Electronics Production | December 15, 2011

Risk Factor #6: Loss of Institutional Continuity

The issues surrounding this risk factor are subtle and difficult because they pertain to the fabric of the outsourcing rationale, and theoretically have been resolved ages ago.
What we mean by institutional continuity could be confused with the concept of ‘core competency’. As most will recall, companies were advised to outsource all but those activities that were considered ‘core.’

I want to be crystal clear about this: institutional continuity is not related to the ‘core competency’ of an organization. I have always felt that the latter was a very misleading concept. Why is it useful to consider activities in this manner? Does it mean that a company has ‘core incompetencies’?

Outsourcing something you can’t do very well is obviously very risky; and the current state of many of the outsourcing relationships we observe in our consulting practice proves how risky it is. Most OEMs are not satisfied with their EMS supply solution, in spite of the ‘master-slave’ power imbalance that exists.

The loss I am talking about is deeper than the core competency discussion indicates.

Institutional continuity is what is elemental in an organization. It relates to the way business is conducted, the company’s history and purpose; and how and why it exists. Does outsourcing in itself break institutional continuity? Not necessarily.

But when you outsource everything – not just manufacturing, but design, logistics, customer service, accounting, IS/IT, and human resources – the system does break down, and I see that happening in some OEMs, especially in the past few years. So many pieces have been removed from the flow of the organization’s value stream that the value begins to leak out the holes.

To illustrate: in the US we have a Constitution, which has been the law of our land for nearly 230 years. Its power comes from the fact that it hasn’t changed much, so a body of law can be developed based on the expectation of continuity. Some people think certain parts are too flexible in fact, e.g. the Commerce Clause, originally meant to limit Federal power over the states, has been interpreted to allow most anything.

But what if we did change the Bill of Rights and other parts of actual Constitution itself every decade or so? What if, like at the state level, it was easier to amend? What if during some difficult times we threw out altogether the First Amendment guaranteeing freedom of speech, or the Fourth Amendment prohibiting unreasonable search and seizure. There would be far less stability in the courts, and among lawmakers and eventually the country would no doubt devolve into chaos.

This is the risk we are talking about related to loss of institutional continuity. It is why businesses fail — they lose their sense of purpose and some central competitive advantage slips away. This can happen at any size company, in any industry, and outsourcing too much, too often, can be a symptom, but it isn’t the disease itself.

In electronics companies, where innovative products are part of the institution’s DNA, outsourcing the manufacturing of those products can lead to a loss of the ability to find the competitive advantage in this skillset. I can’t tell you how many times we hear OEM outsourcing managers saying that all EMS companies are the same.

Granted, the marketing departments in the EMS industry sometimes fail to communicate their company’s unique value. But the OEM has often lost the insights required to identify, understand, evaluate and, most importantly, leverage the unique and varied capabilities that exist in the EMS industry.

Look at Hewlett Packard. This company began when two EE’s, Bill Hewlett and David Packard, started building test equipment. The company’s history with these two men has always been part of the institutional continuity of HP. I remember visiting the company and seeing the two partners’ desks left intact since their retirement. Now, I wonder how potent that history is for HP — and if this isn’t a good example of the risks associated with loss of continuity as the company has considered abandoning hardware altogether. Certainly HP has faltered in the past 18 months.

In chasing “low cost” at any price, many electronics companies have taken their eye off the ball of their own businesses. And continue the sports analogy, it is similar to what happened to the San Francisco 49ers football team. In the 1980’s the 49ers developed the most replicated model in professional football, the aptly named “West Coast Offense.”

This was the brainchild of legendary coach Bill Walsh, facilitated by owner Eddie DeBartolo, and executed by Hall of Fame quarterback Joe Montana. Deploying this model, the 49ers won five Super Bowls and were named the “Team of the 80’s.”

Then in the late 1990’s things started to go wrong. A new owner, a series of new coaches, and various quarterbacks thought they could easily continue the success of the franchise while also changing the underlying factors that had allowed the team to be successful.

The team was losing its institutional continuity. One coach, Hall of Fame linebacker Mike Singletary, even stated that the position of quarterback was not the most important position on the team. How wrong he was! The result was that the 49ers have been a sub-par team for over a decade and have not made the playoffs.

They are only now reclaiming some of their past glory, by many accounts by going back to the principles and style that initially made them great.

Risk is not always a noun (i.e. a probability), it can also be a transitive verb (an actual exposure) and in the world of business its many underlying elements – including loss of institutional continuity – tend to pile one on top of another. Until ultimately, we see them show up as the 40% increase we’ve recorded over the past four year in the Composite Business Risk Index.

I think it’s time to say “enough is enough” and start thinking about how to recover what we have lost versus focusing on what else we can change.

Source: More can be found here.


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