Leading Laterally in Company Outsourcing

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As service and product outsourcing become more commonplace, new organizational forms are emerging to facilitate these relationships. Chase Bank has created “shared services” units that compete with outside vendors to furnish services to the bank’s own operating units. Delta Airlines has established a “business partners” unit to oversee its relations with some 250 vendors and 2,600 contracts for ground crew and customer services at 186 airports around the world. Microsoft out-sources almost everything — from the manufacturing of its computer software to the distribution of its software products, thereby focusing the organization on its primary area of competitive advantage: the writing of software code. Still other firms are creating “strategic service” divisions in which activities formerly decentralized into autonomous business units are now being recentralized for outside contracting. As these various approaches suggest, the best ways to structure out-sourcing remain the subject of ongoing management debate and media coverage.1

As companies devise new forms of organization to assure that outsourcing works as intended, those responsible require a new blend of talents. Rather than issuing orders, managers must concentrate on negotiating results, replacing a skill for sending work “downward” with a talent for arranging work “outward.” Thus, the outsourcing of services necessitates lateral leadership.

We have reached these conclusions about the leadership capabilities required for outsourcing through intensive interviews conducted from 1997 to 1998 with 54 senior managers of twenty-five large firms in the United States and abroad and from a subsequent 1998 survey of 423 managers in U.S. companies (see sidebars about participants). What emerges from the in-depth interviews and the broader survey is a picture of a more demanding leadership environment, even as day-to-day management tasks are streamlined by outsourcing.

Survey Participants »

Interview Participants

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Leadership Capabilities Needed for Outsourcing

Our interviews of senior managers at twenty-five companies revealed that four individual capabilities encompass much of what is now required of managers as outsourcing becomes commonplace:

Strategic thinking. Within the outsourcing framework, managers must understand whether and how to out-source in ways that improve competitive advantage.

Deal making. Outsource process managers must broker deals in two directions simultaneously — securing the right services from external providers and ensuring their use by internal managers.

Partnership governing. After identifying areas suitable for outsourcing through strategic assessment and upon clinching a deal, effectively overseeing the relationship is essential.

Managing change. Forcefully spearheading change is critical because companies are certain to encounter employee resistance.

These four capabilities emerged repeatedly when discussing the essential skills of those responsible for outsourcing decisions, contracting, and oversight. Certainly none of these qualities taken singly is unique to outsourcing, but their combination is critical to leading laterally. In fact, this repertoire of capabilities is probably also critical for joint venturing and other company initiatives that entail working across boundaries without direct authority.

Our subsequent survey of 423 managers at U.S. companies corroborated the importance of these four components of lateral leadership for managing an outsourcing contract and relationship across a broad array of industries and company sizes. We also asked these managers how much of a pay premium they would offer a person having all of the capabilities. Two-thirds reported that they would pay at least 6 percent additional for each skill; two-fifths were prepared to pay 11 percent or more.

Moreover, because the four leadership attributes constitute a bundle, managers who are willing to pay a premium for one capability tend to do so for each of them. (Correlations among the four items range from 0.57 to 0.62.) Companies large- and mid-sized —whether annual revenue is under $50 million or over $2.5 billion — similarly value the four qualities, although deal making brings the highest premium and is comparably valued regardless of company size (see Figure 1). In most industries, lateral leadership capabilities command a pay premium — though slightly less so in consumer products and financial services, and considerably less so in the utilities industry.

