Modular Structuring International Outsourcing |
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| By: Robert II Smith | ||||
Modular structuring and international outsourcing--seems like everyone is doing it nowadays—and if you’re not, you’re missing out. Nevertheless, just how many of the attempts at modular structuring or international outsourcing have actually worked? Modular structuring and international outsourcing are fraught with negative outcomes and huge risks. Organizations can fail overnight. Yet, many organizations are still willing to take the leap. We hear of so many success stories, yet so little of the not so successful. For example, TopsyTail, Inc. a modular organization with only three full-time employees, made and sold a plastic hair care gadget invented by the founder. The company “outsourced tooling and injection molding of the gadget, package design, logo design, photography, printing, packaging and shipping, advertising, etc.” (as cited in Daft, 2001). After researching the product and the company on the Web, I could find little or no information regarding the company’s current status. Although unable to locate specifics, I did discover that a different company named Scunci is now selling the TopsyTail product (http://www.scunci.com/topsytail.aspx). With all the risks and potentials for disaster, why do organizations implement modular structuring or opt for outsourcing? How do the successful organizations do it? Looking at the benefits gained and outcomes achieved by organizations that have successfully transitioned to a modular structure or implemented a successful outsourcing relationship, is a place to start. Modular Structuring The popularity of modular structuring is growing. It’s main appeal: modularization gives organizations the flexibility to combine different components into systems that work best for them (Schilling & Steensma, 2001). 4th Infantry Division, U.S. Army Modular structuring has become so popular, in fact, that even the US Army has jumped on the modular structuring bandwagon. In December 2004, the 4th Infantry Division of the US Army officially became the Army’s newest modular division. Originally divisional-based with unique traditional legacy divisions in terms of design and capabilities (U.S. Dept. of Defense, 2005), the US Army has restructured these legacy divisions into Brigade Units of Action (BUAs) (Anonymous, 2005). The 4th Infantry now has four BUAs whose design is consistent throughout the Army (i.e., a heavy brigade in the 4th Infantry Division mirrors a heavy brigade in the 3rd Infantry (Garner, 2004). Each unit has a portion of all the division staff, and is identical in terms of personnel and equipment (Ziegler, 2005). Each module is an autonomous brigade, able to function on its own, yet able to sustain another brigade. If one brigade becomes inoperable, there is an identical one available to replace it (Garner, 2004; Ziegler, 2005). Here, the US Army’s form of modularization differs from contemporary forms in that instead of a central hub controlling a variety of service providers that perform different functions, the US Army has a central hub controlling services that are exact replicas of each other. Also, it is much more difficult and complex for traditional modular organizations to replace a service provider or partner that has failed, than it is for the US Army who can replace a failed or inoperable unit almost immediately. The restructuring enables the US Army to tailor their forces toward a more effective fighting force (Garner, 2004), (more command and control, and flexibility and mobility for the division commanders) and quicker mobilization of troops (aided in part, by upgraded software that improves the facilitation of communication, planning and coordination (Ziegler, 2005). The new modular units also enable the Army to produce more combat power through lower soldier turnover because the modularization provides more stability and predictability for soldiers and their families. Lower soldier turnover increases unit cohesion and effectiveness, which increases the unit's combat power (Garner, 2004). Benefits of Modular Structuring The example of the US Army illustrates some of the positive reasons organizations should choose modular structuring: increased flexibility, technology, effectiveness and response time. Not to mention, higher employee morale and better communication. Other reasons why an organization would choose a modular structure are that: it helps organizations exploit resources outside their margins (Baldwin & Clark, 1997) and to select the best supplier of a product at given time (Garud & Kumaraswamy, 1995). Organizations can use these benefits to support their product development (Sanchez & Mahoney, 1995), and execute effective market niche penetration, both of which result in greater effectiveness and a more defensible position (Schilling & Steensma, 2001). How Organizations create a Modular Structure Organizations with a range of inputs and demands, formalized standards, high levels of technological change and competitive intensity are best suited for modular structure. How modular their structure is depends on the balance of competing pressures created by the range of demands and inputs, and how well