This whole automotive situation is a microcosm of the broader issues facing the crumbling Western economies in this crisis market, and these issues require significant surgery to our very corporate DNA. And outsourcing and globalization are right at the heart of the issues.
Outsourcing provides an enabler for businesses to change, but ultimately we have to be put in a position where we have to change our corporate DNA and stop clinging to the inefficient ways of the past. That time is now upon us and we need to embrace new ways of working, and new ways of doing this smarter. And if it's fear that is driving us, some short-term panic, some short-term hardship, is a small price to pay to find new avenues of growth and value-creation further down the road.
And that doesn't mean businesses should go out and find outsourcing providers to save them a few dollars today, for the sake of making a quarterly target.
Once you take out some short-term cost, that cost is gone. You saved some money, but what are you left with? Where are the next avenues for further optimizing your business? Once companies move into a multi-year outsourcing engagement they are locked in with their service partner for the long-haul. Hence, selecting that provider which can help you achieve value across all four of these vehicles has never been as important as it is today:
Vehicles for change:
1. People: How can you ensure you have people who are creating value for your business, work with pride and energy, and are always looking at ways to improve their performance?
2. Processes: How can you constantly be finding new ways of achieving business outcomes more profitably?
3. Technology: How can you access all the data-points you need to understand how to drive better performance and constantly refine your business processes?
4. Global Sourcing: How are you embracing talent, process acumen and technology from third-parties, shared service centers, captives and partners around the world to produce cheaper, better products and services than those of your competitors?
And this change in our corporate culture isn't something that comes from the top-down – it comes from the bottom-up. An individual business can create its own culture, its own ways of creating products and delivering services by driving these four vehicles more effectively. If you don't want to work for that business, that's your choice, but the successful workers of the future will find companies that get the best out of them. Bailing out Detroit won't change these automotive businesses, unless the automotive leaders truly want to embrace changing their very DNA and use the vehicles at their disposal to make them more profitable, more innovative and more nimble than their competitors.
Posted in : Business Process Outsourcing (BPO), Captives and Shared Services Strategies, HR Strategy, IT Outsourcing / IT Services, Procurement and Supply Chain, Sourcing Best Practises
I will wholeheartedly agree that the domestic auto industry needs to change. From watching the televised hearings it is obvious that the leaders of the industry just don’t get it, and neither do the Autoworkers.
Except for assembly almost all production is outsourced, and much of it is offshore.
The change needed is that the automakers need to reduce the number of models, make them more efficient and attractive and frankly price competitive. They need to invest more in developing and implementing fuel technology. In short they need to join the 21st century.
Oh yeah they can probably get rid of their private jets, limo’s and other perks, so at least it looks like they have empathy for the rest of us.
When we’ve outsourced all the jobs, who’s going to have the money to buy any of these products? Outsourcing is only good for corporate bottom lines, not for the economic future of America. America needs a solid manufaturing base at home supporting American workers who can then turn around and buy products.
The fix for today’s problems is in workers AND executives lowering their earnings and bonuses so prices can come down and consumers can afford the products.
The fix is making innovative products with turn-on-a-dime development that can react to market conditions instead of being stuck with products no one wants. GM, Ford, and Chrysler are stuck in an early-20th-century development mentality trying to compete in the 21st century, and it doesn’t work.
Finally, the fix is in getting legacy costs out of the price of the product, but not in removing the legacy commitments workers and companies contracted – that would be unethical. But outsourcing isn’t solving any of America’s economic ills and it won’t solve Detroit’s.
One should take note of Boeing aircraft. Many of the components and sub assembly parts are produced overseas and arrive in the US for final assembly. The Boeing 787 for example was designed in Moscow, Russia and in Madrid, Spain.
I foresee a similar set up for GM, Ford and Chrysler
Done right, outsourcing can provide a powerful advantage. And it can create more jobs than if kept in-house. And it doesn’t have to be an all-or-nothing proposition. Outsource at the component or process level, where it provides cost/quality advantages.
That said. NO. OUTSOURCING WON’T SOLVE THEIR CURRENT PROBLEMS. That would be like asking if outsourcing the manufacturing of polyester leisure suits would save a company like Nordstrom. Wrong product!
And under the product problem, lies the cost problem. That’s one I don’t think they can get out of.
The American automotive industry can’t save itself through outsourcing because the problem it has is more fundamental than that.
Over decades, the industry hasn’t set aside funds necessary to cover the outlays it has committed for future retirement benefits. Not accounting for those liabilities as they accumulated, meant costs were artificially low and they could sell cars at prices based on the artificially low costs. That was good for short term competitiveness, but those unaccounted for costs had to be paid someday.
