Outsourcing is not new. This widespread practice nowadays was developed during last century in response to the problems and opportunities the companies were facing. However, outsourcing can still offer more of its potential.
The first steps
» In the first half of the 20th century, companies tended to grow and develop their competitive advantage through integration. They performed inhouse and under their direct control the maximum number of activities. Outsourcing was then off the management mainstream.
From the 1950s onwards, the leading trend was diversification and economies of scale. While this worked well until late 1960s as a profit protection technique, it resulted in gigantic and rigid corporations unable to properly compete at global level in the 1970s and the 1980s.
Outsourcing —assigning ancillary non-critical processes to external suppliers— started to be at that moment a common solution for that problem.
The principle behind outsourcing is as simple as powerful: one —company or individual— cannot be specialist in everything and, at the same time, keep agility, innovation and speed. Therefore, it is better to let specialists take care of parts of our processes.
Outsourcing allowed companies to focus on their key value-creation activities while letting specialized third parties taking care of the rest. The benefit was double fold:
1- on one hand, speed and quality could be evenly maintained throughout the whole value-creation chain
2- on the other hand, effectively running the outsourced functions did not require having specialized equipment, know-how and staff.
A new step towards the general use of outsourcing was taken in the 1990s. Its main driver was the need of cost savings. There was a qualitative jump in outsourcing at this moment: some companies started to include more important functions —even the core ones— within the outsourceable activities.
The positive experience of the previous decades made companies confident of the favourable cost/benefit ratio of outsourcing key activities when needed.
» The next stage in the outsourcing process typically aims at growth. By means of strategic alliances, not only core but strategic activities are assigned to the other party (which becomes a strategic partner rather than just a supplier). These alliances are long-term agreements and are often two-way, with each partner assigning a strategic activity or role to their counterpart. The strategic alliances end sometimes with a merger (back to square one?). This frequently cancels at some extent the advantages of outsourcing for the sake of synergies-seeking.
Today, outsourcing is widely used in all sectors and key functions. There are multiple examples of this trend: pharmaceutical companies outsource their R&D to maximize the returns and spread the risk; logistics are usually outsourced by all kind of companies; technological companies outsource their IT infrastructure to increase safety and reduce costs; most service companies outsource their customer service and contact centres, leaving in external hands the relationship with their customers! And so many other examples.
More and more companies trust in a well-organized outsourcing as a powerful and safe strategic instrument. Still, there is a strategic resource that is hardly outsourced today: Executive Talent.
Going further: harnessing the winds of change
Nowadays, one of the most common strategic challenges for companies is triggering, managing and adapting to change at all levels (organizational, structural, strategic, cultural…). The multiplicity and speed of technological and sociological change, the continuous irruption of crises of multiple sorts and the uprising competition from agile and dynamic start-ups, make absolutely necessary for companies of all sectors and sizes to swiftly adapt their functioning and organization to continuous change.
New technologies, artificial intelligence and digitalization are undoubtedly extremely important tools to face this challenge. The incorporation of new technical profiles at middle-management and lower organizational levels is also helping.
How do companies deal with the need of adaptation to change of their executive teams?
CEOs and Directors are expected to lead their companies at no matter what circumstances. However, they sometimes lack experience in some of the various situations that a corporation must handle or they cannot pay the necessary attention to all the open fronts at the same time.
For instance, the kind of experience or expertise that a top executive requires when the company needs to adapt to technological change is different from that needed when the strategy must be formulated or when excellence in execution is top priority; a commercially-oriented CEO will be ideal for driving organic growth but might not be acquainted with leading the company towards strategic business growth or when it is essential to fix the P&L in search of higher profits and the Balance Sheet to better manage the Working Capital; in turn, financially-oriented CEOs will struggle when boosting sales results is a must; and so many other examples.
In addition, when companies face a major strategic move, their available executive capacity is seldom enough to manage it together with the day-to-day business. Delegation of top executive tasks to less-senior managers down the organizational chart is not always viable or convenient.
The ultimate strategic alliance
A step forward in outsourcing could be the answer for helping companies and CEOs in this complex context: the ultimate strategic alliance is the Executive Talent Outsourcing.
Many big multinational corporations fulfil internally the need of specialized top executives, by moving a pool of them between functions, subsidiaries and countries as needed. This practice, if properly done, is effective while rather expensive. Unfortunately, it is not affordable for most companies and, even in the case of big companies, it is difficult to have the right profile available on the right time.
Instead, establishing a strategic alliance with seasoned executives, acquainted with the situation and needs of the company at any given moment, would provide corporations with a powerful tool to trigger, implement and accelerate change without jeopardizing the business continuation or undermining the management team position.
Executive Talent Outsourcing is not about replacing the existing executives with new ones, which is the traditional way of doing it and it has two main shortcomings: a) the loss of good talent that will be probably needed again in the future or in another function; b) the hiring of new permanent executives to respond to a temporary need, so not solving but just postponing the problem.
This new strategic move is not either equivalent to consulting services, as it implies actual executive action, decision-making, accountability and commitment to provide results, comparable to that of any management team member.
Moreover, by incorporating temporary executive talent, the value and satisfaction of the permanent executives will increase. On one hand, they will learn from the expertise of the temporary ones; on the other hand, they will have more time available for other priorities because the total executive capacity increases. In summary, once the temporary executives finish their assignment, the permanent executive team will have increased their professional value for their own benefit and the company’s.
Regarding risks concerns, as widely demonstrated in previous strategic outsourcing experiences, temporarily subcontracting the executive functions or part of them, if properly performed, is comparable to hiring permanent executives in terms of confidentiality, non-competition and ethical behaviour. A mission contract can be as strong —if not stronger— than a senior management contract to protect the company’s interests and assets.
The move towards Executive Talent Outsourcing is getting more and more adepts. It will probably be a widely extended practice in the years to come. The companies pioneering in understanding and taking this opportunity will benefit of a competitive advantage that might make the difference in the next decades.
JM Noriega 2024