A Model of the Firm’s C-Suite and Its Relationships to Outsourced Division-Level Solutions.

1. White paper series. #201108MM A Model of the Firm’s C-Suite and Its Relationships to Outsourced Division-Level Solutions. How C-Level Managers approach their Roles and Responsibilities. Potential Decision Hazards for the Firm. Using research to help illuminate key drivers and characteristics and help clients target more effectively. (Some material adopted from sources listed at end of this document with permission of authors.)

2. A Composite Outsourcing Decision Model Contextual Dimensions C-Level’s Range of Operating Modes Factors Driving Decisions to Outsource (see next page) Decision to Outsource (see next page) Enterprise’s Organizational Dynamics and Structure Vendor-Transaction versus Operating Costs Six Defining Issues Around Outsourcing: How unique are the production processes (more unique, more difficult to outsource) How severe and how frequent are market cycles (greater impact enhances likelihood of outsourcing) Does the market expect the firm to own production? (greater expectations decreases chances of outsourcing) Are there suppliers capable of doing the work, in terms of both technology and capacity? Can the corporate culture be changed to accommodate the outsourcing? Is there market pressure from lower cost competitors?

3. C-Level’s Range of Operating Modes Capacity / cost management Strategic partnership / outsourcing See Defining Issues around outsourcing on page 2 Short term, market exchange structure – payroll, technology. Utilize consultancy, capacity augmentation, individual freelance skills providers Long term, relational exchange structure - partner takes operational responsibility • Factors driving decisions to outsource: • Quantity and quality gaps • Increased quality/quantity demand beyond current capacity • Shortage of qualified personnel • Impending cost and competition challenges • Control increasing costs under a cost leadership strategy. • Lower costs to improve competitive position. • Limitations on long-term financial planning. • Limited budget for investment / expansion. • Lack of funds to sustain long term strategy and business activities. • Lack of focus on core business • Lack of concentration on main revenue-generating activities. • Other activities should be mainly supportive but are overemphasized. • Coordination becoming difficult • Requirements to coordinate functions inside the division are generating conflict (personal or structural). • Need to envision outsourcing the entire division so that conflicts do not impede strategic direction / management of overall enterprise.

4. C-Level’s Range of Operating Modes + “Stickiness” Factors Capacity / cost management Strategic partnership / outsourcing See Defining Issues around outsourcing on page 2 Short term, market exchange structure – payroll, technology. Utilize consultancy, capacity augmentation, individual freelance skills providers Long term, relational exchange structure - partner takes operational responsibility The enterprise can become “stuck” on existing or inter-mediate solutions due to: Factors relating to C-suite communications and behaviors. Perceptual and judgmental bias factors.

5. Important Background Information The Psycho-Social Aspects of C-Level Executives

6. The Psycho-Social Aspects of C-Level Executives • Large enterprises utilize organizational charts and divisions of labor, and even politics within the corporate culture. • Ideally, this structure helps the firm continue performing in a steady and efficient way. • Employees, including line and staff managers, rely on this steady environment to perform their tasks. • More or less routine challenges arise, and professionals apply their skills to resolve them. • The C-Suite, on the other hand, is in many ways like a handful of artists painting on a large, blank canvas. It is very important to recognize that the C-Suite executives: • Face the brunt of uncertainty in the world inside and outside of the organization, using critical thinking skills and strong internal fortitude to lead the company through various mine fields. • Mustaddress critical problems that no one else in the organization can resolve. • Continually seek out any information that dis-confirms existing assumptions. • From the point of view of the equity owners and lenders, the CEO, CFO, CMO, and CIO are responsible for all risks and returns of the company. Thus, uncertainty and creative struggle continually abound in the C-Suite to manage these outcomes. • But the C-Suite environment can, without the right safeguards, lead to these hazards: • Unreasonably high, uncritical levels of commitment to a course of action, by one or more members. • Group-thinking approaches to problems in which each member of the C-Suite tends to reflect a positive, mutually-confirming reflection to other members on a given decision regardless of its merits. • Rivalries and personality conflicts among members of the C-Suite can lead to lack of communication, isolation and unreasonable risk-taking by individual members. • These roles, responsibilities and hazards potentially emerge in all C-Suite environments, whether the business is small or a member of the Fortune 100.