their integrated parts work together. Organizations can choose from a variety of ways to assemble their modular structure: contract manufacturing, alternative work arrangements, alliances, or outsourcing (Schilling & Steensma, 2001). Contract Manufacturing Contract manufacturing relationships, which are based on core competencies (Robb, 2003), can aid in global competitiveness when they are strong (Griffith & Harvey, 2001). Some electronics manufacturers, like Dell, HP and Cisco systems use contract manufacturing extensively by putting their name on products made by contract manufacturers such as Solectron, Flextronics and Arrow Electronics (Robb, 2003). Contract manufacturing also offers organizations greater scale flexibility by enabling them to meet the scale of current market demands without having to commit to long term capital investments or to an increase in their labors forces. However, too much dependence on contract manufacturing can force an organization to forego key learning opportunities and it can result in poor development of product efficiency because an organization is not investing in its own manufacturing. Additionally, contract manufacturing can result in a significant increase in costs. Not only must the contracting organizations agree to a carefully planned contract, but they must do everything they can to prevent a loss of proprietary technology (Schilling & Steensma, 2001). Alternative Work Arrangements Organizations facilitate alternative work arrangements by creating “loosely coupled components of the production system” through contract and temporary agency workers. These arrangements not only increase flexibility and rapidly alter scope and scale, but they also provide the opportunity for organizations to arrange their various components in a way that produces optimal results. However, alternative work arrangements can cause lower morale and higher turnovers because employees in this type of relationship usually do not develop the firm-specific knowledge and loyalty held by long-term employees. And just like contract manufacturing, alternative work arrangements can increase an organization’s risk of losing proprietary information (Schilling & Steensma, 2001). Alliances Alliances are a popular choice because they provide greater scope capability by giving organizations access to resources they lack in-house, and because they expand the number of ways in which an organization can control its resources. Alliances also enable organizations to share the risk of new ventures and to increase their flexibility. However, alliances can also produce limited levels of mutual commitment and strong competitive advantages because they increase the chances for opportunism and self-interest and the relationships through alliances created can lack the shared languages, routines and coordination so prevalent in integrated firms (Schilling & Steensma, 2001). Outsourcing Many organizations choose to outsource because they face a lack of available, skilled personnel or resources, timing and response issues, or financial concerns; they want or need to stay abreast of new technology; they want to counter the threat of obsolescence; or because they need to focus on their core processes (Engle, 2002; Bierce & Kenerson, n. d.). Outsourcing can help alleviate these problems and concerns because it can provide a strengthened focus on core processes, little or no capital investments, improved service to customers, cost reduction, and the controlled supply of many functions (i.e., information systems, accounting, distribution, customer services, etc.) (Johri & Cooper, 1998; Bierce & Kenerson, n. d.; Chipman, 1993). Additionally, outsourcing can free an organization to direct scarce capital where they hold the competitive advantage (Chipman, 1993), and to obtain predictable outcomes at lower cost than if they had done it themselves (Engle, 2002). Finally, outsourcing can mean a higher return on employed assets (skills upgrade, retention and access), a lower risk of obsolescence, less impact from market forces, and improved technology and responsiveness to change (Engle, 2002; Bierce & Kenerson, n. d.). The Aramark Corporation An “Outsourcing Giant” (Moon, 2003), who took advantage of these benefits, is the Aramark Corporation. Aramark is a “$6 billion contract management company with more than 150,000 employees worldwide that provides support and services to hundreds of companies in fields ranging from food to uniforms to child care” (Vogl, 1997). Early on, the privately held organization had good cash flows and reasonable profits for several years, but eventually projections began to flatten out. Aramark also had a very hierarchical culture that was transaction based and where profitability was a driving force (Hayes, 2004). In 1992, Al Vicere began working with Aramark as a consultant and change agent to give them some ideas on spurring growth through leadership development. This collaboration resulted in Aramark’s Executive Leadership Institute (ELI), which, through its design process, led Aramark to develop a broader perspective of their business. They not only began to develop a social network and to have much more hands-on interaction across the businesses, but they also looked for ways to branch