Now it’s someday and the ponzi-like practice has collapsed. If the companies couldn’t sell their cars at somewhat higher prices 5, 10, 20 years ago and set aside funds to pay future employee retirement benefits, what made them think they’d be able to sell cars now, when the accumulated liabilities have grown so large and the payments have to be made?
No matter what the industry does operationally now to become more cost competitive, it can’t undo the problem they’ve ponzi’ed themselves into, without a bailout or some form of trade protection.
Anything they can do operationally, their competitors can also do operationally to be cost competitive. But the competitors haven’t accumulated the huge extra burden of of paying now for past commitments to employees, and can therefore be far more price competitive, or profit competitive, or both.
Good day Phil,
Taking a different approach, Henry Ford said it best, “Whether you think that you can or you can’t, you are usually right.”
If Detroit embodied even one of his quotes; how much better off would the entire (US) Auto Industry be?
Moreover, if Japanese firms (who embraced Deming when GM essentially dismissed him outright) can successfully establish themselves in the US and not face the issues of their American counterparts – outsourcing is not the only answer for/to Detroit’s woes.
John S. Rajeski
I agree that it is about changing their DNA, or “What does it mean to work at Ford?”. Being in the organizational change business, and taking part in driving this cultural change, I can honestly say that I do see it happening.
What people need to understand is that this is a change in the fundamental way we do business. It is about doing what is right for the long term for the enterprise as a whole. And you can see Ford making this shift. For example, we went to the credit markets before the credit crisis to fund a PRODUCT transformation – mortgaging basically even the Ford blue oval. We knew that we needed to invest in our product future, and we have maintained that course. At the LA Auto Show, we have introduced 5+ new products, all leaders in fuel-efficiency and technology that build on platforms that already are gaining parity with the Quality leaders in every segment. Other OEMs have withdrawn or drastically reduced their planned vehicle launches.
In the past, it was all about short-term cost and profit. This is why the domestics AND foreign automakers focused on trucks and SUVs. Don’t forget that both Toyota and Honda were and are making pushes into the truck and SUV markets. Past crisis brought cost-cutting on products, marketing, etc, relying on the profits of trucks and SUVs to see us through. We would “change plans” often, trying to convince ourselves that the next one would be a silver bullet.
Now, however, Ford is investing in the future at a time when future investment also means tough decisions in the short-term, such as layoffs and debt on the balance sheet. But we are maintaining the course laid out in our business plan, and started to see the results with a profit in the 1st quarter of the year before the current economic crisis hit. Are we through transforming? Far from it. But I have seen change gaining momentum in key senior leadership and am starting to see it gain even more traction at lower levels.
This is why strategies such as outsourcing only have their place at Ford now where it makes long-term strategic sense. Impact on emerging markets? Availability of skills and value-add of the work? We are looking at all these, but short-term cost cannot be the only objective – it must be balanced with the long-term competitive strategy.
Phil, I agree with the mandate but I am afraid the vehicles are just yesterday’s tools, and may prove insufficient for the type of “DNA” change we need. The consulting company I started my career with has been preaching essentially the same four levers since the early 90s, at least.
I think we need to look towards new management techniques that are more collaborative, enabled by 2.0 type of technologies, and absolutely global. Outsourcing, in several forms, is a part of managing a global workforce, but it is just one technique to begin to move away from the basic model of the corporation followed by 99% of today’s companies (ironically, it was created by Alfred Sloan, a GM CEO–maybe the next one could come from the same place?). And I promise you that if we continue to write the types of contracts we’ve written, outsourcing will be a barrier, instead of an enabler, for the change you speak of. For a truly new way to run a wildly successful company, I recommend any of Ricardo Semler’s books.
I ranted about a bailout plan I could actually support on my blog–it begins to deconstruct the basic structures that led to this mess. But let’s also not forget that part of what’s happening here is a LONG suspension of common sense, in which workers, companies, and the US government all spent more than they made, all at the same time–the endgame was clear, it was just a matter of when. Without a shift to more responsible behavior across all three of those groups, we’ll continue to select short-term band-aids over reasonable long term solutions.
Esteban and folks –
Some great comments here. I agree that outsourcing itself is not the solution, just a “vehicle” to help these firms access lower cost talent, better technology and better access into global markets etc. (point 4 above).
Moreover, most of the major auto firms have already entered into a lot of broad ITO and BPO engagements.
And if the governement does some sort of interim “bailout” solution, they should hire management talent from Toyota / Nissan / Hyundai etc to bring new practises and culture to these archaic firms.