7. The Psycho-Social Aspects of C-Level Executives (continued) • Ideally, an open, creative C-Suite environment reinforces positive decision outcomes and avoids the hazards listed above. • When hazards do arise, the main consequence for vendors and potential partners are the “stickiness” factors indicated above on page 4. -------------------------------------------------------------------------------------------- • On the next page or two we will have a look at how these factors operate and what a client seeking outsourced business might do about them. • The client’s addressing stickiness factors proactively – armed, through research, with knowledge of how a C-Suite can and should operate – will help ensure that: • The client receives a fair hearing from C-Suite executives as a prospective outsourcing firm. • All important benefits, risks and costs – both current and prospective – are presented effectively and assessed rationally.

8. Barriers to a Division-Level Outsourced Solution “Stickiness” Factors and Potential Reasons Behind Them

9. Case One: “Stuck” with an In-sourced Solution Short term, market exchange structure – payroll, technology. • The enterprise owns and runs the division, employs staff and buys / leases equipment and technology on the open market. • However, there are significant factors that point instead to an outsourced solution (see page 3). • In this case these factors are likely to be: • Quality and quantity gaps. • Impending cost and competitive challenges. Potential barriers include: Members of the C-Suite are not recognizing growing challenges in the target division. Assumption is “we can work everything out.” Dis-confirming information, which the C-Suite should otherwise be continually seeking out, is not breaking through for one reason or another. The potential benefits of outsourcing the division are undervalued, while the potential costs are overvalued. (This type of bias is known to exist to some degree across all management.) Another common bias, especially true of top management, is that the more experienced planners tend to be overly conservative about new ideas (“been there, done that”), while the less experienced managers tend to be overly optimistic (“it works out on paper, why not give it a try?”). The solution is to combine both modes of thinking. Effective sales force tactics and marketing strategy can and do often break through one or more of these barriers. But, it will take research to identify, measure, and weigh the relative importance of different barriers – that is, help the sales force and marketing pin down the real problems and prioritize their communicationsefforts.

10. Case Two: “Stuck” with Ad Hoc Consultancy and Other Stop-Gap Solutions • The enterprise owns and runs the division, buys skills and technology on the open market, but fills in gaps as they arise. Uses consultants to help manage new and continuing challenges. Freelance workers. • As with the troubled in-sourced solution, there are significant factors that urge an outsourced solution (see page 3). • In this case these factors are likely to be: • Limitations on long-term financial planning. • Lack of focus on core business • Intra-divisional coordination becoming difficult. Utilize consultancy, capacity augmentation, individual freelance skills providers. Potential reasons include: Members of the C-Suite are not seeing the long term picture of the target division. Assumption is “we will deal with it when it comes up.” A common perceptual bias among top leadership is to overvalue short term solution(s), while long term, more stable and viable solutions are undervalued. Because most members of the C-Suite see (by definition) only one major part of the organization, it takes several members to combine their perceptions and clarify the larger picture. (Recall that an open, creative, “blank canvas” environment tends to foster effective C-Suite performance.) It may well be that at least one member of the C-Suite has an affinity for one particular consulting group or a handful of freelance providers. This is an example of unreasonably high, uncritical levels of commitment (see page 6). The stickiness problem here suggests that communications are lacking within the group and, perhaps, that there are personality or structural conflicts preventing better and more open communication. Again, it will take research to identify, measure, and weigh the relative importance of each potential inhibiting factor.

11. Operationalizing the Model for Research and Analysis and Identifying Drivers of Success for the Potential Outsource Client How do we measure the variables: Vendor-controllable, C-Suite-controllable, and non-controllable? If we measure the variables, how can we use them to predict Vendor-Solution acceptance in the firm’s C-Suite? Are there different decision-maker types or segments? Are different types influenced by different drivers/considerations in deciding to adopt an outsourced solution? How much and what kind of competition does the outsource vendor face?

