For those organizations with a small or youthful analytic staff or a complex project that you may want to repeat, Ozanne Customer Analytics Group offers special educational services. The objective of these special services is to teach your staff analytic techniques and best practices while providing immediate support for that important analysis on which you can afford NO MISTAKES. We provide the initial training to your staff on the techniques that are most useful in performing the analysis you need. Then, we continue to provide support and consultation to you and your staff as the project continues.

You gain the expertise to perform similar analysis in the future while securing the experience you want for the present.

You win twice – quality education for your people and consultative advice as well.

Quality and education never are cheap. But, you will find this approach a great bargain.

Creating an efficacious event without destroying a budget requires a great deal of knowledge and skill. A major international events’ business faced a difficult problem. Attendance at one of its most important events was declining: it was increasingly difficult to secure the “right” visitors (high impact opinion leaders), and, costs were soaring. Predictably, their partners were becoming more and more angry with the situation. Ozanne Analytics was employed to determine what might be done to help eliminate this problem.

Since this was an annual event, we were able to employ previous attendance information to provide the data required and develop a scorecard for each potential visitor. The ROX Predictive Scorecard employs sophisticated proprietary modeling to parsimoniously determine a score for each potential attendee designating the probability that each will attend the event.

The scorecard revealed two extremely important expectations:

1. A large percentage of previous visitors had a zero likelihood of attending the event.

2. Opinion leaders, those most important to the event’s perceived success in the eyes of the programs paying exhibitors, had very low likelihood of attending.

Ozanne Analytic personnel worked with the event sponsor to address these issues. In so doing, several approaches to improving efficacy and controlling costs were pursued.

Among these approaches:

1. No contact with those unlikely to attend – often they had either been accidental visitors, changed positions or industries, or were not interested.

2. For those virtually certain to attend, improve the efficacy through ongoing interest specific content.

3. For others, improve the efficacy for both the sponsor and the visitor through various types of contact based upon areas of interest and attendance likelihood.

4. For the opinion leaders whose importance was critical to the events success, personal high level contacts and a specific efficacious event within an event was planned and executed. As a result of these efforts, all but one of these high impact opinion leaders attended the event.

For an investment of $35,000, the event saved $0.5 million alone by not mailing to those who were virtually certain not to attend.

The efficacy of the contacts made with attendees prior to the event led to increased attendee satisfaction while exhibitors were elated with the attendance and discussion with the key opinion leaders. The “problem” is that expectations for future events – both competitive and sponsor – increased dramatically. Not a bad problem to have.

FORTUNE Custom Projects and D&B to Publish Outsourcing; Featuring Groundbreaking D&B Research

MURRAY HILL, N.J. – (BUSINESS WIRE) July 25, 1997 – The Custom Projects Division of FORTUNE magazine and Dun & Bradstreet, two of the business world’s best known publishers, will join forces for the first time to produce Outsourcing: Managing Strategic Partnerships for the Virtual Enterprise, appearing in the September 29, 1997 issue of FORTUNE. The announcement was made here today by P.J. Boatwright, Director of Marketing for FORTUNE and Michael R. Flock, president of Dun & Bradstreet Asia Pacific/ Canada/ Latin America.

With D&B providing the information, the special section will offer case studies and information on how leading-edge companies are using the outsourcing lessons learned” to build competitive advantage worldwide. This joint endeavor will also feature the premier of the D&B Barometer of Global Outsourcing, the first comprehensive measure of global outsourcing.

It is estimated that U.S. companies in 1996 spent between $60 and $100 billion on outsourcing, and that by 2001, the use of outsourcing will more than triple. On the crest of this breaking tidal wave, Outsourcing will also explore the following key topics:

- Outsourcing as today’s fastest growing business strategy – How to manage the new extended enterprise – Selecting the right outsourcing vendor – Which functions should be outsourced – Turning vendor relationships into mutually beneficial partnerships

The emphasis on reducing the size of manufacturing plants and the workforce has led to a virtual enterprise model in which only core competencies are retained in-house and the rest are turned over to outside experts,” said Dr. Marq Ozanne, vice president ” market research and planning for D&B, developer of the D&B Barometer of Global Outsourcing and adjunct professor of business at the University of Connecticut. In today’s increasingly competitive business environment, the winner-takes-all question is no longer ˜To outsource or not to outsource? It’s ˜What and how to outsource? Those that find the answers will be the management stars of today and tomorrow.

