Outsourcing has its costs

Is There Still a Role for Judgment in Decision-Making?

07AUG 2013| by James Heskett l Harvard Business School

http://hbswk.hbs.edu/item/7322.html

Human judgment should be a part of all decisions, but play a dominant role in significantly fewer of them, according to many of Jim Heskett's readers. Is good old-fashioned intuition out of date? What do YOU think?

What is the Proper Role of Judgment in Decision-Making?

There is a seemingly universal (and currently popular) quest for rational processes—what Hamilton Carvalho terms "cognitive repairs"—to counter the foibles of human judgment. Nevertheless, the predominant opinion among respondents to this month's column is that judgment has a dominant role to play in some decisions while it is an element in all decisions. That assumes, of course, that we can arrive at some agreement about what the term means.

Seena Sharp equated judgment with intuition. As she said, "Intuition is far more valuable in decisions regarding people …" However, intuition lags reality. "Use it to consider if the new idea makes sense, but don't give it more weight than it deserves." B. Graham equated judgment with a "gut check." He put it this way: "Seems to me that a 'gut check' on big decisions is always prudent. I realize that is the sort of bias these authors warn about, but the application of their methods shouldn't reduce decision-making to a formula…"

Phil Clark had a more encompassing view of the term: "The discussion you opened is not contradictory to sound judgment. It only emphasizes it…. Judgment is an encapsulation of all those elements … data, facts, processes, etc… that go into decisions from which we have learned in the past." Joe Schmid said: "Our education and work environments are analysis rich and have become synthesis poor… Synthesis is what happens when, after absorbing a subject, there is a leap in thinking that one can't quite explain."

Zuff Deo explained the semantic difficulties this way: "We do use various faculties and when we can't figure out which one we are using we call it gut feel."

There were a number of views regarding the role of judgment. Wayne Brewer commented that "judgment is needed for creating a vision, decision tools are for optimizing a decision." Mark Andrew said, "Judgment can work well in 'high validity' situations—those that are encountered frequently and provide accurate feedback…. Most situations, especially in the business world, have poor validity, in which case intuition is a poor guide. Vance Kirklin appeared to disagree with this, saying that, "Transformative decisions … (strategic decisions that transform organizations…) require a level of intuition. Organizations that preclude intuition from their decision-making will … never be, or cease to be, transformative."

Others had a more expansive view of the role of judgment. As Donald Shaw put it, "Just because we have the technology to record terabytes and terabytes of data does (not) mean we have the tools to understand what it is saying. Judgment is still crucial…." Debra Bordignon put an interesting twist on the issue, saying, "Where systems, tools, and artificial intelligence reach their limits, human judgment IS the decision support tool."

Several were quite eloquent. Aim asked: "So, I need to make a proposal to my girlfriend. What should I use to make the correct decision? Intuition or regression analysis?" Paulina Czentor added: "And going one step further, let intelligent machines make judgment-free decisions. No flawed reasoning, no more human 'interference'… replacing hordes of managers. What will one do with those?" Yan Song reminded us that, "As long as there is still mystery and new discovery to be made in life, human judgment will remain indispensable."

Are we naturally biased on the question? What is the proper role of judgment in decision-making? What do you think?

ORIGINAL ARTICLE

In the last several years, a veritable tsunami of advice on how to make decisions has hit the Internet and what few shelves remain in our local bookstores. The advice is a distant relative of early ideas about decision theory in which we were advised to construct decision trees, mapping outcomes, attaching values to each one, and estimating probabilities that various combinations of outcomes might occur. Judgment entered into the construction of the resulting "decision trees," but the process itself was a way of injecting a certain amount of objectivity and analysis into the decision to be made.

In recent years, we have been advised to make certain decisions in a "blink" by Malcolm Gladwell, to "think twice" by Michael Mauboussin, and to think "fast and slow" by Daniel Kahneman. The replacement of customs and biases with data, "big" or "small," has been intended, at least in part, to drive out such things as tradition, habit, and even superstition in endeavors ranging from child rearing to professional sports. After all, wasn't the book and film, Moneyball, at least in part a glorification of the triumph of statistics and probabilities over intuition and managerial judgment in professional baseball?

