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The Lateral Leap

Whether it’s farming out logistics or contracting for the development of IT applications, outsourcing is playing an integral role in today’s corporate world order.But what does that mean for today’s executives? A two-part study suggests a new blend of leadership skills is de rigueur.

The last decade has seen outsourcing go from buzzword to basic-even blase-business strategy. IT outsourcing contracts alone have surged from $11 billion in 1994 to $33 billion in 1996. Nine out of every 10 large U.S. manufacturing firms now outsource at least one activity, and the typical company outsources as many as nine. Confirming that strategic outsourcing has evolved from the exception to the rule, such statistics also imply a shift in essential managerial skills.

As companies find new ways to get the job done, the management style that comes with issuing orders is giving way to one of lateral leadership, or leading out instead of directing down. In the first part of a two-stage outsourcing research study conducted by the Wharton School’s Center for Leadership and Change Management and co-sponsored by A.T. Kearney Executive Search, in-depth discussions with senior managers at 25 major companies in the U.S. and abroad during 1997 suggested that effective lateral leadership encompasses a combination of four capabilities:

  • Strategic Thinking: Consideration of whether and how to outsource in ways that add to competitive advantage.
  • Deal Making: Brokering deals in two directions simultaneously, securing the right services from external providers and assuring their use by internal managers.
  • Partnership Governing: Effective oversight of the relationship.
  • Change Managing: Effecting a smooth transition and overcoming employee resistance.

What You Need

In the second part of the study, a 1998 survey of U.S. managers at 423 companies underscored the importance of these four components. Managers from a broad array of industries and company sizes who are personally involved in outsourcing were asked to specify the pay premium they would give an individual with one or more of these four qualities who was hired to manage an outsourcing contract. Two-thirds reported they would pay a premium of at least 6 percent for each of the four capabilities, and two-fifths were prepared to pay 11 percent or more (Fig. 1). Furthermore, the four elements together constitute a bundle, with managers who value one tending to value all-and both large and mid-sized firms placing similar value on the skills (Fig. 2).

More than three-fifths of the surveyed managers expressed willingness to pay a premium of 6 percent or more for prior outsourcing management, prior work in the activity being outsourced, leadership of multi-skilled or cross functional teams, and joint venture management-experience viewed as fostering the four lateral leadership elements. Two-fifths were willing to offer more than 10 percent extra (Fig. 3).

As seasoned hands at outsourcing, the responding managers also offered firsthand affirmation of the importance of such experience. More than 80 percent reported that prior outsourcing management, prior work in the same area, team leadership, and joint venture management are of significant value in their work today (Fig. 4).

Where You Get It

Finding the requisite blend of capabilities demands a novel approach to recruiting and developing managerial talent, which in turn requires both top management support and well-honed systems for measuring performance and accountability. Currently, support tends not to be evenly spread throughout the ranks. While a vast majority of respondents-more than 80 percent-reported that their top management supports the sourcing agenda, only half viewed middle management ranks as supportive and virtually all deemed hourly employees as unsupportive (Fig. 5).

Despite its current popularity, outsourcing remains relatively new terrain, and managers with proven talent are scarce. In lieu of commensurate experience, some companies opt to look within, seeking to tap managers with prior experience in related areas, such as leading cross-functional teams or overseeing joint ventures.

Those without work-teaming or joint-venture corporate experience to draw from, or who prefer a more exact background match, are forced to either buy or develop the leadership skills required-a path more companies are taking. Three-fifths of the managers surveyed reported recruiting at least some of those managing their outsourcing contracts from outside. The new demands dictate new forms of management training as well, with the majority of respondents agreeing that the need to invest in developing lateral leadership skills is “critical” or “great” (Fig. 6).

What It Will Do

Beyond outsourcing, the benefits of mastering lateral leadership can also carry over into other areas. Strategic alliances place a premium on working well with others. Top management, whether of a division or a company, demands similar skills for managing relations with major customers, primary investors, and regulatory agencies. Ideally, building the four capabilities-strategic thinking, deal making, partnership governing, and change making-and instilling the two organizational capacities-executive backing and performance accounting-will prove beneficial, not only for outsourcing, but also for joint venturing’ team building, and executive leadership.


Companies participating in the first part of the study vary in size, product, and location, ranging from an employee base of 1,000 to more than 100,000. While most are headquartered in North America, five are based in Asia or Latin America. One-third employ more than 10 percent of their work force at locations outside the U.S. Three-fifths have annual revenues of more than $500 million.

The database for the 1998 survey, the second part of the study, included U.S. company managers who make or manage outsourcing decisions for their firms. During the past three years, the majority have recommended outsourcing, reviewed outsourcing options in strategic planning, negotiated and overseen outsourcing contracts, and supervised outsourcing managers. Half have personally restructured or downsized a unit or division by outsourcing.

Michael Useem is professor of management and director of the Center for Leadership and Change Management at the University of Pennsylvania‘s Wharton School.

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