The best of both worlds.

NEITHER A SUPPLIER NOR A CUSTOMER BE. IN THE NEW WORLD OF STRATEGIC OUTSOURCING, MOST CORPORATIONS ARE BOTH. WINNING COMPANIES, THESE FOUR CHIEF EXECUTIVES AGREE, ARE THOSE WHO'VE FIGURED OUT HOW "TO LEVERAGE THE EXPERTISE OF OTHER ORGANIZATIONS, WHEREVER, THEY FIND IT..."

Over the years, Mary Kay really changed its philosophy toward outsourcing. We used to look at it for cost savings or perhaps for a limited, short-term capacity boost. There was a time, I think, when we were kind of insular and maybe a little cocky in our vendor relationships. They were more traditional and standoff-ish, and the basic message to the vendor was, "You will deliver, and if you don't, there will be a penalty - or we'll get someone else to do it." Today, we've come 180 degrees from there. We now look for long-term relationships and strategic outsourcing partners, and we have developed these relationships in our manufacturing, information technology, and R&D areas. Of course, we've had long-term relationships with some companies for years, but now this is really embedded in our philosophy. In many ways, we now prefer to do things with a partner.

This all started in our manufacturing. We have plants in China and Switzerland, but we also outsource a lot of production to companies in Australia, Argentina, and other countries. We are actually very good at manufacturing - we are a low-cost producer, and we've trebled the output per manufacturing employee the last few years. But we reached a where we felt there was only so much could do on our own. For example, are many overseas markets that smaller runs of products that we can't efficiently produce. And of course, our core competency is not in 200 million units of cosmetic year, although we can do that. It is ability to build and maintain and a huge sales organization. So a few years ago, we re-evaluated the whole subject and decided to take a long-term, strategic approach to building manufacturing partnerships. And since then, we've gone through a critical review of all our products, SKU item by SKU item, to see which ones may be more efficient to manufacture outside - and those that were are handled by our manufacturing partners.

So this approach really isn't about cost savings. It gives us the flexibility to serve those smaller markets in other countries. A closer relationship also gives us a good way to make sure that quality is maintained, because we can share what we've learned about manufacturing and quality with our partners. And, we haven't had to go around the world building plants. So, where a lot of companies find themselves stuck with all this brick-and-mortar capacity, we have the same U.S. manufacturing footprint today, as a billion-dollar-plus company, that we had years ago when we were a $17 million company.

We have a very well worked out process for building and maintaining these relationships. We have formal audit and verification processes that we engage in mutually with these other companies, and we have some sharing of the risk with many of them. We've also made good use of our information systems to share data with partners: That means we are both looking at the same sets of numbers, so that rather than argue about the accuracy of the information, we can look at it together and say, "something isn't working, let's fix it."

That attitude is an important part of these relationships. We've found that with a long-term outsourcing arrangement, there is less of the command-and-control kind of stuff, many challenges and justifications going back and forth. There's more give and take. And that has meant that we've had to develop a certain management mind-set, if you will, and new people-related skills to make this all work. We've had to change a lot of attitudes, and people have left this company because they didn't have the right attitude for these kinds of relationships.

Another important element in our approach is our up-front use of a vendor-certification process to make sure that we are both on the same page. We go through this process very laboriously to make sure that the other company is aligned with our ethical structure. It's very important to us that they think like we think about the ways in which they treat employees and the standards and values to which they hold their organization. A company might be a very efficient producer, but if they are not aligned with us in terms of integrity, they are not going to do business with us.

You have to have this kind of match in the way you do business, because there will always be problems in a relationship - it's axiomatic in this world. There are always going to be a lot of people coming to you and telling you how great they are. But we like to dig in and see for ourselves. And so we might do some small projects where there are risks for both parties. That lets you see how the other guy reacts when somebody stubs their toe. That tells you a lot and lets you know early on how well you work together to solve problems. Then you can decide if this is a good fit and move toward a long-term partnership.

The trend today seems to be toward the use of alliances and partnerships, in addition to the more traditional routes of internal development or mergers and acquisitions. And I think this is a trend that is just beginning. In our credit-card business, for example, Barnett Bank recently formed an alliance with Household Credit Services, which is the sixth-largest Visa/MasterCard issuer in the United States. This alliance combines our brand and market strength with Household's marketing sophistication and back-office efficiency, and was set up to manage and grow our $1.2 billion portfolio of cardholders in Florida and Georgia.