Earlier studies of information systems outsourcing touched on aspects of the four leadership capabilities we have noted. A detailed examination of thirteen such cases, for example, found elements of partnership governing to be essential. Another study of sourcing decisions among forty U.S. and European companies revealed aspects of deal making to be critical to success. An investigation of outsourcing contracts among thirty-four companies found facets of strategic thinking to be vital. Our analysis has concluded, however, that effective oversight of sourcing requires a comprehensive combination of all four qualities. We also found that companies require this unique blend not only for leadership in the outsourcing of information systems and component manufacturing in which many companies have pioneered, but more recently in an array of areas.2

The four leadership qualities we have identified are not explicitly stated on most peoples’ résumés. But certain types of work experience that foster such qualities may be evident, and managers reported a willingness to pay substantially higher salaries to those with such a track record. Most of the surveyed managers were willing to pay a premium of 6 percent or more for previous experience in (1) outsourc-ing management, (2) the activity being outsourced, (3) leading of multi-skilled or cross-functional teams, and (4) joint-venture management. For such backgrounds, one-third to two-fifths of the managers are prepared to offer at least an additional 10 percent salary (see Figure 2).

Seasoned veterans in outsourcing, the responding managers confirmed the value of their own prior experience for their current work in outsourcing. More than 80 percent said that their previous out-sourcing management, team leadership, and joint-venture management were of great value to what they are doing now.

The four capabilities associated with lateral leadership are evident in day-to-day decision making as well as in longer-term initiatives. Moments of decision by several managers (whose names have been changed) illustrate the four capabilities in action.

Strategic Thinking

Managers must decide which in-house activities add real value and which, by contrast, can best be achieved by others. A first quality of lateral leadership is the ability to determine how the outsourcing will serve the company’s strategy and gain competitive advantage.

Though outsourcing is on the rise, company expenditures on outsourcing contracts still account for only a fraction of annual spending (see Figure 3). While not a major preoccupation of most top executives, sourcing decisions are a critical component of many managers’ work days and the sole responsibility for some. For both top executives and front-line managers, deciding which activities to be contracted out requires an understanding of the firm’s strategic imperatives and how to achieve them. Strategic thinking is thus essential for making sourcing decisions at all levels even though such decisions constitute only one part of a far larger mosaic of managerial action.

Identifying the Essential and Unessential

Consider John Thompson, a manager at a leading U.S. telecommunications company, who is responsible for developing the firm’s outsourcing agenda, a daunting assignment that involves more than $1 billion in hotly contested sourcing contracts.

Thompson’s senior managers have told him that cutting service costs and reducing management distraction are essential. They’ve indicated that outsourcing must reduce the complexity of the company’s management agenda, pointing out that some necessary functions consume more energy and management time than warranted. Precisely where to reduce management distraction depends on the company’s core competencies, defined in Thompson’s words as “something that gives us competitive advantage, something we are highly competent at as an enterprise.” When deciding which activities to move outside the firm, his criterion — aside from expense reduction — is simple: If something must be done but it doesn’t support a core competency of the enterprise, he adds it to a sourcing “hit list.”

While ridding the company of peripheral in-house functions, Thompson studies the inside prospects and outside providers for handling integrated customer billing and concludes that “we don’t have the wherewithal to do that on our own in my lifetime.” Thus, outsourcing is a way of handling the unessential that is vexing but also the essential that is missing. Thompson identifies which activities are not core but are cardinal (and, conversely, which are core but not realizable), and he must have a sound appreciation for the company’s strategic direction if he is to make the right choices.

Pinpointing Competitive Advantage

The importance of strategic thinking is also evident at a leading U.S. commercial bank, where much of the credit-card operation has been routinized, though some processes remain unpredictable. Bank manager Susan Meyers says that the crux of the matter is “understanding how customers make choices, and how we make money.” Accordingly, the bank is phasing out the high-volume but largely routine authorization of purchases and posting of charges, because transaction processing is akin to selling a commodity. Most banks supply these services reasonably well, margins are thin, and little opportunity remains for outperforming competitors. Customers make predictable choices, the bank profits only slightly, and outsourcing vendors furnish the services at lower cost and less aggravation to the bank.