out through extension opportunities and new markets) (Hayes, 2004). Aramark sees each of their partnerships as a “system-delivery vehicle,” and controls and programs them by separating each one into individual pieces, monitoring their outcomes as they go through each system. One of Aramark’s goals is to obtain an unlimited partnership with each of their customers, and they are very close to becoming a virtual organization (Vogl, 1997). In 2001, Aramark launched was some consider the most successful IPO of that year, doubled employment, and tripled revenues. In 2004, the Fortune 500 survey ranked it number one in its industry and Fortune named them as one of “America’s Most Admired Companies” (Hayes, 2004). Weakness of Outsourcing Aramark illustrates some of the benefits of outsourcing, but not all organizations have experienced the same. When organizations outsource, they must deal with the uncertainty of costs involved and the availability of outsourcing providers. Then they must face a possible loss of control within their company and their employees’ concerns regarding job security. Finally, most organizations stress over the possible difficulty reversing their decision at a later date and the biggest fear of all: the risk of failure (Engle, 2002). Take the case of EDS and WorldCom, Inc., for example. In October 1999, EDS and WorldCom, Inc. signed a reciprocal outsourcing deal in which EDS was to supply IT services to WorldCom and EDS was to act as a reseller for WorldCom (the sum of which was to exceed $12 billion over an eleven year period). July 2002, WorldCom filed for bankruptcy (the biggest in US history), and the EDS share price plummeted and they suffered a $210 million loss. Some might say the outsourcing deal wasn’t all that bad because, although EDS suffered a huge loss initially, what remains of their deal with WorldCom, Inc., generated approximately $160-175 million per quarter in 2002. However, in late 2002, EDS agreed to pay WorldCom $187 million (Bierce & Kenerson, n. d.). International Outsourcing When an organization turns over a responsibility for a function performed in more than one country (Peterson & Maw, Oct. 2002), there many issues with which organizations must deal. From understanding business and social cultures to navigating logistical infrastructures, to dealing with time zones (Bierce & Kenerson, n. d.), building and maintaining relationships can be very demanding, and cultural differences can result in misunderstandings, frustrations, and incorrect assumptions (Davey & Allgood, 2002). Other problems associated with international outsourcing are supply chain monitoring, maintaining control of partner relationships (Robb, 2003), politics, legal issues (labor laws, intellectual property, data privacy, compliance), international taxation, dispute resolution processes, financial systems and currencies (Bierce & Kenerson, n. d.). In 2004, international outsourcing played a huge role in the US presidential election campaigns. Although both sides were divided on the issue, Democrats and Republicans alike reacted furiously when the head of President George W. Bush’s Council of Economic Advisers, N. Gregory Mankiw stated “’that outsourcing is just a new way of doing trade’ which makes it ‘a good thing.’” Democrats accused the Bush Administration of wanting to take more American jobs overseas, and even Speaker of the House Dennis Hastert commented “outsourcing can be a problem for American workers and the American economy (Drezner, 2004). And it’s not only manufacturing workers the politicians are talking about; for the first time, white collar workers must now also face the pressure global competition. This is due the conversion of nontradable sectors into tradable ones, as facilitated by technological innovations. As mentioned above, white-collar workers are reluctant to accept that they are now subject to global competition. In addition, the Internet has only made it easier for this group of unhappy workers and “those who blame outsourcing for their troubles” to organize politically (Drezner, 2004). Conclusion Modular structuring and international outsourcing have dynamically changed the way organizations do business. They have opened doors for many organizations that would otherwise be left floundering to face a lack of resources, financial concerns, poor response time, and a myriad of other dilemmas. Modular structuring and international outsourcing have crossed international and cultural borders, and led to the development of new technologies. Even organizations that do not opt for either route, can reap these rewards. In the introduction of my research paper I questioned why an organization would choose to adopt a modular structure or outsource its non-core activities considering the risks and potential for disaster associated with doing so. The answer: the potential rewards available if done. Modular structuring and international outsourcing are not for every company facing some of the issues mentioned in this paper, but for those organizations that carefully plan their transitions, navigate through a host of potential problems, and be able to maintain their newfound relationships once established, it can be. |
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