THE SOCIAL ARCHITECTURE OF PARTNERING

Professor John Carlisle, Chairman of JCP International and JCP South Africa, and Chair of the Rhodes University J&J Leadership Development Institute Preface In 1997, the Merrill Lynch Forum published a well constructed paper by Michael Schrage of the MIT, called The Relationship Revolution: Understanding the Essence of the Digital Age. The author makes the case for the soft touch priority of John Naisbitts High Tech- Soft Touch aphorism. This too has been our experience of working with over 30,000 people in major project implementations world-wide, i.e. that, again and again, when implementations fail, the basic cause is a relationship failure. What does Michael Schrage say? We are not in the Information Age. The world of information may have been transformed completely by Digital Technology through speed and accessibility (for the First World); but the real significance is not in the data that are processed and stored. The biggest impact is in the relationship between people and organisations. Schrage calls this a relationship revolution, because the digital media forces us to ask: What kind of relationships create value? The common thinking on this question is always downstream, customer focused, i.e. CRM, KAM, and service augmentation such as air miles and the like. However, none of this is possible if the structure is not in place to deliver it, i.e. the upstream conditions, which comprise organisation of product, people, processes and, the glue which holds them altogether relationships. Value cannot be created at the user interface if it has not been implemented at every phase of the delivery chain; be that in projects, manufacturing or service industry. Thus, if you dig down into why Schrage contends that it is a relationship revolution then you will find that it is because, bottom line folk have finally discovered just how INTERDEPENDENT the world is. No, it is not the Information Age; but the Age of Interdependence, especially now that we are truly global. The question is, therefore, just how do you construct organisations that operate most effectively in this age? The paper will look at this very pragmatically, with emphasis on Outsourcing. 1. When is Outsourcing the answer, using maintenance as a specific example? 2. What is the relationship that is needed in productive outsourcing?

3. How is this social structure designed and constructed? Outsourcing: the Rationale and the Results Here I will quote extensively from a colleague who is an expert in this field, Mike Levery. The main reasons for seem to centre on whether the activity is core or non-core. This is a critical decision, and very often leads to the baby being thrown out with the bath water. First of all the activity is always viewed from a certain mindset that makes a judgement as to whether it is a cost, or adds value; whether it is a risk or not. If it is seen as a cost and not risky then why not outsource, is the conclusion? The classic here is the staff catering, followed by FM. The next is IT services, followed by, for example, financial services and engineering maintenance. The reason is usually given as cost effectiveness. In municipalities they have also outsourced (privatised) garbage collection and housing, again for cost reasons; quoted as better use of the tax payers money. Now, in all of these, especially maintenance outsourcing, the jury is still out. It simply is not proven economically that it always works. Railtrack is a classic. So, to quote Mike Levery, why do companies who already have the
necessary skills for maintaining their facilities look to the marketplace for potential outsourcing. In a world where productivity is king then the perception of the maintenance function is invariably that they are a cost and overhead, adding little value to the production or operational processes. Moreover, the perceived maintenance culture of engineers doing what they want to do without regard to production/operational needs, or involving other key stakeholders has proved difficult to break, creating the illusion that an external provider is bound to perform better than an in-house maintenance department. If only the maintenance problem could be outsourced then we can get on and deal with our core business is the cry of many organisations. There will always be quick wins through any outsourcing activity, but with the drive to establish procurement processes through contracting and benchmarking being inexorable, then the maintenance activities gets swallowed up in this whirlpool of efficiency and cost saving. Time and again organisations grasp the short-term benefit of outsourcing to find very quickly that asset performance and availability is reducing, failures are increasing and yet the supplier is meeting all his contractual obligations. But once the outsourcing decision is made there is invariably no going back. There will never be an admission that the outsourcing decision was flawed, so if things arent working out then it must be the fault of the supplier. The solution? Try to get the supplier to perform, and if this fails, re-tender and get the right supplier next time. Yet the reality is that nothing really changes.

In South Africa, in 2001 there were country-wide strikes against privatisation an extreme form of outsourcing for this very reason. The real questions have to be: If it is a cost, is it exceptionally high? If it does not add value, why not? (Remember that, until Schonberger, Abernathy, Hayes and Wheelwright, and then Womack and Jones with

their Lean Manufacturing came along, manufacturing was seen as only a cost.) There is a real Pygmalion effect here. If you perceive something or someone as a cost, and treat them as such, they will behave as such. It is a mindset again. What you think is what you get. Here are some classic reasons for outsourcing, adapted from Mike Leverys paper, Asset Based Performance Contracts (2001).
The following are typical of some of the reasons given by both client and supplier for looking to establish contractual arrangements for maintenance. Client Other organisations are outsourcing; therefore it must be right for me. Managing by contract is a mechanism for controlling the activity. The contractor will always respond to client requests, but maintenance departments dont. Outsourcing follows the 80:20 rule and usually 20% or less of operational costs should be treated as a supplied service!!!!! We can control and reduce cost through competitive tendering. Outsourcing can yield immediate financial benefits we can deal with the long-term later. With procurement specialists and tightly defined contracts we can make the supplier perform; the more we specify the more control we have. We can give the supplier our departmental budget and they will reduce the cost if the contract says they must. A maintenance supplier will provide cost effective solutions to failures because thats what we want.

Supplier Our overheads are always lower so the service will cost less if we provide it. This specialised service is best looked after by experts. We are better equipped to ensure people work productively. Our negotiated arrangements for spares supply mean we can effect repairs much more quickly. Discount deals with spares suppliers can be passed on to the client, saving considerable cost. We will supply information about every job we carry out. We have the range of skills and expertise to deal with any eventuality.

The Reality Asset performance is invariably the clients responsibility and therefore failures carry no risk to the supplier. Most outsource suppliers (maintenance contractors in particular) are financially risk free from the suppliers perspective because the financial risk sits with the client even where there is a budget reduction contract. In this situation the supplier will ensure that their company makes a reasonable return, meets their contractual obligations and hits the financial target and if this means doing the minimum, then thats what will happen. Contracts carry no quality or work effectiveness measures resulting in no incentive for the supplier to adopt a right first time approach. Contracts invariably require some form of policing to satisfy the client that the supplier is performing. Where preventative maintenance schedules are competitively bid on a fixed price, there is little incentive for the suppliers to execute the work effectively as their greatest return comes from responding to failures. Increased failures results in greater turnover and hence more profit for the supplier. The suppliers focus is on the contractual service measures and their own volumes and returns. He has little interest in overall performance.

Bottom line: be very sure exactly why you are outsourcing, and never, never outsource something just because it is a problem. Always ask how integral it really is to profit performance and customer perceptions. If you cant sort it out when it is inside the tent, you are highly unlikely to get it sorted by someone outside the tent!