However, the bank is preserving certain aspects of the in-house credit-card operation that contribute to the bank’s competitive edge. Value-added services include credit assessment (identifying prospective customers as “good bets”), reward programs (linking card usage to airline mileage), and seamless service (integrating a customer’s credit card, checking, and savings accounts). In an era of mass customization for “markets of one,” the bank is retaining marketing functions in-house to focus on establishing and preserving customer loyalty. And because the risk of outsourcing is perceived to be too high, the bank retains the function of reissuing stolen or lost credit cards. As the manager who drafted the bank’s first sourcing contract pointed out, determining what to outsource followed a textbook prescription for attaining competitive advantage.

Deal Making

Outsourcing managers create a web of relations between outside vendors and inside operations, brokering deals in two directions simultaneously: Securing the right services from external providers and ensuring their effective use by internal managers. The leadership capacity required is comparable to what investment bankers bring to the high-stakes world of mergers and acquisitions: An uncommon ability to create common ground between prospective but wary partners.

Deal making on the outside requires, above all, selecting the right provider. Picking a vendor is sometimes compared to choosing a marriage partner: The decision can be extremely fateful, though the vendor relationship is shorter and the vows narrower. One telecommunications manager had arranged three vendor contracts that she considered “make or break” decisions. Selecting the wrong vendor, she observed, can be akin to picking the wrong spouse, and “almost dooms you from the beginning.”

Inside a firm, effective deal making involves securing buy-in from reluctant users. “Shared services” are most advantageous when they are managed company-wide, but this requires reclaiming the discretionary decision-making authority of the operating presidents. Outsourcing thus often leads to partially recentralizing processes that had earlier been decentralized among business units. “Yes, our individual businesses are accountable for their bottom line, and we are eager for each to be productive,” observed the CEO of the U.S. petroleum company in our study, “but the well-being of one business unit may impede the well-being of the group or other business units. To transcend such divisions, we’ve got to move forward as a team.” Outsourcing managers work doggedly to persuade the business-unit heads to accept services not entirely of their own choosing. Brokering such arrangements depends on transforming unit presidents from reluctant players into active owners of the sourcing.

Anticipating the Future

Establishing the wrong terms in a sourcing contract can be as calamitous as overpaying for a company acquisition. Wording that limits the capacity of either side to respond to the unexpected is among the worst pitfalls. Fred Steinmetz, a manager at a commercial bank, had negotiated a contract with a provider a decade earlier to support the bank’s vast credit-card operations. Data-processing technologies subsequently evolved at a pace that both sides could accommodate.

Although he had expected technical advances, Steinmetz had not foreseen his bank’s subsequent merger with one bank and then a second. Both banks had run their own credit-card empires on different IT platforms. Consolidating three IT systems under one existing sourcing contract presented a potential debacle. Wisely, Steinmetz had incorporated contract language that ensured flexibility for both sides, allowing the bank and the provider to consolidate the merged card operations without a major hitch. Even with the database swelling to 15 million account holders, the contract language withstood the test of time.

Protecting the Firm

The steel company in our study opted for giant strides in outsourcing rather than incremental steps. “We’re in the steel business, not the data-processing business,” explained executive Robert Hunter, justifying the decision to outsource management of the firm’s information systems. “We recognized that costs were escalating in that part of our business and that we were incapable of managing them appropriately.”

Hunter decided to contract out part of the outsourc-ing process itself. He hired several companies that specialize in negotiating contracts ranging from IT management to food-service operations. “They had been through it before,” he recalled. “They knew all the pitfalls, and they knew how to organize the thought process.” Following protracted negotiations with two competing vendors, he confidently signed a 5-year contract with one; so complex was the deal that the printed contract occupied more than 1 foot (30.5 cm) of shelf space. The multiyear sourcing proceeded smoothly. Hunter reported that hiring the sourcing advisors “turned out to be one of the best things we ever did.”

By contracting with the vendor on such a massive scale and prolonged basis, steel company managers supplied this particular vendor with proprietary information that could enable the vendor to service other steelmakers. However, Hunter negotiated a clause prohibiting the vendor from contracting with competing steel companies. As positive inducement, he inserted incentives for the vendor to help the steelmaker further reduce its internal costs. To monitor and thoroughly understand the firm’s information systems and to substantiate the vendor’s implementations, Hunter also retained a small, but dedicated, high-end staff of information technologists.