Dun & Bradstreet (D&B), a company of The Dun & Bradstreet Corporation (NYSE:DNB), is the world’s leading provider of business-to-business credit, marketing, and purchasing information, and receivable management services. The corporation, which also includes Moody’s Investors Service and Reuben H. Donnelly, is headquartered in Murray Hill, N.J. and employs 16,000 people in 7 countries. For more information about D&B, visit the D&B web site at http://www.dnb.com.

For information about advertising opportunities and text coverage in Outsourcing, contact Lisa Wood of FORTUNE at 505.820.7981 or e-mail her at lisa@fvg.com

Outsourcing: The Hidden Costs

by Garaventa, Eugene Tellefsen, Thomas
Review of Business

Outsourcing is growing in popularity as a means of cutting costs and increasing flexibility. However, it can also entail a variety of unforeseen consequences. These problems can include administrative costs, reduced employee morale, decreased employee performance, and ethical trade-offs. Managers must consider this full range of consequences to develop a more balanced perspective of the net effect of outsourcing.

Introduction

The 1990s witnessed numerous additions to the vocabulary of business. Two of the more important additions that transcend jargon and slang are the concept of the “virtual corporation” and one of its integral components “outsourcing.” The creation of these new dictionary entries represents a fundamental change in the workplace as we know it and a transformation of the American corporate structure.

At the core of this transformation is the advent of the virtual corporation. This new organizational structure is characterized as a legal-financial entity whose physical plant is scattered across the globe and whose people-parts are almost as interchangeable as chips in a motherboard. The ties that bind corporations to people and places are increasingly seen as tentative, temporary, and optional.

A critical element of the virtual corporation is the process of outsourcing, which can be defined as the contracting out of functions, tasks, or services by an organization for the purpose of reducing its process burden, acquiring a specialized technical expertise, or achieving expense reduction. A key aspect of outsourcing is the substitution of full-time workers with part-time, contract, and other contingent workers who receive few or no benefits. Although outsourcing has historically been a major element of the Japanese economy, the concept of workers not having extended or career-long employment with a single firm has until recently been an alien concept in America. Firms historically characterized as paternalistic are now actively seeking to employ temporary workers.

Although outsourcing did not become a significant and wide-spread aspect of the American business environment until the 1990s, it has been used since the early part of the century by manufactures seeking to realize cost savings. At one time limited to the production of component parts, outsourcing has expanded into areas that were assumed to be immune from the process. For example, a recently created firm specializes in leasing scientists to corporate clients. Its roster of employees includes 1,100 chemists, microbiologists, and laboratory technicians.

This expansion has fueled rapid growth of the entire outsourcing industry. A 1999 survey by the Dun and Bradstreet Corporation found that global outsourcing expenditures had nearly doubled in three years and were expected to reach $1 trillion by the end of 2000. The U.S. was the single largest market for outsourcing and was expected to have $340 billion in outsourcing sales by the end of 2000 [13].

Outsourcing has been lauded by numerous management scholars and practitioners, including Peter Drucker and Tom Peters, as the salvation of the manufacturing sector of the American economy. However, an unbounded advocacy often times does not measure all costs associated with outsourcing. Some costs are obvious, whereas other costs are “hidden” — more subtle an not easily observed or quantified. Hourly labor costs, costs per unit, and most other financial costs would fall into the first category but there are also inherent expenses that are not as overt. In addition to economic costs, an organization must be willing to accept the existence of administrative, human, and ethical costs as factors in their decision to outsource. Outsourcing is a complex, multi-faceted process, with implications and consequences that span department, division, and corporate boundaries. Consequently, it is essential that organizations contemplating outsourcing be aware of and include the “hidden costs” in their analysis prior to out sourcing.

Administrative Costs

At first glance, outsourcing appears to be a rather straightforward exchange of permanent, high wage employees with lower paid, temporary workers. Further analysis reveals that there exists a series of hidden administrative costs that may reduce, if not eliminate, the expected benefits associated with outsourcing.

Prior to entering into an outsourcing contract, several activities are required to insure the contract is awarded to the firm most compatible to the needs of the outsourcing corporation. These activities include: 1) conducting a detailed situational analysis; 2) preparing a Request for Proposals (RFP); 3) holding a pre-bid conference; 4) pre-qualification of bidders; and 5) bid evaluation and contract award.

Successful firms rarely embark upon a course of action without first conducting a detailed analysis of the potential consequences. A decision about outsourcing should be no exception, and the study should be more than a simple cost-benefit analysis. Although financial aspects are critical, there are many other considerations that should be factored into the decision matrix.