Two recent books add to the genre of advice on decision-making. One advises us how to make better decisions. The other helps us ensure that we don't allow our decisions to get sidetracked (or sidetrack them ourselves).

In their book Decisive, the Heath brothers cite four major reasons—all linked to common human traits—why we make poor choices and how to avoid doing it. They are: (1) the "narrow framing" of problems that makes us miss options; (2) the "confirmation bias" that leads us to give undue credence to information confirming a decision while ignoring other information; (3) the injection of "short-term emotion" into the decision process; and (4) overconfidence that we naturally display about the future (something that may be peculiar to only certain of the world's cultures, by the way).

They advise us to do such things as: (1) widen our options by emphasizing the "and" over the "or" in formulating them; (2) reality-test assumptions by reviewing them with more objective associates or making small tests; (3) seek ways of attaining distance by looking at a decision through someone else's eyes or focusing on the long-term impact of the decision; and (4) prepare to be wrong by setting limits on outcomes (similar to a "stop loss" order in stock trading).

Harvard Business School's Francesca Gino cites findings from her own research studies and those of her colleagues in her book Sidetracked, to warn us of three types of forces that derail our decisions: forces coming from within, from our relationships, and from the outside. Among those that emanate from within are an inaccurate and often inflated view of ourselves that leads us to treat advice inappropriately at the wrong times, "infectious emotion," and a tendency to adopt an overly narrow focus. To cope with these she suggests ways of achieving greater self-awareness (mitigating our biases by soliciting expensive advice, which we are more likely to take seriously, for example), taking our emotional temperature (determining when our feelings regarding a decision "were triggered by an event unrelated to the decision at hand"), and "zooming out" for broader perspective (for example, by asking "What information am I missing?").

I didn't Google the texts of these books, but there is no mention of the word "judgment" in their tables of contents or indexes, and I don't recall the use of the word in the texts. In fact, if there is a sense that one gets from all of this work, it is that we are our own worst enemies when it comes to making and implementing good decisions. We need tools to correct the errors and biases of our own judgment. This is puzzling, because we are frequently reminded that the ability to exercise judgment is what sets humans apart from other forms of life. (Perhaps judgment is what leads us to adopt recommendations such as those of these authors.) Is there still a role for judgment in decision-making? What do you think?

A Pragmatic Alternative for Creating a Corporate Social Responsibility Strategy

28 MAY 2012| by Dina Gerdeman l Harvard Business School

http://hbswk.hbs.edu/item/6994.html

Many companies preach and practice corporate social responsibility, but their efforts often lack an overall strategy that dilutes their effectiveness. Professor "Kash" Rangan and colleagues offer a pragmatic solution.

Thousands of large, profitable companies have all the right intentions of giving back to society—and yet a sizable number of them have corporate social responsibility (CSR) programs that provide little benefit to either the community or the company.

"Of all the companies involved in CSR, the majority of them are not doing it effectively," says V. Kasturi "Kash" Rangan, the Malcolm P. McNair Professor of Marketing at Harvard Business School. "If you look at the Fortune 100 companies, you'll find at least half of them could do a much better job than they're doing."

The problem? They lack a cohesive CSR strategy, says Rangan, who recently cowrote the working paper Why Every Company Needs a CSR Strategy and How to Build It with HBS research associate Lisa A. Chase and Sohel Karim (HBS DBA '88), managing director of Socient Associates.

A social responsibility strategy should fulfill two goals: create a positive social impact, and enhance the company's brand, reputation, employee morale, and/or its bottom line, Rangan says. "But it does not have to be totally integrated into the core business strategy of the company as some people believe," he emphasizes.

The fact that such strategies often do not exist or are ineffective is frequently the result of how CSR efforts start. At many companies, these efforts may begin by executive mandate or somewhat organically, through the efforts of employees that then meander in various directions within different departments. For example, human resources might initiate a United Way gift program that involves a company match; operations might work on waste reduction; and marketing might collect an extra dime from employees' paychecks for breast cancer awareness.