Overcoming Defects

Underestimating long-term problems in an outsourcing deal occurred at one of the commercial banks in our study. For more than a decade, it contracted with an information service provider for all back-office processing of its growing credit-card business. The full-service contract had worked well: The bank contained its rising costs and acquired fast-changing technologies.

But the bank president believed that the deal may have been working too well for the vendor, because of a unique service capacity that the bank’s contract had allowed it to build. When Visa and Mastercard change their policies, for instance, the bank informs the vendor, and the vendor in turn incorporates the new policies into its service for other banking customers too. Moreover, the bank’s dependency on the vendor for so many services (more than a fifth of the bank’s annual budget is allocated to the relationship) means that no other vendor knows the bank’s needs well enough to realistically bid on its work. “It is almost cosourcing,” complains a senior vice president, “and we are bonded together.” The downside of being “joined at the hip”: The bank has lost the upper hand in this vendor relationship and has also foregone any returns from what amounts to a long-term investment in the vendor. Perhaps a joint venture or profit-sharing contract would be more mutually beneficial, and bank executives are contemplating such a solution.

Partnership Governing

To effectively manage their outsourcing relationships, partners must not view a deal as one between arm’slength contractors, but rather as between locked-arm partners. A third quality of leadership, then, is adept governing of partnerships.

A partnership generally connotes the willingness of the two sides to work actively and constructively over time not only to achieve what is required by contract, but also to enhance the service quality and financial benefit to each. Not all sourcing contracts lend themselves to partnerships: If the service is clearly delineated, relatively unchanging, and zero-sum in payoff, governance of the contract may require little more than enforcement. But several studies suggest that when one or more of these conditions is absent, viewing the relationship as an enduring partnership yields superior results for both sides.3

Fostering a Relationship

The telecommunications firm in our study outsourced part of its retail “customer care,” including telemarketing, billing, and account management. John Griffith built the enterprise from a “desert start” to a fully running system 17 days after the company committed to the deal. He became responsible for the service product of 1,400 people — only 150 of whom still wore his company’s badge. The company initially forecasted 10,000 telephone queries per day from customers, but the daily tally soon climbed to 55,000, a staggering surge requiring three contractors to handle. “If you are in an entrepreneurial environment or when market conditions are highly dynamic,” said Griffith, “outsourcing is ideal.”

The telecommunication company’s attorneys resisted the formal “partnership” label to describe the relationship since it connoted liability, but Griffith embraced the concept operationally, and he picked vendors who sought it as well. “You have to feel that the vendors buy into the same success criteria that you do,” he said.

A partnership implies an enduring engagement that survives and even strengthens with stress and conflict. “I want somebody who is with me for the long haul,” said Griffith, who views every contact with providers as either building or eroding their long-term relationship. Like customer-focused companies that treat every employee contact with customers as a “moment of truth,” he saw the most routine encounter with the providers and every decision about them as either helping or hindering his efforts. He could impose stringent demands on the vendor as long as they fell within the terms of their contract; but he also knew that forcing compliance now would probably result in less responsiveness later. During the summer of the contract’s first year, an unanticipated downturn in customer demand resulted in fewer calls and higher costs. Rather than insisting that all three vendors slash their staffing, as permitted under their contracts, Griffith negotiated a separate solution with each. By agreement, one vendor reduced staffing by relying on employee attrition; another reduced its service charges but not its staff; and the third, whose agent performance was most uneven, dismissed its least productive employees. Fostering such solutions, Griffith observed, differed greatly from actions he would have taken earlier when he “owned everything.” For Griffith, governing partnerships required patience and an eye toward the future: “I don’t want to win the battle and lose the war.”

