I've often said that outsourcing has taken a wrong turn by being overly focused on immediate cost savings. Often this is little more than labor or cost arbitrage, perhaps moving work from an area where people are paid $30 an hour to where they are paid $3 an hour. Alternatively, moving a factory from where the land and electricity are expensive to where land costs less and electricity is plentiful and cheap is another form of cost arbitrage.

In an emergency, arbitrage may be needed and it may be necessary, but it’s usually lazy management. You get a benefit, but it’s a one-time benefit.

If you start your program thinking you can outsource but leave your process unchanged, you will hold on to this as a program parameter for far too long. When the first contract is over, you will find that the new contract has no new benefits. If anything, your outsourcer will look for a price increase. Too much outsourcing in the years since the global financial collapse has been based on lower salaries, or moving work to a low cost offshore location. Innovation, not arbitrage, is the reason why long tern savings happen. Skilled and creative people who identify and introduce new best practices ultimately deliver the greatest benefits.

When you talk to the firms that manage big outsourcing programs, but have settled for short-term benefits you often hear, "Well it's great talking about innovation, but how much can innovation deliver? And how long will it take?

With lower salaries I can reduce my operating cost by 30% or 40% today!" Fair enough. Let’s put some numbers to these theories. In 1999, the renowned productivity expert Peter Drucker, said, "The most important, and indeed the truly unique, contribution of management in the 20th century was the fifty-fold increase in the productivity of the MANUAL WORKER in manufacturing. The most important contribution management needs to make in the 21st century is similarly to increase the productivity of KNOWLEDGE WORK and the KNOWLEDGE WORKER." An increase in productivity of 5,000% is enormous! Why has manufacturing made this level of increase, but knowledge work… the very office work that has been outsourced in recent years… has failed to achieve this level of productivity?

Mangers of knowledge-based services often dismiss industrial productivity gains as irrelevant. They may say that there are too many differences between industry and office work, or that there are too many differences between different industrial models. So, let’s take a look at a very… concrete… example. Let’s take a look at what’s been happening in construction. Specifically, let’s look at improvements in how the world’s largest buildings were built.

In 1931 the Empire State building was the tallest building in the world. At about 1,200 feet high (not counting the antenna), it was huge. By using the latest steel based technology, it was built in just over a year. In the 70s the Twin Towers, which are two hundred feet taller than the Empire State Building, took two years to build. It was soon surpassed by the Sears Tower (now the Willis Tower) in Chicago, which also took two years to build. Not too much progress in nearly 50 years. Today, at just over 2,700 feet tall, the tallest building in the world is the Burj in Abu Dhabi... early twice as high as the tallest building in the US. The Burj took six years to build. The Burj is the most sophisticated building in the world, but whatever happened to the idea of “economy of scale?” Most of the other tallest buildings in the world that were built since the Sears tower have taken 2 years or less to complete. Shouldn't the Burj have taken 4 years, or less?

Now, let’s turn to China, and to the Broad Sustainable Building Corporation. BSBC has analyzed the construction process, and founded that the typical construction site is chaotic and inefficient. Alternatively, a factory environment is organized and efficient. BSBC’s goal is to apply factory methodology to construction. By applying the best practices of the factory floor to the construction site, they have committed to building the world’s newest “World’s Tallest Building” in record time. Instead of 6 years, they will build Sky City One in just 90 days. This is an improvement of 24 times over the last “biggest in the world” building, just two years ago. That’s not quite the 50 times increase that Drucker found in industry, but this is an improvement in just a few years instead of a century.

How does BSBC achieve this miracle of efficiency? Simply put, they applied the rules of industrial production, and engineering. The building meets all the requirements of the building plan (number of offices, amount of cubicle space, heating and cooling capacity, elevator capacity, etc.), but they eliminate the typical Greek columns on the ground floor and strange architectural flourishes on the top of the building. Most modern office buildings also lack these details, but instead they have substituted other flourishes that are only understood by fellow architects and don’t add to the functionality of the building. They've streamlined the design, and they use as many pre-fab components as possible.

BSBC is improving productivity by taming the “chaos” on the work site. That chaos comes from two sources: environmental and structural issues. Look at the environmental issues in a typical construction site that is open to the elements. It can rain or snow or be too cold or too hot to effectively perform certain functions. Concrete, as an example, sets differently when the temperature or humidity changes, requiring different mixing ratios… which can have consequences later in the construction process. Compare this to a slab of concrete that is made from a standard formula, molded into blocks or slabs by automated equipment and left to set in a temperature and humidity controlled room. The difference in process results in a vast difference in quality, and cost.

The structural issues become obvious when you examine the roles for each worker. Construction workers may many different titles, but each title performs a complex set of functions, and may need to swap roles when site conditions change. Consider the “simple” task of laying concrete: placing the daily orders for materials, directing the movement of supply and mixing trucks, managing the mixing process, ensuring that re-bar (re-enforcing steel) is in place, operating the pumps that deliver concrete to the right floor, placing and moving hoses that deposit new concrete, raking and leveling concrete on each floor, etc.

Depending on the specifics of the day, different people (with differing levels of skills) may perform each task, and workers may need to cover multiple functions if fellow workers are missing or if work is behind schedule. In this situation, it is difficult to know when something goes wrong, or who made the mistake. Many lessons learned are not applied to the next building, or even the next floor. The next new building follows different processes, using different materials that may be custom built for a specific project.

Work crews… even experienced crews… have a steep learning curve when they arrive on a new site and must adjust to the vision, materials, work style of a new architectural firm. And as you go up in a building, the design, the materials, technology or the methods for construction may vary, requiring new training or different workers. In a factory, each worker performs specific, well defined, functions that can be carefully managed; as problems and issues are identified, new best practices are put in place to improve processes.

The same chaos that occurs on a construction site, occur in many of the knowledge worker departments that are outsourced. Do your workers perform multiple functions? Is there complete documentation of your work process… or do workers have wide secretion in making decisions? Do these decisions have an impact on the cost or time to produce your products? As discussed in previous articles, the difference between BPO and KPO is that BPO workers follow a set of instructions to produce a product, while KPO workers make decisions to produce their product. One aspect of the industrialization process is to convert individual decision making into standard processes. Not every decision can be made into documented processes, but in almost every KPO situation you will find that some decision makers regularly make the best decisions (or create the best products). By carefully identifying how these workers produce the best products you will find new standard processes.

However, innovation is not just about tweaking the existing process. Big improvements mean big changes. In too many outsourcing programs, big improvements are desired but no changes are permitted. In the 80’s a typical computer worker had a mono-chrome dumb terminal (i.e. no memory, processor, graphics, etc.), and today we’re working on iPads. There were many innovations along the way, but almost every necessary innovation was greeted by resistance from at least some users because it was not something they needed (at that moment), or they preferred the old way of doing things. If you want to have the degree of improvement in product quality and cost that you see in technology, you also need to accept a major degree of change in process and in the appearance of the end product.

Sky City One is a different kind of building, that eliminates what is unnecessary, non-value add, or inconsistent. By applying industrial rules of production to building construction, the next “World’s Biggest Building," will be built in record time… presumably with a record reduction in cost (the budget is half that of the Burj). At the end of the 20th Century, Peter Drucker concluded that industrial performance only advanced once the work functions of individual factory workers were analyzed, and job descriptions were rewritten so that worker performed narrowly defined tasks that could be accurately monitored. This process of moving from chaos to order, and industrializing the process can be applied to any form of work. To benefit fully from industrialization and best practices, you need to allow your products to evolve, in a controlled way.