Offshoring - The GE and McKinsey Connection

Manjeet Kripalani has an interesting article on "Offshoring: Spreading the Gospel" (requires registration) in the latest issue of Business Week.  She zeroes in on an interesting pattern: the growing number of GE and McKinsey alumni that are running offshore outsourcing businesses:

While there are no numbers, anecdotal evidence suggests that scores, perhaps hundreds, of former GE and McKinsey executives and consultants play key roles as both suppliers of outsourced services and customers for them. "Every time we have an outsourcing forum, it's like a GE and McKinsey alumni association meeting," says Sunil Mehta, vice-president of NASSCOM, India's software industry association.

Manjeet attributes this to many factors:

Insiders and outsiders say the two are unique in their scale, their ability to attract top performers, their comfort with multiple cultures and languages, and their commitment to outsourcing. Both also view outsourcing more as a tool to increase growth and boost efficiency than as a pure cost savings exercise, a strategic insight most other corporations are only starting to grasp.

All of these are certainly relevant factors, but the one element that really stands out is the fact that these two firms, more than any others, have established a global leadership in attracting, developing and retaining top talent. It is no accident that these two firms are contributing more than their fair share of leadership of offshore outsourcing businesses. As the offshore outsourcing business evolves from wage arbitrage to skill building arbitrage, the alumni of these two firms have a natural advantage in terms of deep experience on talent development.

Now, that’s the good news. The bad news is that executives from these two firms are likely to have a blind spot.  This blind spot is likely to reinforce a blind spot that already exists among many offshore outsourcing firms, especially in India.

McKinsey has minimal experience in outsourcing of its own operations, especially when it comes to its core processes.  It will locate its operations flexibly around the globe to tap into local talent pools, but these are all captive facilities with staff employed directly by McKinsey. Although there are definitely signs of change on the horizon, the mindset and instinct of most McKinsey leaders in dealing with their own firm is to bring talent inside rather than developing broader relationships with talent outside.

GE is somewhat better on this score since it has been more active in outsourcing in a variety of its businesses.  Until recently (especially with the spin-off of Genpact two years ago), though, GE’s instinct was to offshore operations to captive facilities, rather than going one step beyond to outsourcing. And when it comes to outsourcing, GE’s experience tends to be with “first generation” outsourcing – one to one relationships with broad-based outsourcers.

As offshore outsourcing moves to a greater focus on skill building arbitrage, we are seeing a corresponding shift to “second generation” outsourcing. This form of outsourcing involves networks of companies coming together under the leadership of an orchestrator who can bring together the appropriate specialized talent to serve a specific client’s needs.  GE has very little experience with this new outsourcing model. Similarly, all the major Indian offshore outsourcing firms still tend to be focused on “first generation” outsourcing.

This will be the challenge for both GE and McKinsey alumni running offshore outsourcing operations.  They certainly understand the need to attract, develop and retain talent within their own enterprises.  But will they also understand that capability building can occur much more quickly in global process network (pdf file)of highly specialized companies coming together to serve the needs of other companies?

This is an example where a strength can also become a weakness.  By focusing so much on internal talent development, will they also ignore the growing opportunities to get better faster by working within large networks of highly specialized business partners?  The management techniques to do this are being pioneered largely by Chinese offshore outsourcing companies. To my knowledge, there are no GE or McKinsey alumni running these companies.

Comments

[val]

John,

Nice post.

I think the key similarity between these two firms is their focus on efficiency as the primary economic engine. Outsourcing as executed by GE has produced no material innovation. GE has successfully executed extending company value propositions to drive growth. McKinsey is NOT a consulting firm that has ever been successful at pushing anything more than the denominator when developing strategy. Economic analysis is the primary tool employed with the McKinsey consulting model.

I would posit the reason we see so much of McKinsey and GE is because they over index as CEOs. This I read as a negative.

[vinnie mirchandani]

John, I add to your perspective below:

http://dealarchitect.typepad.com/deal_architect/2006/03/mckinsey_and_te.html

[Will]

Good post. I enjoyed the linked pdf. You often talk about module linking. Do you have some good sources for designing business processes in modular form?