"The biggest problem is that companies do CSR in fits and starts," Rangan says. "Programs are fragmented, and so they're not that effective in helping the community or the company."

And then the CEO wakes up one day and realizes that "we're doing $50 million worth of charity work, and we don't seem to be getting credit for any of it."

STARTING THE STRATEGY

The authors argue that every company should have a CSR strategy that unifies the diverse range of its philanthropic giving, supply chain, "cause" marketing, and system-level initiatives all under one umbrella.

However, they advise that companies should not force the disparate CSR programs into their business strategies. Instead, the goal should be to "bring discipline and structure to the many fragmented components. [The] components will in some cases support the core strategy and in many others may appear adjacent," with a potential to influence core assets, such as brand reputation or employee morale.

In the paper CSR initiatives are explored in three "theatres." Theatre 1 includes activities primarily motivated by charitable instincts, even though they may have potential business benefits. Theatre 2 represents activities intended to benefit the company's bottom line, as well as the environmental or social impacts of one or more of its value chain partners. Theatre 3 encompasses programs targeted at fundamentally changing the business's ecosystem. This transformation is intended to enhance the company's long-term business position, but frequently entails short-terms risks in order to create societal value.

"Our analysis suggests that most companies rarely coordinate among the three theatres, let alone recognize the contributions of each to societal well-being," write Rangan, Chase, and Karim.

Every company, large or small, should have a clear idea of why it is involved in CSR and the expected outcomes. They should know whether CSR benefits the brand, boosts the reputation of the business, affects customer retention, reduces waste, or provides a boost to employee morale, retention, or even productivity.

"You have to have a rationale and logic for why you're doing a particular program. Somebody should be able to articulate what the benefits are because if you can't, it may not be worth doing," he says. "You don't have to flaunt what you're doing. Not all companies may want to make a visible statement of their involvement. But every company should know what kind of impact CSR is having."

Rangan adds that it helps if CSR activities are headed by a person who has senior management rank. While executive management may not need to be directly involved in all CSR initiatives, it's important that at least one C-level executive champions the efforts, particularly to make sure the programs receive budgetary approval and continue through other business transitions.

Executives of smaller companies that do not have CSR programs can get started by first talking to employees, customers, and board members to discover issues they may feel passionate about, whether it's the environment, hunger relief, or the arts.

Once the company has a short list of ideas, senior management can decide which ones best fit the current and future business of the company. "It is hard work, but you can usually find opportunities that provide a connection between what a company can do for society, and how it will affect its business," Rangan says.

DOING IT RIGHT

Coca-Cola, for example, contributes $88 million annually to a variety of environmental, educational, and humanitarian organizations. Microsoft donates almost $300 million annually in software products to nongovernmental organizations around the world. There has to be an internal logic for how these efforts help the company, and it does not have to be always related to the bottom line.

Some companies have invested time and energy into their CSR programs only after getting burned by bad publicity. For example, Nike suffered from an onslaught of negative press and large-scale protests from those who claimed its contract employees were paid low wages and toiled away amid dangerous working conditions in overseas factories. So the company launched an initiative to reduce the negative environmental impact of its entire supply chain and established a code of conduct focused on compensating employees fairly and ensuring that they would not be exposed to a dangerous or unhealthy working environment.

Yet it shouldn't take a negative headline to move companies toward CSR. In fact, Rangan says, many owners and executives of large, successful corporations are driven by their conscience to give back.

"Successful entrepreneurs at some point in their life discover that they have made more money than they need, in the process of building their private enterprise," he says. "Maybe they didn't intend to make millions or even billions of dollars. So they start wondering what they can do to put it to good use. They want to be known for doing something for the community."

In fact, some executives have gone to great lengths to throw the company's entire business model behind CSR.