Changing the DNA was the solution earlier and is the solution now! The world has changed from the days when Fords and GMs ruled the auto world. There was a lesson to be learnt from the Japanese auto-industry AND now is a bigger lesson to be learnt from all the globalized industries in general.
The major problem (disguised as a fortune) with the US auto-industry was its heavy reliance of its revenue-base from within the US. With the market so HUGE back home, and every American loving BIG cars, it made sense why US auto firms never felt the strong urge for a paradigmatic shift (DNA change) earlier of penetrating enough other markets and catering to their needs with a more multi-domestic strategy. (Count how many countries in the world drive Japanese and Korean cars… and how many of them drive American cars… the count will tell the tale)
I believe the priority has to be on strategies far more important than outsourcing. Instead of looking outside the US for Labor(alone), they could’ve been (still can be) better off concentrating on the global market for revenue-base. The stubborn and almost arrogant attitude of US auto-makers of not giving due concern to the market needs of less-developed countries (of smaller more fuel efficient vehicles) is what has caused them the current turmoil. The hike in the fuel prices only added to the burdens when the Americans also couldn’t afford to keep their large vehicles fueled up.
Getting nimble, agile, smart and more globalized (not necessarily through outsourcing) but by establishing good local marketing and distribtuion functions in their international operations is the key.
We’re about to learn a new lesson! Globalization is not about finding skilled hands working throughout the world (wherever they can be found cheapest), BUT Globalization now is more about finding GREAT MINDS globally (wherever they can be found greatest!) and tapping their potential to find and create new markets by creating competitive advantages one after the other in a never ending sequence.
The above is true not just for the US auto-industry but almost every US industry (maybe with an exception of healthcare and a limited few others)
Three interesting points come out in the comments:
1. Product innovation is key and Detroit missed this. Ford seems to have started doing this.
2. Short-term focus contributed to the current crisis. This is well understood in the financial sector and does not come as a surprise in the manufacturing sector.
3. If the US really wants to get manufacturing jobs back from China, pay cuts are required to go down to Chinese levels!
The last one is interesting but seems retrograde. This is clearly questioning the fundamental tenets of globalization. This goes beyond outsourcing.
What is true globalization?
Manufacture in the US and sell in Asia at prices that Asia can pay, i.e. US to become net exporter? Then US workers need to take paycuts to compete with Asians?
Localize the manufacturing in each region and sell at prices that each region can pay? That would work but would need protectionist import barriers!
Manufacture in low-cost regions and sell all over the world? This is what the US is doing right now with China. This means a complete loss of all manufacturing jobs in the US. Unlikely Obama will continue with this.
I am no expert in globaliztion but the “localized manufacturing” seems to be the way to go?
The answer to Detroit’s woes isn’t outsourcing. Outsourcing can help a company grow, but it is only effective when it represents a strategic choice. Many companies have outsourced their IT departments because they correctly realized that they are not IT companies. Giving IT work to a company that specializes in IT allows a company to focus precious talent and resources on whatever the main business priorities are.
Automobile companies are manufacturing companies. Outsourcing manufacturing will never work because it is core to what they do. Toyota realized this a long time ago and has spent most of its energy getting employees to do more with less. There is a huge difference between what a Toyota employee does on the manufacturing line and what happens at GM. I’ll spare you a list of the differences, but please take a look at this HBR article if you want to know more: “Learning to Lead at Toyota – May 2004.” And the irony is that Toyota doesn’t even try to make this a secret. The Big 3 will never be able to make cars to the quality standards achieved at Toyota because they will never have the same level of trust between labor and management.
What Detroit needs to do is raise the bar for their employees and managers across the board. They will also be helped when the US government picks up more of the tab for retirement and health care (a huge advantage enjoyed by both Japan (paid through taxes) and China (no benefits).
Maybe the Big 3 should reorganize as non-profit companies. They certainly act like big charities so lets make it official.
The last time the auto industry was in trouble it was because a foreign company with a captive private market and government funding had access to our markets and excluded us from their markets. When we gave them a level playing field they creamed the competition.
Lets give our guys a level playing field for two years and then throw stones.
I would like to see the following steps taken
– Give our guys access to the markets in China and India that are
currently protected by steep tariffs- no howls of indignation from globalists about India and China using tariffs?
– Enforce private property rights. Stop the China and India “Clone” cars and make them pay penalties for breaking international laws and making the global economy a catch-as-catch can game of corporate espianage.
– Let the renminbi float against the dollar. Our financial institutions have been protecting their investment by artificially inflating the dollar. If the dollar was allowed to float it would erode the advantages of foreign manufacturing ( and destroy the long term investments of those who bet against American competitiveness)
– Enforce international environmental and labor standards equally.