The Household alliance is essentially a way to keep up with the rapidly changing credit-card business. Barnett sees credit cards as a high-growth area over the next several years, so it's a business that we would like to stay in. But this is also a business that requires huge operating scales and huge investments in technology in order to stay current. And, it's a business that is consolidating, so there are some very large, highly focused players out there that concentrate on a single business. So as a full-service bank, Barnett is competing with people who are in just the credit card business for a living.

When we looked at that environment, it was clear that it was going to become more challenging to offer our clients, new, state-of-the-art products at competitive prices. So the partnership approach made the most sense because of the size of the operation that we had compared to the size of some of the large, national players we were competing against. It didn't make sense for us to try to build what we needed internally - the extensive data processing capabilities and communications networks - or to go out and acquire another company that would be large enough to compete. We don't want to be that invested in the credit-card business. So it came down to the question: Is this an area of strength for us, or are there other people who can do it better? And we found a partner who's good at it - one that can provide the scale of operation and investment in technology this business needs.

Of course, the key to any alliance is making sure it works for both parties. Under this agreement, our Barnett credit cards will continue to carry our name, and Barnett and Household will both actively market them. The two companies will also share in the profits generated by this portfolio. Overall, this allows Barnett to share the risk of the credit card business with someone else, rather than shoulder it alone, and it gives us access to economies of scale and technology that we don't really want to spend the time and resources to build ourselves. We also gain from Household's proven expertise in customer service and product development. For its part, Household gets access to Barnett's substantial brand awareness, market segments, and distribution channels - especially in Florida, where Barnett has relationships with nearly 40 percent of the state's households.

This partnership with Household is actually Barnett's second alliance in the credit-card area. We also have one with First Data Corporation in our merchant credit-card business, which provides services to businesses that accept credit cards for payments. From our experience, we've learned that it is critical, from the very beginning of a relationship, to develop a consensus-building approach and a strong sense of trust between the two partners. You also have to have the management processes in place that will allow information to flow back and forth in a very open and timely way, so that people on both sides of the partnership can feel that they understand what's going on. And you have to sit down, very early on, and really pay close attention to the development of a joint strategy, making sure that both partners' individual strategies are very clearly defined and matched up. Then, as you start to run the business together, you are both focusing on joint goals.

Finding that kind of match is possible only when you first understand both the core strengths and core weaknesses of your own organization, and the strengths and weaknesses of the partner organization. The ultimate success of the alliance probably starts right there, because a successful partnership should create something new. Together, the two partners should be able to do something that neither partner can do independently. So if you take the time to match your strengths and weaknesses - if you choose the right partner - you can create new value, which ultimately heightens everybody's commitment to the alliance.

The whole concept of outsourcing has evolved dramatically in the last decade. In its early days, outsourcing was largely confined to relatively menial sorts of functions that people simply didn't want to do inside their corporation - housekeeping services, food services, perhaps some data processing, and so forth. The feeling was that these were not especially critical activities, and that there were lots of people around who had the capability to do it.

Outsourcing has become the norm, rather than the exception. More than 85 percent of the largest U.S. publicly traded companies have outsourced a significant portion of their business. But more important, we are now seeing it approached more strategically, with companies outsourcing a much wider range of sophisticated functions. Businesses have started to realize that some of the more complex and critical functions can be handled by an outside company; they see that some of the areas that were traditionally held to be core are actually good candidates for outsourcing.

As the business world moves along this curve, the outsourcer changes from being simply a vendor to being a business partner. By that I mean that the outsourcer must get in touch with the client's understand how to go about helping them get the business results they want and create competitive advantage. At Norrell, this is reflected in what we call "strategic work force management," in which we work closely with the client to understand its business strategy workplace dynamics, design a solution, and even take responsibility for delivering overall results, such as enhancing productivity or profitability. As a result, we have to make sure our associates are in touch with the client's business objectives and culture, and are able to operate within the client's walls without being a foreign body in the corporation.

Naturally, we have gone through the same analyses that our clients have performed, and taken a hard look at what our core competencies are versus what we might be able to outsource - and we do outsource a number of things, including information systems processing. These kinds of arrangements let us focus our attention on our core competency of relationship management - hiring people who are good at developing relationships, and understanding the client and the client's culture.