Finding the Skills

In many firms, relationship skills are a prerequisite for promotion into positions that are responsible for outsourcing. At a major computer manufacturer, for instance, the director of strategic staffing, Mary Jackson, described her ideal candidate to head a global operation with a staff of 700 and an inventory of $700 million. “A key factor is figuring out what to keep and what to outsource, and then managing those outsourcing arrangements.” She sought a deal maker and a partnership overseer: “I’ve got to appoint somebody who can be rigorous and analytical about determining what we do inside and outside the firm, someone who can choose the vendors and manage them so that I don’t have hiccups.”

When asked to choose among two candidates, only one of whom had already managed an outsourcing contract or a joint venture, the candidate with sourcing or joint-venture experience was Jackson’s unequivocal choice. Is such experience essential? “Absolutely,” she says, “it’s a requirement.” Even for the top marketing jobs, she wants people who can work to establish partnerships, joint ventures, and joint marketing arrangements. Since so little outsourcing had been done in the past, few inside the company had the skill sets she required. “We are focused on doing a great job with the resources we’ve got,” she observed, “but we’ve lost sight of where the competition is and where the [cutting] edge of industry is.” To refocus on the competition, top managers wanted to implement global sourcing with a limited number of supplier partners, and Jackson knew that this required going outside the company for the talent. “You’ve got to have people who understand not only how to decide which activities to take outside,” she said, “but also how to make the transition from inside to outside.”

Managing Change

Outsourcing is frequently accompanied by employee resistance. For most hourly employees and many managers, outsourcing is synonymous with job loss or change. Improved competitiveness is still widely overshadowed by employee anxieties about downsizing after transfer of work to the vendor. Employees of the express delivery company in our study viewed partnering with a provider as one step removed from “consorting with the devil.”

Thus, it is not surprising that the labor union at a steel company with a recent history of outsourcing —but a far longer history of collective bargaining —has insisted on inserting restrictions on outsourcing into the union-management agreement. The two “parties recognize the seriousness of the problems associated with contracting out work both inside and outside the plant,” the contract states. The agreement prohibits the company from further outsourcing unless managers prove that the existing labor force cannot do the work.

Even among the white-collar ranks, resistance to out-sourcing runs deep. A manager at an old-line industrial company had sought to migrate all of his company’s business units onto a new information platform managed by an outside provider. He encountered deep skepticism among the business-unit heads, who wanted to do it their own way. But he discovered that the most vigorous opposition came from the information systems staff itself, who feared their own job vulnerability. “They don’t really want this to happen,” the manager observed. “They’re all negative.” As white-collar professionals they perceived that they could not openly oppose the change, so they expressed their negativity through passive resistance. One key systems engineer, for example, saw problems developing during the changeover to the provider, but he remained utterly unresponsive, volunteering nothing about the problems except when asked directly, and then offering minimal response. Later, as the problems materialized, he feigned incredulity.

Courage under fire is essential for leading change during outsourcing. Equally important is preemptively identifying which changes are required regardless of the resistance expected. For example, managers at one petroleum company dispatched teams to visit forty-five companies that employed outsourcing for some functions they never imagined could be out-sourced. Each six-member team was comprised of people from the company’s exploration, refining, and distribution units. All were charged with understanding not only what could be sourced, but how to out-source when most employees could see no value in it.

After their return from the company visits, the reconnaissance teams reviewed the various functions in their own operations. Team members began asking, “Why are we still doing that?” Of course, those doing “that” frequently took offense at implications that their own performance was substandard. After the oil company managers had identified opportunities to outsource extensively, they still had to overcome employee hostility and reverse their perceptions: “We are not saying that people are doing things poorly. Actually, we are doing things very well, extremely well.” However, the manager continued, outsourcing should be viewed as “an opportunity to go out and look at doing things better.”

