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To transform your company – think small!

Once upon a time, an East African corporation of substance had precisely that: plenty of physical substance. A major company would own, amongst other things: a resplendent corporate headquarters, complete with flags, statues and fountains; huge manufacturing or assembly plants; conference and training centres; vast fleets of vehicles; clinics and medical centres; kitchens and restaurants; and even sports pavilions and pitches. To maintain these facilities, the company would run armies of cleaners, guards, caretakers, mechanics, messengers, nurses and attendants.

That was the era of ‘insourcing’ – when the size of a company’s assets and its workforce were reflective of its success and stature in the market, and when most, if not all, activities were kept in-house, under a very expansive corporate umbrella. That, of course, was then. Today companies are judged on return on assets and capital invested, and on revenue per employee. All the denominators in those ratios must therefore be kept to the bare minimum. Today’s companies are ‘asset-lite’ and ’employee-lite’: they ‘stick to the knitting’ and outsource everything else.

If you visit any of the region’s leading companies today, you are likely to find only a minimalist company HQ and a lean production facility, staffed by as few employees as possible who use cutting-edge technology to aid them in their work processes. You will also notice something else: that the company still has cleaners, guards and messengers around – it just doesn’t employ them. That work is given out to specialist firms: couriers, security providers, caterers, fleet managers and cleaning and sanitation experts. This situation suits everyone – the company sheds staff and assets and gets access to people who do the job better; the service providers enjoy booming demand and can employ the best people in their area of expertise.

The idea is sound: that a company focuses on its ‘core competencies’ – the skills and capabilities where it enjoys competitive leadership and provides unique value to its customers – and outsources every other activity. In this way, the theory goes, a company can build a business model around what it does best. It is allowed to focus its financial and managerial resources on very specific, mission-critical activities. It reduces costs by passing out work to other firms. Those firms in turn build competencies around what they are good at doing. Everyone wins.

But outsourcing today is going even further. Nike is the world’s largest supplier of athletic shoes, but it doesn’t actually make any shoes – that work is farmed out to manufacturers and assemblers around the world. Nike focuses its activities on research and development, and on marketing and distribution. Coca-Cola, the world’s best-known brand throughout the last century, is essentially a marketing company – other people own most of the physical bottling plants. Or take that gadget in your pocket, the ubiquitous mobile phone: no matter what brand you carry, the chances are it is made by one of only two contract manufacturers in the world.

What exactly is part of the ‘sacred core’ of a company these days? Manufacturing? No, contract manufacturers are all the rage. Distribution? No, fulfilment specialists and logistics firms can distribute anything you want. Customer service? Call centres operated by third parties and wired up to your customer data can take that off your hands – and they don’t even have to be in the same country to do it. Payroll and other regular payments? Just talk to your bank. Managing your human-resource systems? That’s being farmed out en masse in the West.

Outsourcing has gone far beyond cleaning and guarding, to areas once thought to be at the very heart of a company, like research, design, logistics and even financial planning. And it will go further still. For East African business leaders, this is a wind that’s building out at sea, and it’s heading your way. Today, we may only have critical mass in the supply of a few activities: delivery, security etc. Outsourcing is a no-brainer in those areas. We have yet to see the emergence of local data processors, process managers and call-centre operators. I believe that in the next 1 to 3 years, those types of service providers will be flocking around your business.

So be prepared to consider a fundamental question that will induce much soul-searching and introspection: what exactly is your core business, and why? How much will you farm out, and what will you retain within? Where exactly are the boundaries of your company?

Outsourcing can, of course, go horribly wrong. There are lessons to learn from those who have been there before and found themselves face-down in the mud. One critical lesson: what is core today, can be non-core tomorrow, and back to core the day after. Take airport security. Up to 8 September 2001, that would be a non-core activity handled by outside firms. From September 9, it reverted to being a core activity provided by the government of every affected nation, for obvious reasons. So it pays to be flexible and open-minded as you embark on the outsourcing journey – there may be many twists and u-turns ahead.

Equally, many companies have found that they spend all their time micro-managing myriad suppliers, negotiating deals and struggling to maintain quality standards. Many will tell you that once an activity leaves your four walls, control goes with it and you expose yourself to unacceptable risks in terms of unfulfilled orders, angry customers and time lost.

The best advice is to look beyond mere cost cutting and choose your new service providers as long-term partners. Cheapest is rarely best in the outsourcing game, and a standard bidding or tendering process is unlikely to yield the right results. As outsourcing comes ever closer to your strategic core, it requires more and more attention at CEO level. In short, not something to leave to the accountants. You are likely to need to experiment and get things wrong before you get them right. And as with most things, reputation, credibility and track record are the things to look out for in a service provider.

When done well, outsourcing can be an integral part of a strategic transformation. By the early 1990s, IBM was a limping giant, a company whose strategic ground had shifted beneath its feet. Outsourcing became a critical part of its turnaround. It spun off what was once considered hallowed ground in IBM: its hardware and components manufacturing. Its core was redefined to be e-business services and technology solutions – not supply of computer boxes, where it had long ceded competitive leadership. Its entire supply chain was reconstructed, and its acquisitions thereafter all supported its new ‘services and solutions’ focus. It is today in effect a different company, whose return on invested capital moved from -5.7 per cent in 1993 to over 15 per cent by 2000.

As strategic outsourcing looms large on the East African corporate horizon, we should also bear in mind that there is further gold to be had. If call centres and data-processing firms take off here the way they have in India and the Philippines, they could help alleviate a major social headache. Unemployment in our countries is essentially an urban phenomenon, involving relatively well-schooled, English-speaking youngsters with a low skills and experience base. That is precisely the employee segment most attractive to many outsourcing companies. If the outsourcing sector can throw up a few world-class local firms that cater for pan-African companies and beyond, they may do what endless government promises never can – provide meaningful urban employment.

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