If you look at these growing webs of strategic relationships, you can get a sense of what the organization of the future may look like. I think most companies are heading in the direction of viewing themselves as organizers of activities and process. Some processes and activities will be performed in-house. Others will be performed through strategic alliances, outsourcing, subcontractor arrangements, and a whole host of relationships with other organizations. London Business School professor Charles Handy describes these companies as essentially being managers of contracts and relationships that are bundled in such a way as to produce the good or service the company is providing to customers.

I think of this organization of the future as a "chameleon organization," because it will be a very adaptable organism. Its shape and appearance will change as its environment changes. Clearly, companies tomorrow are going to have even shorter windows of time in which to predict the needs of the market. They will also have to be more customer-centered than ever because increasingly, customers will not tolerate products or services that do not meet their needs as they have defined them. In order to be viable, you are going to need the ability to shift to meet customer demand - and you'll have to build that ability off a changing set of competencies.

The strategic use of outsourcing will be a very important part of all this, because the chameleon organization will have neither the time nor the resources to invest in non-core processes. Instead, it will pull in the additional capabilities and competencies it needs from other organizations, and when things change, it will alter its relationships or find new partners. This will give it tremendous-flexibility to restructure and change itself to keep pace with the market.

I think the pace at which are moving toward this more flexible, even virtual, type of organization will accelerate - I certainly don't see it slowing down in any way. We have passed the point where the skeptics have had their day. These ideas are now becoming widely accepted in the rate world, because it is becoming clearer and clearer that this is how we must organize ourselves in the future.

In terms of the strategic use of outsourcing, Wallace is really part of a network of relationships and alliances. While we have long been a supplier of such office-products as forms and labels, we also provide outsourcing services. On the other hand, we believe very strongly in leveraging the core competencies of our suppliers for the benefit of our customers.

This network has evolved over the last few years as Wallace has shifted from a pure product orientation to more of a service orientation. And it has been in step with a fundamental shift in how our corporate customers think. They are no longer so concerned with the cost of, say, a given form. Instead, they are looking at the total cost of using that form - which can end up being anywhere from 14 to 60 times the original cost of the form.

As a result, we have moved into forms management, where we not only supply consumables, but manage the whole process - storage, distribution, procurement, etc. In some cases, we have our employees at the customer site full-time, running that segment of their business for them. We're providing our specific expertise, our technology, and our distribution processes - things the customer is not interested in investing in because it's not its core competency. The goal of these services is not just to handle the process, but to improve and streamline it.

We strengthen these outsourcing relationships with customers in a couple of ways. For example, we provide special technology that gives our customers access to our internal operating systems. As a result, they can always see what is going on with inventory, orders, and so on; they have the information they need to support broader decision-making - and to remain in control while we do the work. We also look for contracts that run at least five years, because we think that you need that time to really establish a close company-to-company relationship and develop the insight that will let you reduce your customer's costs and improve your own efficiencies.

At the same time, we are also building close relationships with suppliers. We look for partners that give us some advantage at the same time we give them some advantage. For examples, we have outsourced some parts of our manufacturing. Even though we consider that a core competency, we have found a partner with key capabilities in certain parts of the manufacturing process, and we want to leverage those strengths.

We also have a good-sized alliance with United Stationers, a wholesaler of office supplies. This alliance lets us add their product categories to ours so we can bring total answer to the market - an answer customers would not be able to find if we weren't in this alliance. And in many cases, United Stationers is handling inventory and distribution directly to our customers in our name - so we have made sure we are aligned with them in our attitudes toward serving and satisfying the customer. Incidentally, this alliance illustrates just how complex these relationships can become: United Stationers is not only a supplier and partner to us, they are also a customer, because they buy some of the products we make. And they are a competitor, as well, because they resell those products we make to other companies, including some of our direct competitors.

I believe that tomorrow the winners in business will be those companies that have the dual capability to be both a provider and user of strategic outsourcing services - to leverage the expertise of other organizations, wherever they find it. This capability is really a key to providing not only the best of both worlds, but the best of many worlds, to your customers - and ultimately, to producing the best financial rewards for your shareholders.