Preparation of the RFP is also an important step in the outsourcing process as it assures that all potential providers of services have the same understanding of the services desired. In addition, the document should also explain the purchaser’s goals and objectives for the proposed purchase. These specifications enumerate the details of the services required and the time frame in which they are required. The RFP will also serve as a standard to evaluate contractor performance. As a result of the critical nature of the RFP, it should be prepared by individuals having specialized expertise in this area.

A pre-bid conference is used to provide relevant information to prospective bidders and/or to interpret the RFP. It is especially useful if the solicitations are unique and/or complex. Care must be exercised to preserve the integrity of the bidding process and the equality of competition, with all potential bidders being informed of the date, time, place, and purpose of the conference.

In order to deter unqualified bidders, the purchaser has the legal right to pre-qualify bidders. The courts have held pre-qualification to be nondiscriminatory if it is reasonable, not arbitrary, and provides uniform treatment of all bidders. Pre-qualification is usually based on the selection of bidders who have demonstrated in the past their satisfactory performance and experience, have shown proof of financial responsibility, and have established that their resources (i.e. personnel, equipment, etc.) are adequate for the satisfactory performance of work [11]. Having restricted bids to qualified suppliers, the bid submission must be evaluated and the contract awarded. The contract should not be awarded exclusively on the basis of cost. Contractor references and reputation should also be considered.

Outsourcing does not eliminate the need to manage the function now performed by a contractor. Rather, it creates a situation requiring managers to utilize a different set of skills. Effective contract monitoring requires the creation of a reporting system that allows for tracking of performance and costs, and technically competent individuals are required to implement the system. Depending on the service/product outsourced, the contractor’s performance may also require on-site inspection. Prior to outsourcing, it is essential to conduct a skills inventory to determine the firm’s in-house ability to meaningfully manage the contract. The efficiency and effectiveness of outsourcing lies in the manner in which the contractors are managed.

At the conclusion of the contract it is necessary to evaluate the contractor’s performance. Although the extent of the performance appraisal system required will be a function of the complexity and magnitude of the contract, some measure of the effectiveness of the outsourced function must be undertaken. Contracts involving expensive and complex services may require evaluation mechanisms designed especially for that one contract.

In addition to the suggested procedural requirements, managers should also prepare contingency plans which address the inability or unwillingness of outsourcing firms to continue to provide the required level of service. Service interruptions may arise as a result of labor disputes, natural disasters, and bankruptcy. The importance of these plans is determined by the relative critical nature of the product or service outsourced, and the ability to either replace the contractor or to resume providing the service internally within a reasonable period of time.

Perhaps the most important caveat for firms contemplating outsourcing is that they give careful consideration to contracting out those “…carefully nurtured and guarded internal capabilities that provide the essential underpinnings of competitive advantage” [5]. For example, one staff scientist notes that while his firm is able to stretch its research budget with outsourcing, it also looses control over the knowledge gained through the outsourced activity [4]. Such concerns point toward an important distinction. While there may be limited risk in outsourcing peripheral functions such as payroll or maintenance, there may be a much greater potential for disaster when dealing with corporate core functions. Inherent to outsourcing is a reduction of internal control and an increased burden of coordination with external firms. Outsourcing can prove effective, but it must be realized that suppliers will act in their own self-interest, and interests may diverge with the passage of time.

Human Costs

The last decade and a half has witnessed a renewed acceptance of the principles of neoclassical economic thought, with Milton Friedman as its guru, and the mantra of profits as the ultimate arbiter of corporate decision making. A consequence of this revival is the rekindled perception of the worker, on the part of management, as an adjunct piece of machinery whose treatment is dictated by a series of cost/benefit analyses.

Regardless of the popularity of any economic philosophy, the “human side of enterprise” cannot be ignored. Today’s workers are significantly different from early-century employees who populated factories managed by the principles of scientific management as advocated by Frederick W. Taylor and his contemporaries. Today’s workers are better educated, better protected by society, and bring to the workplace greater demands and higher levels of expectations in terms of needs they expect to be satisfied and the rewards they expect to receive from their employers.

Organizations are formed and maintained on the basis of some mutuality of interest among their participants. Managers need employees to help them reach organizational objectives; people need organizations to help reach individual objectives. If mutuality is lacking, it makes no sense to try to assemble a group and develop cooperation because there is no common base on which to build [12]. Mutual interest provides a super-ordinate goal, one that can be attained only through the integrated efforts of individuals and their employers.

