanding the limits and capabilities of the aircraft. What’s most important to keep in mind when considering how technology fits in is to look carefully at the ways in which the organization doing the smartsourcing and the provider of the smartsourcing link their technologies in order to achieve agility and accelerate innovation. It’s fairly easy to have someone else perform a process, but not so easy to make sure that process continues to keep pace with every other aspect of your business after it’s been outsourced. Smartsourcing requires greater synchronization and coordination of processes that may reside with multiple partners. That is primarily a technology challenge.

What would be the penalty attached to resisting the move towards outsourcing, particularly smartsourcing?

In many ways, we only need to look to the U.S. automotive industry to answer that question. In manufacturing, those industries that delayed or simply ignored the move to offshoring paid and continue to pay a heavy price. Change in any industry is painful, especially when the industry is accustomed to premier stature. The only thing more painful, in the long run, is ignoring the change. We need to face the challenge and opportunity of globalization with a retooling of our educational systems and our workforce. For those individuals, organizations and nations who resist, the future will be uncompromising in passing judgment on their inability to keep pace.