Organizational Leadership for Outsourcing

The individual component of leadership is what is conventionally considered leadership: a vision of the future, excellence in judgment, the power of persuasion. The organizational component is what we often fail to appreciate at first but almost always find close behind: cultures, incentives, and relations that encourage the widespread exercise of individual leadership. Leadership in outsourcing organizations requires both the individual and organizational components. We observed great variation in what is outsourced but remarkable consistency in the emphasis placed on both the individual and organizational aspects of leadership for effective outsourcing.

Our interviews revealed that an effective organizational context for the exercise of individual leadership contains two key elements: executive backing and performance accounting. Both enhance the exercise of individual leadership to achieve the goals of out-sourcing. Without them, individual initiatives are more difficult; with them, those responsible for making the most from sourcing contracts are more likely to realize their goals.

Top management support for outsourcing is widespread, and most of the managers we interviewed affirmed that their sourcing efforts are surely doomed without it. More than 80 percent of the surveyed managers report that their top executives back the agenda, and, by contrast, only half viewed their middle-management ranks as supportive, and virtually all deemed hourly employees as opposed.

A nearly universal dictum in outsourcing management is: “Measure what you plan to source.” Leading a partnership also requires an unambiguous understanding of a shared path, so managers must be clear-minded about how they will judge the results. This translates into a clear-cut scorecard: Detailed metrics of performance with an agreed method for upgrading and evolving the metrics over time. In the words of a manager at one of the commercial banks, echoed by virtually every manager we interviewed: “If you can measure it, you can manage it. If you can manage it, it will get better.”

Measuring outsourcing performance often requires a restructuring, so that operating units can clearly quantify their own results. By pinpointing responsibility and accountability in business units and their subdivisions, companies provide managers with the tools required to know if and when they are meeting their performance criteria. Only then are the measures available for writing and monitoring outsourcing contracts.

At one of the computer manufacturers, internal accountability was demanded of four autonomous business units, each required by headquarters to meet tough performance objectives. The four units annually purchased several billion dollars’ worth of outside components and services, ranging from disk drives to travel tickets; they later jointly managed purchasing through a practice of shared services. They manage the outside relationships via ten teams whose members are drawn from the line managers of the four business units. Under the leadership of a top executive from one of the four business units, each team takes complete responsibility for arranging the sourcing deals and managing the vendor contracts. Several of the teams oversee contracts with providers exceeding $100 million annually, and some are managing aggregate annual outsourcing deals worth $300 million or more. To ensure that the business-unit heads drive the shared sourcing, the company gives them authority over team appointments and the annual performance review of team members.

The company has invested full responsibility and accountability in the teams and their directors for delivering the products and services that the business units demand. With well-developed metrics of performance, ranging from cost and quality to timeliness and responsiveness, team directors know when they are getting the results they require. So, too, do the business unit presidents, and, since they are footing the bill, this provides the foundation for their continued support.

Corroborating the importance of an organizational architecture that supports rather than undermines effective individual leadership, our survey of 423 company managers revealed that companies with higher rates of outsourcing — greater proportions of their annual expenditures allocated to outsourcing contracts — are also more likely to have adopted pay-for-performance plans and created profit-and-loss centers. More generally, the data revealed a cluster of company practices that foster a climate conducive to outsourcing and its leadership, namely, top executive commitment, incentive pay systems, leadership development programs, and profit-and-loss centers.

Implications for Outsourcing Leadership

For companies sourcing their services and products, the novel blend of requisite skills requires fresh ways of recruiting, grooming, and promoting. For institutions responsible for educating those who will lead the reconfigured activities — whether outsourcing, joint venturing, or work teaming — the new demands dictate new forms of management training as well.

Our interviews and survey results revealed four critical capabilities on which management recruitment, training, and promotion should focus. The study indicates that emphasis on these capabilities is widespread, and they are equally relevant whatever the company size or product sector. Two-thirds of participating managers reported that they would boost a manager’s compensation by at least 6 percent if he or she had the requisite skills, and one-third would increase the salary by at least 11 percent.