I would also like to take issue that outsourcing is an enabler of change.
During the 70’s and 80’s the only area of production that did not double in productivity was food processing. Because an ample supply of cheap (and mostly illegal) labor companies did not have the same incentives to innovate and froze research.
In a similar way outsourcing has stopped innovation in management and manufacturing in its tracks. Outsourcing can best be used by the big guys like Microsoft and Cisco who can build universities in India and negotiate with the leaders of the country. Outsourcing may well have kept these guys alive at the expense of smaller more nimble and innovative companies.
Outsourcing did not enable corporations to become more nimble it enabled fossilized corporations to outlive their economic usefulness.
This has been an interesting discussion and one close to my heart. I have worked on consulting projects for one of the major US auto manufacturer for over two years. Based on my experience there I think that outsourcing itself would not be the panacea, but coupled with a change in focus from the cost side of the equation to better product development that leads to higher profit margins it could help energize their performance. Detroit completely missed the hybrid bandwagon and has been playing catch-up to Toyota; also the original USP of offering ‘muscle cars’ does not hold ground either, with BMW and the other European firms eating their lunch.
I think that their recovery will be a two step process:
1. Detroit needs to do some introspection and figure out what they want to offer to the customers in different parts of the world.
2. Next they need to innovate at a faster pace and at a competitive cost to bring appropriate products to market. This is where outsourcing could come into the picture. Indian vendors have been investing in product development a d manufacturing services and in some cases have been very innovative in deal structuring (I.e. Profit sharing instead of fixed cost deals). This could be an excellent way for the Detroit biggies to be nimble while they build products that are better targeted to their audiences.
The days of building unappealing products and thrusting them into the market via 0% financing are over.
Phil: the US Government knows what the real question is and they are terrified of the consequence of it being asked in a way that puts the Government into the position where it has to act.
The facts are the US Government does not wish to provide citizens with a platform of social services, which the Governments of most other Western and many Eastern countries provide.
So GM and the other US automobile companies have to continue to shoulder the burden of health and other social services that the Government is uniquely positioned to provide.
Social services are always far more efficiently delivered by Government than by private industry and the costs for these services do need to be paid by taxes on businesses and individuals.
I will probably be criticized for making these suggestions, however the sad facts are that so many people in the US can not afford basic care, when similar people in other countries only need to ask for the service and it is provided.
The other big problem for the auto companies is all the dealerships around the country, those businesses are inefficient and apparently the auto manufacturers need to pay the proprietors to close their doors, which is incredible, why does any manufacturer need to pay for a retailer to close their business, especially when the manufacturers business model has changed so much?
Then there is the salary creep relating to the years and years of hard nosed negotiations by the UAW who have the power to close the auto manufacturers by withdrawing their labor. Those salaries need to come down to a competitive level, otherwise the Chinese and Indian auto workers are going to eat the lunch of the US auto workers and there will be no more US manufacturers.
If the social security obligations were removed from the auto companies and the dealer network was rationalized at no cost to the auto companies, and salaries were market competitive, then I actually believe they would have a very good opportunity to return to profit.
Robert Chautard Jensen
I would say that the biggest problem US automakers face is the internal trade barriers they set up for themselves but not allowing brands that could make a difference, and which they own, not be imported into the US (eg. Opel, Saab, Volvo, etc…).
The trade unions in this industry have effectively stifled all possibility of the big three ever competing effectively with overseas manufacturers. Its amusing to hear that there are still people who believe that trade barriers are the reason for GM, Ford and Chrysler not becoming successful on a global scale.
In fact, GM is one of the largest car brands in China, but with product lines that cater to the Chinese market. The gas guzzling behemoths that Detroit regularly churn out will be uncompetitive in any country other than the US and the cost of making 1 car in the US just makes it a non-starter in the developing countries.
Hsien-Hui and Mukul:
Thanks for the input. You hit a strong point that the US auto-makers have been far too micro-focused on their domestic market and taken their eye off the ball internationally.
Data repeatedly shows the productivity of the US manufacturing worker is high, so the core issues seems to be with leadership’s inability to enbrace developing economies and formulate a global plan (with the exception of Ford).
With a global recession (and probably the first true “integrated” recession), it’s going to take the smartest firms to be in place to respond to demand in those regions which will pick up first. It’s interesting to see Chinese business leaders talk about more focus on their domestic economy. So we need to examine the regulations stopping us selling US cars into Chinese market…
The US automotive industry is being held hostage by the UAW union. A US car has 2000 added onto it compared to a foreign car (made in the US) of 300.
