Bonneville Power Administration, a quasi-commercial arm of the U.S. Department of Energy, generates, transmits and sells electric power in the Western United States. Several years ago, it eliminated all 37 of its quality positions. Quality engineering was then parceled out to design engineers, and the other quality work was outsourced. Our firm won the bid to do the work.
During a two-week period last fall, we received three unsolicited requests to provide outsourced quality services. Our conclusion? Quality outsourcing is increasing and will have a profound and lasting effect on the quality profession during the next few years.
In this article, we’ll explore the following questions:
What is today’s business model?
Why are companies outsourcing?
Why are companies outsourcing quality?
What quality functions are being outsourced?
What can you do to stay employable?
Concluding the discussion in each section, “take-away” summaries will help you ask the right questions to manage your quality career.
Companies now face severe competitive pressures. Senior managers also face more uncertainty and risk. In response, they’re adopting new business models based on core and noncore processes. For most companies, today’s business model is simple: Core processes are retained, and noncore processes are outsourced.
Almost 10 years ago, Charles Handy coined the expression “corporate fitness” in his book, Beyond Certainty: The Changing Worlds of Organizations (Harvard Business School Press, 1996). Handy, probably one of the smartest workplace gurus around, believed that the future workplace would be characterized by half as many core employees on the payroll, who would be paid twice as much and produce three times the current quota.
Well, he was close. The number of core employees is often much less than half, they’re paid about the same while doing more work, and they often produce more than three times as much as they used to because of offshore outsourcing.
Look at what Sara Lee Corp. is doing. Like many of today’s companies, it plans to sell its noncore factories. The organization will focus on its core strengths—specifically, developing new products, managing its brands and increasing market share. Sara Lee will outsource commodity manufacturing and other noncore activities and retain only its “highly proprietary” processes. In other words, it plans to focus on what it does best.
Take-away:Do you know your company’s business model? We’d estimate that less than 5 percent do. If you don’t know your company’s business model, you don’t know what’s important to your company.
Handy was prescient. Today, most companies are organized around three concentric rings.
Inner ring: The organizational core, this ring is composed of corporate managers and professionals. They might be highly trained engineering and sales professionals. They determine the organization’s intellectual property and core process competencies that distinguish it from the competition. They’re the glue that holds the organization together and increases its market share. The inner ring has been shrinking due to outsourcing. Employees once considered part of this inner core may find themselves on the outside. The critical question for quality professionals is, “Are you core or noncore?”
Middle ring: Project workers inhabit the middle ring. These people are contractors or temporary workers. They sell marketable, transferable skills, knowledge and abilities to the highest bidder. We’re seeing more quality professionals move into this middle ring as itinerant professionals.
Outer ring: This ring is composed of largely interchangeable workers. These employees often are less skilled service workers. They’re considered much like commodities and can be easily outsourced. As a quality professional, you don’t want to be in this outer ring.
Take-away:Are you in your company’s inner, middle or outer ring? Your position indicates your probability of being outsourced. It also forces you to ask, “Do I want to be in the inner ring, or would I rather be in the middle ring?”
Every company we know is asking the critical question, “What’s core and what’s noncore?” Similarly, it might be the most critical question of your quality organization and your career.
The outsourcing arithmetic for quality is simple. If a quality function adds value, the function is retained; otherwise, it’s outsourced. Companies may outsource selected parts or the entire quality function. The decision to outsource is based on whether the outsourcing provider can do similar work at a lower cost, or whether senior management wants additional quality skills that its present quality professionals don’t have. Often, the value to an organization from outsourcing quality isn’t from lowering costs but from providing access to new quality capabilities.
Most Fortune 2000 companies are going through this analysis. From our recent experience, the first areas to be outsourced are help desks, information technology support, training, human resource support and similar services. However, many companies are also outsourcing quality.
Is outsourcing happening in the federal or state governments? Most definitely. In the federal government, outsourcing is driven by the President’s Management Agenda. Most federal agencies must pass the Office of Management and Budget’s A-76 Analysis, which determines if the government function is “inherently governmental.”
Take-away: What value does your quality organization add to the company? The answer to this question must be transparent, easily understood and demonstrable to your company’s decision makers.
Members of the inner ring don’t want to admit or provide early signals that they’re discussing outsourcing and ultimately plan to reduce their workforce. When word gets out, it’s bad for publicity and the company’s stock price.