When employees join an organization, they make an unwritten psychological contract with it. This contract is an addition to the economic contract where time, talent, and energy are exchanged for wages, hours, and reasonable working conditions. The psychological contract defines the conditions of each employee’s psychological involvement (in terms of contributions and expectations). Employees agree to give a certain amount of loyalty, creativity, and extra effort, but in turn they expect more than economic rewards from the system. They seek job security, fair treatment (human dignity), rewarding relationships with coworkers, and organizational support in fulfilling their developmental expectations. These contracts help people organize and simplify their lives [2]. Recent research [17] indicates that workers suffering a breach of their psychological contract were not only likely to lower their organizational contributions, but that these violations were so significant that neither promotions or pay raises were able to counter their negative effect on employee performance.

Many managers might argue that employee expectations of job security are excessive and a primary cause of low quality, inefficient output by American workers. Consequently, outsourcing (and workers’ fear of it) is assumed by many organizations to be a panacea for their administrative and financial ills. The belief that more insecurity will raise the productivity of workers (regardless of their field) is at odds with a large body of evidence [8]. In fact, there are sound administrative reasons for creating a work environment that provides some degree of job security within a framework of employee trust and loyalty.

As a result of our economy shifting from manufacturing to service, there has been a fundamental change in the manner in which employees are managed. Most worker performance can no longer be measured in quantifiable terms, and consequently the role of managers has become more complicated. With the decreasing number of middle managers, supervision has become less direct. The inability to engage in direct supervision, coupled with the increased difficulty in appraising the performance of service industry workers virtually requires a worker-employee relationship predicated on mutual loyalty and trust. A major contributor to this relationship is job security and the elimination of the fear of being replaced by low bid temporary/ contract employees.

Organizations are complex social systems with dynamic environments, and all parts of the system are interdependent. The interdependence of the organization’s components creates a situation in which the effect of outsourcing cannot be confined to individuals directly impacted by the decision to outsource. Workers will look to their outsourced colleagues and wonder when it will happen to them. These perceptions will foster feelings of insecurity among remaining employees and have a psychological impact similar to that of being outsourced. They may feel diminished loyalty to the firm and offer little enthusiasm or special effort. In addition, they may fear that “they will be next” and seek collective protection through increased union activism [3]. Outsourcing has created such concerns in organizations as diverse as General Motors [9], Federal Express [1], and the U.S. Postal Service [6].

Ethical Costs

Having addressed the administrative and human consequences associated with outsourcing, it is also necessary to discuss potential ethical conflicts that may arise between organizations and their workers when outsourcing is implemented. Although it is difficult to enumerate and quantify ethical costs, that should not preclude their inclusion in discussions pertaining to the efficacy of outsourcing.

Outsourcing has been described as a betrayal of workers by top executives whose salaries on average are 150 times greater than that of average U.S. factory workers [7]. Outsourcing can be especially insidious when it is used as a weapon to exact wage concessions from employees. Not only is this reminiscent of unacceptable management practices of the late nineteenth and early twentieth centuries, but it ignores one of the causes of the perceived inefficiency poor management. American workers are neither inherently indolent nor inefficient. Rather, they are products of a managerial philosophy that for years found it expedient to accede to the demands of labor and pass on higher costs to the consumer. Writing in his autobiography, Lee lacocca [10] describes a management philosophy that prevailed in America’s manufacturing sector for many years: “As long as Detroit was making money it was easy for us to accept union demands and recoup them later in the form of price increases.” It is unethical to ask American wo rkers to bear this burden in terms of lower wages and the absence of health insurance in an era of astronomically high executive compensation packages.

In his now classic encyclical Rerum Novanm, Pope Leo XIII [15] identifies the worker who “…through necessity or fear or a worse evil, .. . accepts harder conditions because an employer or contractor will give him no better, he is the victim of force and injustice.” One hundred years later, Pope John Paul II [14] in another encyclical Laborem Exercens, defines work as a duty, but also a source of rights of the person. Specifically, “Just remuneration for the work of an adult who is responsible for a family means remuneration which will suffice for establishing and properly maintaining a family and for providing security for its future.” John Paul’s concept of just remuneration goes beyond wages. It includes the right to health care, medical assistance, rest (vacation), and insurance for old age.

The call for ethical treatment of workers is not limited to papal encyclicals. Society recognizes that organizations are not entitled to exercise absolute authority over workers’ behavior either on or off the job, and that workers are entitled to more than economic rewards. Included in these non-economic rewards are self-respect and dignity. John Rawls [16] states that perhaps the most important primary good is self-respect, and “without it nothing may seem worth doing, or if some things have value for us, we will lack the will to strive for them. All desire and activity becomes empty and vain, and we sink into apathy and cynicism.” A key aspect of self respect and dignity is the performance of meaningful work. Employment is far more than a measure of income, for many it is the essential measure of self-worth. Increasingly we tend to define ourselves based on what we do.

