Finally he pointed out that the economics of a services business were very different from those of a product-based business. A major services contract might last six to twelve years. An outsourcing contract for, say, seven years might lose money in the first year. All of this was foreign to the traditional world of product sales and would create problems for our sales compensation system and the financial management system.
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So we made a betâone that, had we articulated it loudly at the time, would have left our colleagues in the industry rolling in the aisles.
Our bet was this: Over the next decade, customers would increasingly value companies that could provide solutionsâsolutions that integrated technology from various suppliers and, more important, integrated technology into the processes of an enterprise.
I have worked in services companies (McKinsey and American Express) and product companies (RJR Nabisco and IBM). I will state unequivocally that services businesses are much more difficult to manage.
But a human-intensive services business is entirely different. In services you donât make a product and then sell it. You sell a capability. You sell knowledge. You create it at the same time you deliver it. The business model is different. The economics is entirely different.
Anyone will tell you that software acquisitions are risky. The asset youâre acquiring is human. If the critical people decide to walk (and a lot of them would certainly have the financial wherewithal to do that once the deal closed), then youâve spent a lot of money for some buildings, office equipment, and access to a customer-installed base.
Outsourcing is a contractual relationship, and contracts (like debts) are typically all-or-nothing affairs. Either a requirement has been fulfilled or it hasnât. The typical outsourcing contract narrows the bandwidth of the communication channel to either âeverything is going more or less as anticipatedâ or âitâs stopped working and we need to find out whyâ. If itâs the first of these two cases, everythingâs fine. If itâs the second, the continued stability of the system will depend on how much information-handling capacity can be brought to bear to address whatever problem has arisen.
Since the outsourcing communication channel is designed to spend most of its time transmitting âeverythingâs OKâ, itâs difficult to guess how much additional bandwidth needs to be allocated to carry messages like âbut the following conditions are changing which might affect things in the near futureâ â let alone how much might need to be allocated at short notice when it starts to say âeverythingâs no longer OKâ. If you have targets to make, it will always be tempting to cut out a bit of spare capacity.
And this is of course what happened; in an accounting system which targeted overhead costs, combined with an emphasis on generating cash, it looked like a no-brainer to thin out the ranks of middle managers who didnât appear to do anything. But unfortunately, a âno-brainerâ was exactly what it turned out to be. Over the course of Jack Welchâs career, the industrial worldâs productive system â the corporations â set about the equivalent of amateur brain surgery, hacking away bits of their regulatory and information-handling system, to see if they could do without them.