The late Ray Anderson, founder of the global carpet company Interface, said he had an "epiphany" about the environmental damage being done by Interface's material sourcing, production, and shipping systems, and felt driven by a moral obligation to remake every facet of the company's ecosystem. The initiative drastically changed how Interface manufactured, distributed, and sold its carpet--including the production of carpet not as entire floor units, but as modular tiles that could be replaced or repaired when worn. In addition to reducing greenhouse gas emissions by 92 percent and saving about $400 million per year through recycling, the company's sales increased by 65 percent and profits by 200 percent after the changes.

Companies such as Interface that promote the social or environmental value of their efforts can see a big payoff. Consumers have demonstrated willingness to reward such companies by paying 5 to 8 percent more for their products. "For the kind of CSR that Interface practices, it's important for the companies to connect with customers and let them know what they are doing for the environment," Rangan says.

PROFIT DOESN'T ALWAYS FOLLOW

Yet some companies make the mistake of drawing an overzealous connection between social responsibility and business goals, believing that being a good corporate citizen should always lead to increased profits.

"When companies try to find a profit linkage, that's a hard test on CSR," Rangan says. "It might not lead to that."

Instead, executives and shareholders should consider other benefits CSR can provide. For example, Bimbo Bakery not only uses biodegradable packaging, but also focuses much of its CSR efforts on treating its employees well. The company provides staffers with free education services to complete high school and supplementary medical care to cover gaps in government health plans. These efforts have created a loyal and committed workforce: a clear plus for the company.

In an ideal world, Rangan says, executives whose companies extract resources will feel an obligation to return the favor, whether it's a furniture company that plants trees to offset its extraction of lumber or a bottling plant that initiates a water conservation program to make up for the water it takes from the ground.

"If companies only analyze the resources they take, they should try to give a big portion back," says Rangan, who notes that companies may not always operate at a "net positive" to society or the environment, but they should at least strive to offset their negative impact on the world. "It may be a while before companies learn to leave a net positive behind. When that happens, we'll all live in a much more positive world."

Learning Curve: Making the Most of Outsourcing

10 APR 2013| by Paul Guttry l Harvard Business School

http://hbswk.hbs.edu/item/6892.html

Companies that view outsourcing as an easy way to offload commodity work are missing powerful improvements to be gained by working closely with service providers, says Professor Robert S. Huckman.

Companies that outsource merely to shuffle off commodity work to save costs might be missing important opportunities to work with vendors and significantly improve the final product.

"When it comes to the outsourcing of many complex professional services, the world is not as 'flat' as one might think," says Robert S. Huckman, the Albert J. Weatherhead III Professor of Business Administration at Harvard Business School. "In particular, when this type of work is outsourced it should not be viewed as a mere commodity."

Instead, he says, cultivating important person-to-person relationships with the vendor of outsourced services can improve the efficiency and perhaps the quality of services delivered—particularly in health care, where outsourcing is on the rise.

In research recently published in the journal Organization Science, Huckman and colleagues shine a light on how the outsourcing model fits the practice of teleradiology. The article, titled "Learning from Customers: Individual and Organizational Effects in Outsourced Radiological Services," was written by Huckman; Jonathan R. Clark (HBS PhDHP '10), Pennsylvania State University; and Bradley R. Staats (HBS MBA'02, DBA'09), University of North Carolina at Chapel Hill.

Teleradiology is the reading and interpretation of CT, MRI, X-ray, and other diagnostic images. Increasingly, medical institutions outsource this work to licensed experts located across town or around the world.

The research team found that the more an outsourced radiologist works with a particular hospital, the more efficient he or she becomes reading that hospital's scans. In addition, that efficiency is not immediately translatable to other customers.

THE OUTSOURCED RADIOLOGIST

Some parts of the teleradiology model closely resemble outsourcing in industries like electronics, business processes, or software development. The health-care customer—typically a hospital—sees the need for a service that is reasonably well defined, but it can't provide the service at an efficient scale. Service providers see an opportunity to consolidate this volume, achieving the scale required to provide the service efficiently for a wide range of customers.

Here's how it works in teleradiology in the United States. Radiologists at an outsourcing service provider log in either remotely from their homes or at a reading center. As new scans come in, they are randomly assigned to the radiologists, who must be licensed in the state and credentialed at the hospital where the scan was performed. The random assignment of scans to any accredited and available radiologist suggests that the teleradiology industry views its product as a commodity—that is, two qualified radiologists are expected to read the same image in the same way.