Doing business… it’s the UAW that raised those prices… Strikes that happen at GM wont happen at Nissan.
Fixing this issue? Allow the top 3 to go into bankruptcy. Dissolve the agreements with the UAW, and start up shop again without the unions. If you want to strike, that’s fine, Move the plant… I think that its not wise to have all of those auto plants in the same location anyway… Move to Texas, or Arizona, or Kentucky… I am sure that there will be HUGE welcome packages out there for the move… But realistically, the top three have to invest in the future. All the Japanese cars are sporting better fuel consumption, better hybrids and the US auto industry is still making SUVs and Huge trucks… Its time to stop that practice and reign in the waste. Start having more focus groups with the American people.
About this economic Stimulus, I hope the US govt, DOESNT allow any of that money go over seas… I would hate to think that our 11 billion slotted for GM goes over to the Russian plant they are building…
I think the US needs to start looking for a way to let the Auto Industry die a peaceful death, and find a way to recover from it… because the AI has been on its death bed for years… almost 30 now as the Japanese have taken almost completely over…
If I was The Pres and Congress…
1. I would have them all declare bankrupcy, dissolve the unions
2. Have them create a restriction on their Executive pays and bonuses
3. Have them create a committee that looks for waste
4. Have all three create a research company that will combine all the hybrid tech together in hopes of finding the perfect solution.
5. ENSURE that none of the money being “lent” will go to across boarders manufacturing, unless its the expense of bringing it back.
6. Encourage to have the AI – big 3 lower their prices to a more reasonable market
7. Have them use recycled materials – purchase scrap metals from older cars, melt down – could be yet another company, it would lower the costs by “outsourcing” the task.
I can’t resist jumping back in…this is a great discussion.
Buick is the #1 selling brand in China. Ford kicks butt in Europe. GM’s Australian vehicles lead their market. It’s not that the Big 3 can’t build good cars that are successful in the market, it is that they succumbed to creating localized products that are not competitive in other regions. Golf, Accord, Corolla, Altima, Megane (not to mention anything from Benz, BMW or Porshce)…These are platforms designed for global consumption, so there are enormous savings in having a global product, which allows the companies that build them to reinvest in development, quality, reliability etc…
Ford has an infinitely superior Focus in Europe than what they sell here. Why?
Now there’s some talk about tariffs. Tariffs are bad. But let’s remember that the US uses them too (in particular to protect trucks). When we say we have free trade, we give the treaties way too much credit. We have a long way to go here.
But oddly, the auto industry has proven it knows quite well how to get around them (see Buick in China or Honda in the US).
The ills I see in the industry aren’t hard to describe:
1. Competitively disadvantaged due to labor agreements
2. Regional instead of global products
3. Lack of passion for the automobile
4. Clueless leadership that allowed all of the above to happen and did not make the tough decisions earlier.
If the US Big 3 are to be competitive again, it will be through some combination of the following:
1. Truly global product platforms
2. Disbanding of the unions, permanently
3. Government assistance with pension and healthcare liabilities
4. Change in executive leadership
5. Leadership in one or more alternative fuel solutions
Thanks Phil, for starting this important discussion. I hope congress and the boards of directors of these companies are tuning in.
I think Detroit’s primary problem is poor management – can you outsource that? The next problem is artificially expensive workforce – trade unions are the problem here. If you can’t solve that problem, then outsourcing is the only other option – but that is political suicide. Let them fail. If American manufacturing can’t compete with the rest of the world either on price or quality, then they should get out of the business.
Here is a great article about why the Detroit auto institution is failing right now:
While this isn’t mentioned the article, Toyota introduced lean manufacturing principles to GM in the mid-90’s but because GM wasn’t committed to change course (thru systemic engineering and cultural changes), they lost marketshare and have become largely unsustainable.
* “The real problem [with GM and Ford] is failing to stay competitive with global rivals in the realm of advanced principles of design and manufacturing….”
* Look at Sony or Samsung or Apple or Honda. What these companies (really, groups of companies) have cultivated is the capacity to experiment. The point is, you don’t want that much riding on each try. You want (if you’ll pardon more sports metaphors) to transform your design-to-manufacturing paradigm from football to basketball — that is, to set yourself up to rush the basket many times per game, not painfully drive your way toward the end zone just a few times. ”
* “Washington cannot save GM and Ford by handing them money and waiting for them to produce (or even demanding that they produce) an advanced hybrid. You can’t order up innovation; you have to empower entrepreneurial teams to assemble delight, piece by piece, for specific customers.”
Ken Huffington isn’t a real person.
Don’t believe anything that comes out of this person.