Outsourcing across a broad array of functions is a relatively new arena at many companies, and few managers boast résumés with more than a few years of experience in making deals or governing partnerships. Experience in leading cross-functional teams or overseeing joint ventures is useful background. However, companies with little “work teaming” or joint venturing may not find this collateral experience in their ranks. As a result, companies are both buying and cultivating these leadership skills. Three-fifths of the surveyed managers reported that their company recruits some managers for outsourcing deals from outside the company. And, in their view, the company must also invest far more in developing the missing skills during the years ahead (see Figure 4). Management development programs can be expensive, but if their annual cost runs less than 5 to 10 percent of a manager’s yearly compensation, the investment is likely to be worthwhile.

Mastery of lateral leadership is required for more than the growing world of outsourcing. Strategic alliances require persuading others to collaborate when consent is discretionary. Teamwork for developing products and focusing on customers also places a premium on working well with those you cannot command. Top-level managers — whether of a division or a company — need much the same skills to manage relations with major customers, primary investors, and regulatory agencies. Building the four individual capabilities identified in our study and the two organizational capacities (see Figure 5) is likely to facilitate not only outsourcing but also joint venturing, team building, and, more generally, executive-style leadership throughout a firm.4

The emergence of shared services units and strategic service divisions in many companies will further foster these leadership capabilities. In gathering a range of sourced services under a single administrative umbrella, companies are seeking to exploit the advantages of larger scale and lower price. In so doing, they are also creating a full-time professional staff whose work is almost entirely lateral. The director of shared services — increasingly a de facto “chief resource officer” for the firm — leads an operation that resides partly inside and partly outside the firm, with neither part under authoritative control. Those working in the operation will be among the first to master and then mentor others in the four main elements of lateral leadership.5

Although the four desirable managerial elements are bundled, specialists do emerge who are strong in one or two areas but not all. The strategic thinkers and deal makers, for instance, often delegate direct oversight of a contract to other managers, and the latter must be effective in governing relationships but not necessarily enabled in the other ways. Still, even those on the frontline of sourcing are expected to be capable of reasoning broadly, remaking deals, and promoting change when necessary. We noted that managers who place a substantial pay premium on one capability tend to place a high premium on all, and specialization in just one or another of lateral skills is unlikely to be sufficient in a world where complete leadership is more widely required and increasingly expected.

During the decade since outsourcing has spread from manufacturing components and information systems into a range of other areas, many best practices in contracting and managing these relationships have emerged from front-line experience and academic research. Among practices that transcend specific applications are:

  • Emphasis on preemptive bridging of cultural differences between the outsourcer and provider.
  • Active training of those at the forefront of the relationship.
  • Intensive exchange of information and expertise between the organizations.
  • Performance-based pricing and incentives using objective criteria.
  • Formation of relationship teams.

Managers with the ability to think and lead in a lateral fashion, according to the present study, are also an essential element if companies plan to successfully implement these and other best practices.6

Public agencies and nonprofit organizations will require similar capabilities as they follow the private sector’s trend toward outsourcing. Many of their practices are ripe for outside contracting: the U.S.

Department of Defense, for instance, writes 6 million pay checks per pay period at a cost of $12 per check; Automatic Data Processing issues 20 million pay checks per pay period for its contracted customers at a cost of $1 per check.7

Whether in the private or public sectors, lateral leadership should be seen as one facet of a more general “package” of leadership capabilities. A manager acquires the ascribed power of the position to hire, fire, instruct, and budget (see Figure 5). When moving beyond one’s vested authority, a person’s capacity to lead is tested. Can the manager think strategically? Is he or she able to catalyze a restructuring of the operation to ensure that it facilitates rather than undermines partnerships with outside organizations? We agree with John Gardner, Noel Tichy, Warren Bennis, and other writers on leadership, who extol such personal qualities as vision, integrity, and determination, as well as the ability to organizationally delegate responsibility and streamline processes.8 As outsourcing becomes more prevalent, distinctive individual and organizational capabilities conducive to lateral leadership are also likely to become a required part of the manager’s basic repertoire.