That situation provided the research team an opportunity to test three questions about outsourcing that had received little attention before: Does a radiologist increase productivity by focusing on one customer? Does the radiologist's range of experiences with other customers result in better results delivered to that particular customer? Do individual's benefit from others' customer experience; in other words, does the outsourcing organization itself become more productive as its individual employees march down the learning curve?

"Though the increased use of outsourcing has led to a rise in the number of customer-supplier interactions, the learning benefits of customer experience remain largely unexamined," the researchers write in the paper.

THE RESEARCH

The researchers studied data from OutsourceCo (a pseudonym), a major provider of outsourced teleradiology services in the United States, with more than 1,400 client sites, mainly hospitals and radiology group practices. The 97 radiologists in the study were all board certified and licensed to practice radiology in the United States.

The data set included 2.7 million scans read by the radiologists for 1,431 customers over a 30-month period. Nearly 85 percent of the scans were CT; roughly 10 percent were ultrasound; and X-ray, MRI, and nuclear medicine accounted for the remainder.

The scans were analyzed according to the reading radiologist, the customer (hospital or radiology group practice) it came from, the anatomical area depicted, and the length of time it took to read.

THE RESULTS

The results showed that experience between a radiologist and a customer paid off. A radiologist's experience reading scans from the same customer and involving the same anatomical area was found to produce the largest increase in efficiency, with an additional 1,000 cases of cumulative experience increasing a radiologist's subsequent weekly output by 7.4 percent.

Productivity is extremely important in this setting. Many scans are submitted by hospitals in emergency situations, so quicker analyses may lead to faster decision-making and better patient outcomes. The outsourcing firms, of course, also benefit by processing a greater number of scans.

The efficiency benefits of shorter read times did not appear to come at the expense of clinical quality; the rates of "discrepancies" reported by customers was low.

The researchers point to prior research to explain why. Repeated experience helps the service provider learn the customer's standard operating procedures, generally improves communication and coordination, and sets up the possibility of knowledge transfer between them.

The advancements accrued not just to individual radiologists, but to the outsourcing firm as well. Huckman explains what happens as an outsourcing firm gains experience with a customer. Let's say that the firm has 20 radiologists. Dr. A reads the first 200 scans from a particular hospital, developing considerable expertise and efficiency with that customer. Then she and Dr. B each read half of the next 200 scans from the same hospital. Both doctors have now developed individual expertise with the hospital—but so has the outsourced company as a whole. As other radiologists read more cases from the hospital, the difference made by the greater expertise of Dr. A declines.

As Huckman puts it, "Something gets baked into the firm's expertise that essentially substitutes for an individual radiologist having experience with that customer. If you're an outsourcing firm, that has implications for how you think about staffing a new client versus one with whom the firm has a longer history."

Huckman's future research will look at more instances of decentralization, including other types of telemedicine and specialized providers of niche services such as retail clinics, single-specialty hospitals, and disease management companies. The research, he says, reflects the traditional pendulum swing in health care between centralization and fragmentation of services. Some critics complain that health-care delivery is centralized in hospitals that are seen as too big and inefficient. In contrast, others find fault with an overly fragmented system that may result in significant coordination and quality problems.

Huckman says that his current findings speak to one of the key challenges posed by greater decentralization not only in health care but in other settings as well.

"Some services that we have thought of as commodities actually have subtle features that make them differentiated," he says. "Ultimately, the relationship between customers and the individual outsourced employees who work with them has an impact on the efficiency of the services provided."

How to Do Away with the Dangers of Outsourcing

06 JUN 2013| by Ranjay Gulati l Harvard Business School

http://hbswk.hbs.edu/item/7152.html

The collapse of the Rana Plaza garment factory in Bangladesh should be a warning to companies that embrace outsourcing, says Professor Ranjay Gulati.

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.

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.

Дата добавления: 2015-10-29