12. How do We Measure the Variables? We draw the variables for the model from the preceding discussion. Using survey research, we collect responses on the following: Six defining issues around outsourcing (page 2). Five factors driving decisions to outsource (page 3). Important psycho-social dimensions of the C-Suite (pages 6-7). Stickiness in moving towards an outsourced solution and potential reasons for this (pages 9-10). The outsource vendor’s competitive context. The questions in the survey may not mirror the exact text shown earlier in this document. There may be more than one variable specified to measure a given factor.

13. How do we predict solution acceptance? • Latent class, multinomial logit model: What is multinomial logit? Unlike multiple regression, where several variables are used to predict a scaled, metric outcome such as purchase volume or units sold, the multinomial logit model predicts the probability of each of several discrete, qualitative categories. For example, Rice Krispies versus Wheaties versus Corn Flakes. In our case, we would be predicting (a) In-sourcing versus (b) Consultancy and other Ad Hoc solutions versus (c) adoption of a complete, division-level, outsourced solution. (See page 4.) Other than some specialized techniques to estimate the parameters, the multinomial logit is very much like a multiple regression in its structure and purpose. Thus, for example, it produces an R²-type measure. What are latent classes? These are an added dimension to the analytical problem – they help account for differences in responsiveness by different groups in the target population. A latent class is like a market segment, and each class or segment can potentially have different drivers of the decision to outsource (see six defining issues, page 2 and five factors driving decisions to outsource, page 3) In addition, each class or segment can potentially have different inherent characteristics – different types of potentially outsourcing firms, sales volume and different barriers to outsourcing in the C-Suite (see pages 9-10), as well as competing vendors.

14. What Will the Results Look Like? Here’s a simplified, hypothetical example. Latent segments in this hypothetical case tend to fall into very useful categories. The best customer type – one who is likely to obtain an outsourced division (but does not yet have one) is only 5% of the population. Characteristics and drivers can be leveraged by the outsource vendor to target marketing messages, cold calls, and follow-up calls with the most effective elements.

15. Summary As the population ages, the economy is sluggish, yet specific skill sets are more and more in demand, many firms need division-level outsource solutions. The C-Suites typically makes the division-level outsource decision. Ideally the C-Suite members are open, vigilant about important trends and seek out creative answers to problems. Proposed solutions are evaluated in an unbiased, rational way. In many cases, however, the C-Suite members suffer from perceptual and judgmental biases, lack of communication and personality conflicts. ---------------------------------------------------------------------------------------------------------------------- We have presented a model of the C-Suite decision process involved in adopting a division-level outsourced solution, so that different factors can be taken into account by sales and marketing. However, research is needed to measure, across the market and across different types of firms and C-Suites in the target industry, the relative importance of key drivers in the decision process, factors inhibiting adoption of an outsource solution, along with the relative sizes of different potential target groups. A latent class multinomial logit model can help accomplish these goals. The results will help the outsource vendor target and talk to their prospects (and customers) more effectively.

16. Sources Bazerman, Max H. (1994), Judgment in Managerial Decision Making, New York, NY: John Wiley & Sons, third ed., chapters 3-4. Camerer, C. F., G. F. Loewenstein, G.F., and M. Weber (1989), “The Curse of Knowledge in Economic Settings: An Experimental Analysis,” Journal of Political Economy, 97:1232-1254. Daft, Richard L. and Richard M. Steers (1986), Organizations: A Micro/Macro Approach, Glenview, IL: Scott, Foresman and Company, pages 461, 498. Fill, Chris (2000), “The Outsourcing Dilemma: A Composite Approach to the Make or Buy Decision,” Management Decision, 38(1):43-50. Kahneman, D. and A. Tversky (1979), “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica, 47:263-291.