However, here are some early warning signs of impending outsourcing:
Financials may be very good or very bad. This is counterintuitive. If your company’s financials are very good, executive management wants to sustain the gains and satisfy investors’ high expectations. Conversely, if your company’s financials are very bad, management wants to improve them. In both cases, the solution is to reduce expenses through outsourcing.
Executive management has retained a management advisory firm. Outsourcing companies come in several flavors. Our firm, Lean SCM LLC, is a boutique, supply-management company. Others, such as BCG, McKinsey, PRTM and Bain, may recommend outsourcing as a part of their portfolio of solutions. The Final Four accounting firms (Ernst & Young, Pricewaterhouse Coopers, KPMG and Deloitte & Touche) and their spinoff consulting arms provide strategy, supply management and even outsourced back-office processes.
Quality isn’t brought to core-level discussions. Outsourcing or “make or buy” decisions are made at the core level, which includes the chief executive officer, chief financial officer, chief operating officer and other senior executives. Ten or even five years ago, most companies had a core-level quality executive called the chief quality officer. However, when quality isn’t brought to these top-level discussions, the message is that it’s a commodity and therefore can be outsourced.
Strategy, processes, people and technology are obsessively reviewed. Managers often secretively examine every element of the company to determine core and noncore capabilities. They also evaluate critical supplier capabilities.
Take-away: As the outsourcing mania increases, patterns of activities are emerging, such as those discussed above. Is there a chance the quality function in your organization will be outsourced?
After the decision to outsource noncore processes is made, the harder decisions are considered. As we noted previously, a critical question is, “Is quality core?” If it isn’t, then what quality-related functions can be outsourced—all, or just some of them?
We’ve uncovered several truths about outsourcing quality:
Existing senior quality management is retained to oversee outsourced quality and contract management. Even as outsourcing quality increases, suppliers must still be managed. A core group of senior managers from manufacturing, engineering, quality and purchasing will form the core team to manage critical suppliers.
Quality assurance in regulated and high-value product sectors is retained. As part of their compliance activities, regulated industries tend to retain highly specialized and technical quality assurance staffs. High-value product companies also keep quality assurance staffs due to the nature of their products. However, quality assurance will shift from traditional quality to risk management.
Quality engineering in regulated and high-value product sectors is retained. Quality engineering is gaining in importance, especially in regulated and high-value product sectors. Core process and product knowledge is a value differentiator and therefore must be retained.
Standardized quality processes and practices can be outsourced. Any quality practice or process where controls
aren’t critical and/or that can be replicated easily has a high probability of being outsourced.
Service quality in most industries can be outsourced. Unfortunately, service quality sometimes isn’t perceived as a value contributor or value differentiator. This is counterintuitive because most quality professionals assume that customer-
facing activities are valuable and generate revenue. That’s true, but help desks and other activities can be standardized and outsourced.
Quality control in many industries can be outsourced. As more noncore and manufacturing activities are outsourced, quality control at the source is emphasized even while internal quality control is outsourced.
Internal quality auditing can be outsourced, and ISO 9001 is an adjunct of commodity, noncore processes. Certainly ISO 9001 is a valuable quality management system. However, executive management perceives it as a ticket that must be punched and might not add core or strategic value. Thus, many activities focused around ISO 9001 are being outsourced.
While you can probably identify exceptions to these rules, we have observed many occurrences of the above.
Take-away: As outsourcing increases, the above patterns emerge. What are the chances your job will be outsourced, and how should you position yourself in response?
Employability is your bottom line. In today’s market, the following tips will enhance your value as a quality professional.
There are three critical steps to maintaining employability: knowing the market, identifying your personal competencies and communicating your value-added characteristics. Let’s examine these a little closer.
Know what the market wants. Quality isn’t disappearing. However, it is evolving and therefore requires new skills such as risk, contract and supply management.
Identify your personal core competencies, what sets you apart from others in your field and your value-added characteristics. These three elements are related. Much like a company, you have personal core competencies. Monster.com categorizes these as action-oriented, interpersonal and intellectual. These competencies differentiate you from other quality professionals and represent your value-added characteristics in the marketplace.
Communicate your value-added characteristics. If your boss or customer doesn’t know your core competencies, personal differentiators or value-added characteristics, then they’re worth nothing. You may as well consider yourself outsource material.