The standard argument for outsourcing is that firms must he flexible if they are to remain competitive in domestic and world markets. But flexibility should not be assumed to be synonymous with disposability. Outsourcing should be viewed as a last resort, rather than a “managerial quick fix.” Managers should consult with workers in an attempt to address those issues that are making outsourcing potentially attractive.

Although the profit motive is a cornerstone of our society, its pursuit should not justify an absence of commitment to employees. In its utilization of outsourcing, management should rethink the importance of employee loyalty and job security. History teaches us numerous negative lessons concerning the use of mercenary armies to attain and maintain political power. If America is to remain competitive in the world economy, it will not happen with the use of “mercenary” workers. American corporations need to renew their ethical commitment to their employees, and create a workplace characterized by mutual respect and loyalty.

Conclusion

The utilization of outsourcing continues to increase among organizations being pressured to reduce costs. A casual analysis may indicate a greater promise in outsourcing than actually exists. Seduced by apparent lower labor costs, many organizations fail to include all costs in their decision-making and are confronted by a situation in which projected savings are not realized. Not only do expected economies fail to materialize, but the possibility exists that costs may actually increase.

The discussion of the “hidden costs” associated with outsourcing is not an attempt to totally dismiss its utilization, but rather is a call for a realization that it is a complex administrative and social process and not a panacea for all management ills. Outsourcing has long been, and will continue to be a part of the American business environment. Its potential for success is a function of both the willingness and ability of managers to accept the premise that its successful application is situational – and a key component of the situational analysis is the consideration of its “hidden costs”.

References

(1.) Blackmon, D.A. “FedEx Intends to Outsource Despite Victory,” Wall Street Journal, Nov. 23, 1998, A3.
(2.) Braun, C. “Organizational Infidelity: How Violations of Trust Affect the Employee-Employer Relationship,” Academy of Management Executive, 11,1997, 94-95.
(3.) Byrne, JA “Has Outsourcing Gone Too Far?” Business Week, April 1,1996, 26-27.
(4.) Chapman, D. “Outsourcing: Hard Figures, Harsh Criticism,” Business Week, April 22, 1996, 12.
(5.) Chesbrough, H.W. and Dj. Teece. ‘When is Virtual Virtuous?” Harvard Business Review, 74 (January-February), 1996, 65-71.
(6.) Fonti, N. “At Postal Union, Priority Mail Outsourcing Is a Crucial Issue in Contract Negotiations,” Wall Street Journal, Nov. 25,1998, B11.
(7.) Gordon, D.M. Fat and Mean: The Corporate Squeeze of Working Americans and the Myth of Managerial Downsizing. New York, NY: Martin Kessler Books, 1996.
(8.) Greenwood, D. “Problems in the University? Eliminate Tenure They Say,” Academe, January-February, 1998, 9-10.
(9.) Heinz, M. “GM Canada, Union Talks Stall on Issue of Outsourcing,” Wall Street Journal, October 18,1999, Al8.
(10.) lacocca, L. lacocca: An Autobiography, Toronto: Bantam Books, 1984.
(11.) Marlin, J.T. and E.B. Berenyi, eds. Contracting Municipal Services: A Guide For Purchase From the Private Sector. New York, NY: Ronald Press, 1984.
(12.) Newstrom, J.W. and K. Davis. Organizational Behavior, 10th ed., New York, NY: The McGraw-Hill Companies, Inc. 1997.
(13.) Ozanne, M.R D&B Barometer of Global Outsourcing: The Millennium Outlook. New York, NY: The Dun and Bradstreet Corporation, 2000.
(14.) Pope John Paul II. “Laborem Exercens,” In The Papal Encyclicals 1958-1981, Vol. 5, C. Carlen, ed., Raleigh, NC: McGrath Publishing Company, 1981.
(15.) Pope Leo XIII. “Rerum Novarum,” In The Papal Encyclicals 1878-1903, Vol. 2, C. Carlen, ed., Raleigh, NC: McGrath Publishing Company, 1981.
(16.) Rawls, J. A Theory of Justice. Cambridge, MA: Harvard University Press. 1971.
(17.) Robinson, S.L. ‘Trust and Breach of the Psychological Contract,” Administrative Science Quarterly, 41, 1996, 574-599.