1. M.C. Lacity and R. Hirschheim, Information Systems Outsourcing: Myths, Metaphors and Realities (New York: Wiley, 1993);

M.C. Lacity, L.P. Willcocks, and D.F. Feeny, “The Value of Selective IT Sourcing,” Sloan Management Review, volume 37, Spring 1996, pp. 13–25;

C. Saunders, M. Gebelt, and Q. Hu, “Achieving Success In Information Systems Outsourcing,” California Management Review, volume 39, Winter 1997, pp. 63–79; also see:

R. Klepper and W. Jones, Outsourcing Information Technology, Systems, and Services (Englewood Cliffs, New Jersey: Prentice-Hall, 1997).

2. Lacity et al. (1996);

Saunders et al. (1997);

J.H. Dyer, “Specialized Supplier Networks as a Source of Competitive Advantage: Evidence from the Auto Industry,” Strategic Management Journal, volume 17, number 4, 1996a, pp. 271–291; and

J. H. Dyer, “How Chrysler Created an American Keiretsu,” Harvard Business Review, volume 74, July–August 1996b, pp. 42–56.

3. For more about the value of leadership skills for working across boundaries in joint ventures, see:

J.D. Lewis, Partnerships for Profit: Structuring and Managing Strategic Alliances (New York: Free Press, 1990);

J.D. Lewis, The Connected Corporation: How Leading Companies Win Through Customer-Supplier Alliances (New York: Free Press, 1995); and

M.Y. Yoshino and U.S. Rangan, Strategic Alliances: An Entrepreneurial Approach to Globalization (Boston: Harvard Business School Press, 1995).

4. F. Casale, The Rise of the Chief Resource Officer (New York: Outsourcing Institute, 1999); and

J.B. Quinn, J.J. Baruch, and K.A. Zien, Innovation Explosion: Using Intellect and Software to Revolutionize Growth Strategies (New York: Free Press, 1997).

5. M. Corbett, Best Practices in Managing the Outsourcing Relationship (Poughkeepsie, New York: Outsourcing Research Council, 1997);

J. Cross, “IT Outsourcing: British Petroleum’s Competitive Approach,” Harvard Business Review, volume 73, May–June 1995, pp. 94–102;

J.H. Dyer (1996b);

F.W. McFarlan and R.L. Nolan, “How to Manage an IT Outsourcing Alliance,” Sloan Management Review, volume 2, Winter 1995, pp. 9–23; and

J.B. Quinn and F.G. Hilmer, “Strategic Outsourcing,” Sloan Management Review, volume 4, Summer 1994, pp. 43–55.

6. S. Domberger, “Public Service Contracting: Does It Work? Australian Economic Review, third quarter, 1994, pp. 91–96;

R.D. Wertz, Privatization Survey Summary (Staunton, Virginia: National Association of College Auxiliary Services, 1997); and

R.D. Wertz, Outsourcing and Privatization of Campus Services (Staunton, Virginia: National Association of College Auxiliary Services, 1997).

7. J. Gardner, On Leadership (New York: Free Press, 1993);

N.M. Tichy, The Leadership Engine: How Winning Companies Build Leaders at Every Level (New York: Harper Business, 1997); and

W. Bennis, On Becoming a Leader (New York, Perseus, 1994).


The authors wish to thank Joseph Haberman, Constance Brohman, Martha Peak, Fred Steingraber, and Martha Watt of A.T. Kearney; the many client managers at A.T. Kearney and EDS who assisted in the project; Roxanne Jones-Toler and John Rutter of the Wharton School; and two anonymous reviewers. A.T. Kearney Executive Search sponsored the project on which this article is based; the Wharton School’s Center for Leadership and Change Management supported the project through its Leadership Council; and Michael F. Corbett & Associates contributed additional resources on behalf of the Outsourcing Research Council.

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