The Reality of Outsourcing – Nu Leadership Series

Men cease to interest us when we find their limitations. The sin is limitations. As soon as you once come up to a man’s limitations, it is all over with him.

Emerson

Why should a leader analyze if outsourcing core functions of his organization is a good thing? As we have discussed previously, organizations form socio-technical systems. In simple language, one action can influence other parts of the system. Hoffman, a leadership guru, argues that values determine the course that an organization takes. Handy, an organizational strategist, describes outsourcing and organizational structure as another kind of paradox.

Handy notes that businesses outsource their unproductive functions, thereby getting rid of surplus people. Clearly, organizational structure is impacted by corporate culture. Outsourcing creates an atmosphere where employees are merely physical beings. Employees distrust management. Managers are leery of staff. According to a USA Today poll, nearly half of those interviewed said that corporations can be trusted only a little, or not at all, when it involves looking out for the best interest of employees.

Clearly, companies shouldn’t be limited in their management options. Galbraith, author of Designing Organizations, argues that organizations compete with others in an era of temporary advantages. Cutting out parts of an organization’s function to meet short terms gains is a business mistake. On the contrary, Galbraith maintains that low-and medium-skill levels should be being eliminated by either automation or outsourcing. The primary reason for claim is that the costs of coordinating fragmented, interdependent tasks are too high in a rapidly changing environment. Organizations are increasingly moving to a market structure that allows them to response faster to market actions.

Authors Nadler and Tushman argue that a manager’s organization design should seek balance between organizational effectiveness through the work processes and corporate culture. This corporate culture relates to impacts on employees, group relationships, and political dynamics.

Gone are the days of traditional organizations, designed with pyramids of boxes. Today’s organizations follow the Doughnut Principle. The structure centers on a small organization with a small core of key personnel and a portfolio of support staff around that core. Utilizing the Doughnut Principle, the new organizational structure consists of a core team and its strategic partners; these strategic partners include traditional suppliers, independent professionals, and part-time workers.

Routinely, businesses put their material suppliers in their corporate doughnut. However, increasingly organizations are outsourcing critical business functions. Handy notes that short-term gains may result in long-term damage if a demoralized service fails to meet the organizational demands. Many advocate the doughnut structure because of its flexibility. However, companies that become too dependent on one supplier are placing their organizations at risk.

Furthermore, in order to maintain optimum balance, Nadler and Tushman maintain that managers should adapt in the following ways: (a) develop a rudimentary understanding organization design for an inherent competitive advantage and (b) recognize effective organizational design as ongoing. Therefore, 21st century businesses must carefully implement any strategies impacting their organizations in this hostile, global environment.

References:

Hackman, M. & Johnson, C. (2000). Leadership: A communication perspective. Long Grove, IL: Waveland Press.

Handy, C. (1997). The Age of Paradox. Boston, MA: Harvard Business School Press.

Galbraith, J. (2002). Designing Organizations. San Francisco, CA: Jossey-Bass.

Nadler, D. & Tushman, M. (1997). Competing by Design. New York: Oxford University Press.

© 2007 by Daryl D. Green