How to Do Away with the Dangers of Outsourcing

The recent collapse of the eight-story Rana Plaza garment factory in Bangladesh was a red alert for every company that has embraced the "virtual organization" model and the outsourcing that goes with it.

The lure of the model is obvious. Virtual corporations shrink the core activities they pursue internally, while relying heavily on outsourcing many of those activities to strategic partners. At the same time, they seek to increase the number and nature of product offerings, many of which are also offered by their partners. As a result, traditional corporate boundaries disappear. Staffing, risks, benefits, and regulatory compliance are all increasingly externalized, most often to parts of the world where need routinely trumps prudence.

Rather than manage their own corporate assets, CEOs and other top executives of such corporations are confronted with the seemingly easier challenge of managing relationships with "partners" or "associates." Yet as the Rana Plaza disaster and too many other examples show, every outsourced stop along the supply and production chains holds the potential for tainting the mother ship, exposing it to litigation and diminishing the quality and even viability of its offerings.

Outsourcing Has Its Costs

Just ask Boeing. No firm placed a bigger bet on the virtual organization model. Its new 787 Dreamliner was going to be the UN of manufactured goods: German-made cabin lighting, Swedish cargo doors, South Korean wing tips, and on and on—a coalition of associates that spanned the earth and in the end proved nearly as dysfunctional as the real United Nations often seems. Outsourcing woes cost the 787 an estimated three extra years of development, required Boeing to bring numerous suppliers inside the company, and culminated in a lithium-ion battery so deficient that the entire nascent fleet of 787s had to be grounded shortly after launch.

Boeing's scale was epic, but these problems are far from new. Nike, Foxconn, and a host of others have suffered similar public embarrassments. Such incidents, though, are rising in frequency and complexity as the virtual model spreads and takes root. Apple is in the extraordinarily uncomfortable position of suing one of its major suppliers, Samsung, for alleged patent infringement. And now, with Rana Plaza and its 1,100-plus dead, we have reached a high-water mark in the human cost of rampant outsourcing.

"Every outsourced stop along the supply and production chains holds the potential for tainting the mother ship”

What to do? Certainly, the newly announced plan by a coalition of clothing retailers, including many of the biggest names in the business, to fund fire- and building-safety improvements in Bangladesh is an important first step—and a vital recognition of responsibility, especially given the reluctance of so many garment-factory owners in Bangladesh to make necessary changes on their own. But this cannot be a one-time solution because we are not facing a one-time problem or a one-industry or one-nation crisis.

If firms are going to continue to operate in an outsourced world—and there's no inherent reason they should not—they need to find a more systematic way of thinking about when to move business beyond their own boundaries and when not to, and how to more carefully monitor (and when necessary ride herd on) the partners on whom their virtual model depends. And they need to drive this process deep into their supply and production chains.

One useful framework for accomplishing this can be found in a surprising place: the seminal work of psychologist Diana Baumrind on parenting styles.

Her research highlights four parenting "prototypes" oriented along two dimensions: the level of direction parents demonstrate to their children and the levels of warmth and support. Low levels along both dimensions result in what Baumrind calls "neglectful" parents. High levels of direction coupled with low levels of support produce "authoritarian" parents—what in an organizational context most closely resembles the old command-and-control structure—while high levels of support coupled with low direction lead to very lenient, "permissive" parents who demand little from their children and bestow too much freedom, analogous to the see-no-evil approach so prevalent with global outsourcing.

The Authoritative Solution

Baumrind's fourth prototype, "authoritative," offers organizations a valuable path between the traditional top-down, inside-the-tent corporate structure and unbridled license to suppliers to do as they want. Marked by high levels of direction and support, this approach offers children—and by extension corporate partners and associates—freedom within a well-defined structure.

The authoritative style is both demanding and responsive. It encourages in equal measure entrepreneurial action and healthy self-regulating behavior. Like authoritative parents, authoritative virtual corporations resist the temptation to micromanage relations with their associates. At the same time, they never leave responsibility for work conditions in the hands of their partners or cede decisions on quality control.

Implemented with care, this freedom within a framework sharpens and transforms value creation and innovation. It sets the rules that let outsourcing partners be more creative, efficient, and customer focused. It also enables faster response to shifts in the market—something especially important as innovation continues to flow globally, rapidly, and often from unknown sources.

Most important, this framework helps assure that virtual corporations will be anticipating crisis moments instead of responding to them. Stakeholders at either end of the spectrum, from seamstresses to stockholders, deserve no less.