Take-away: Can you address the above three bullets and provide specific personal solutions?
A company doesn’t make outsourcing decisions quickly. There’s “due diligence” to ensure that the move is feasible and pencils out financially. The decision might take more than a year to take shape. During this time, there are a number of things you can do to demonstrate your value to your present employer as well as the outsourcing company.
Let’s start with the moment you suspect that quality might be outsourced. First, talk to your boss to see if quality is on the outsourcing shortlist. If you suspect it is, then determine if your job can be outsourced. Do you offer the company demonstrable value?
At this point, we’ve observed that people generally react to the news in two ways. Many long-term quality professionals are shocked and then angry that quality and, ultimately, their livelihoods might be outsourced. These folks are in denial and reactive. They don’t understand today’s work rules and haven’t adapted themselves professionally.
Then there’s the responsive reaction. People who respond in this manner don’t like the fact that quality is being outsourced, but they understand the new economic realities and position themselves accordingly.
Talk to your quality peers, talk with your boss and then talk with a labor attorney to explore your options. Once you’ve done that, you should have a clearer understanding of the who, when, where, how and why of outsourcing your position. You can then approach your present employer as well as the outsourcer to discuss how you can facilitate the transition.
Once the outsourcing decision has been made, your company has new critical requirements to manage suppliers, manage the contract, monitor and/or improve supplier products or services, correct deficiencies and ensure a seamless transfer of quality responsibilities.
The following tips can help you position yourself with your company during the transition:
Your company has institutional and core quality knowledge it wants to share with its suppliers. You have the requisite quality and technical knowledge.
Your company wants a seamless transfer of services to suppliers. You have knowledge of the customer’s business model, processes, programs and products to ensure that seamless integration.
Your company wants to select, manage, monitor and improve its suppliers. You have the knowledge, skills and abilities to do this.
After outsourcing, your company has new knowledge requirements for managing supplier quality. You can demonstrate to management your ability to manage supplier risks, monitor contract compliance and improve supplier performance.
Your company has increased engineering, quality, purchasing and logistical requirements. You can be part of the multidisciplinary team to manage the supplier base.
Your company will outsource technology, processes, services and products to offshore suppliers. You can provide your company with quality assurance services.
Take-away: What are you doing to make yourself indispensable to executive management during the transition?
Many quality professionals think that there are no employment opportunities with outsourcing firms. This isn’t so.
First, understand the requirements of the outsourcing organization. Most want to ensure seamless transitions. The best way to do this is to pick the best employees from the previous quality organization. We’ll ask the company, “Which employees were considered indispensable and why?” Then, we’ll make a resource gap analysis between what the customer wants in quality services and what we must do to satisfy them. Often, we need and will hire existing employees.
We’ll approach quality professionals with a transition offer. But we also prefer to have quality professionals approach us with ideas—on how to ensure a flawless transition, for example, or how to satisfy the customer, or how to ensure sufficient margins and obtain additional outsourcing business from the customer.
Being proactive tells us many things about prospective employees. It reveals that they want to be part of the transition solution. It tells us they want to work with our organization. It tells us they’re self-selecting, self-managing and entrepreneurial.
Take-away: Have you considered working with the outsourcing company? Why does it need you?
What’s in it for you to join the outsourcer, you wonder?
You ensure continued employability and the seamless transfer of benefits.
You continue working with the same great people as before.
You’re given increased responsibilities and authority.
You might make more money; however, bonuses are based on performance.
You quickly develop additional value-adding and transferable skills that can be used with other assignments or as a freelance quality consultant.
You can double up on your retirement benefits.
Outsourcing is a trend that will increase during the next few years; pretending it isn’t happening won’t make it go away. Even quality departments are falling outside the charmed circle of companies’ core competencies as quality outsourcing agencies offer the same (and often enhanced) skills that companies formerly retained in-house. As a quality professional, you must accept the inevitable, discern the direction your company is heading and adapt your skills to the new business model.
About the author
Greg Hutchins is the principal engineer with Quality Plus Engineering LLC and Lean SCM LLC (www.qualityplusengineering.com and 800-COMPETE). Hutchins is the author of a number of bestselling books on supply management, quality management, value-added auditing, ISO 9001 and work management. If you want more information on how to improve your quality and technical employability, visit www.workingit.com. If you want more information on risk management, go to www.valueaddedauditing.com.