Outsourcing’s Wrong and Right (Part 1)

As with most everything else in life there’s a right and a wrong.  It’s no different in outsourcing.   Unfortunately the  lines of demarcation can get a little blurry, as when doing what seems to be the right thing in the beginning fails miserably and then you win an award for it.

Let me explain. Armstrong World Industries, the manufacturer of flooring, ceilings, and cabinets, recently won the 2010 NASSTRAC Shipper of the Year award, after bringing its outsourced transportation functions back in-house.  The October issue of  Logistics Management magazine profiles their story in this article.  Armstrong outsourced its transportation business to a major 3PL in 2007.  The problem, the article explains is that Armstrong “quickly realized—in less than a year—that the new partnership was not going to pan out” because the arrangement was not meeting Armstrong’s cost and service goals. Marcus Smith, Armstrong’s manager of transportation procurement, was quoted in the article saying that it was pretty evident from the start that the arrangement wasn’t going to work. “The biggest flaw was that our 3PL took a one-size-fits-all approach.”

My take is that if they felt it necessary to bring it back in house they did something wrong from the get-go in the decision to outsource and then in setting the deal requirements. If they knew from the start it was not going to work, then why do it?  Did they not spend their time doing due diligence  to make sure they had the best partner to understand and fulfill their needs?   I wonder if they spend the time to any of the work we spell out in Step 2 of the Vested Outsourcing implementation framework – which is Understand the Business.

The article goes on to say that Armstrong really felt it could manage the transportation better than a 3PL.   Perhaps Armstrong should never have outsourced if it considered transportation a core competency.   And since they won the shipper of the year award,  Armstrong obviously is good at what it does.  My beef is if it had really understood it’s business and managing transportation was a core competency, it should not have outsourced in the first place!  If Armstrong had done its math correctly—remember that Ronald Coase says business basically is a math problem—Armstrong probably would have not outsourced.

So this was not even close to a vested relationship – the parties did not agree together on clearly defined and measurable outcomes (Rule 3), the focus was apparently on transactions and costs and not on outcomes (Rule 1).   I am almost certain to guess that the governance structure did not follow  (Rule 5) by creating a governance structure based on insight versus oversight  since the article mentioned that Armstrong kept four people to manage the 10 people that worked for the service provider.  (Note to providers – if your potential has those kind of ratios – RUN because you are almost certain to micromanaged by some junkyard dogs, aka Ailment 4.

The last thing that bugged me about this article was the opening sentence which started out  with “Sometimes it is better to control your own destiny.”   People reading this article will get the impression that it’s bad to outsource.  In a proper, vested outsourcing relationship there is no abdication of a company’s destiny to the service provider. It’s a mutual destiny they are working on collaboratively from the outset to achieve desired goals that profit everyone – leveraging each other’s core competencies to achieve success.

Maybe I am stupid – but rather than award Armstrong shipper of the year for rebounding for a totally failed outsource deal – I’d rather spread kudo’s for companies that seem to get it  right from the start.   We’ll look at that next time.

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