> I think this is absolutely right. I have recently completed a case study
> in a manufacturing plant where this was happening in an organisational
> learning context. Each part of the operation was a separate cost centre -
> including all management and support functions. Production cost centres
> could choose to use internal centres such as personnel. engineering,
> accounts, and so on - or outsource at their own discretion. The in-house
> service cost centres kept their jobs so long as they could provide the
> production cost centres with a competitive service.
I'm not sure I can endorse this approach without some reservations. The
first problem is that treating functional areas within a company as
separate businesses often ignores the interdepencies between the areas.
This can create situations in which departments can engage in "cost
cutting" that's really cost shifting. For example, if purchasing is
evaluated as if it's a self-contained area, it can make itself look really
good by negotiating large-volume, one-time delivery orders at the lowest
possible price. The low price will show up on Purchasing's books, but the
cost of the extra warehouse space required to store half a year's worth of
raw materials will be booked to Manufacturing. Similarly, Engineering
gets punished for spending time and money doing anything that makes
products easier to manufacture, because they get the denominator of the
ROI equation but Manufacturing gets the numerator. There can be a lot of
pressure to sub-optimize in situations like this.
The second problem is that often the internal department is hamstrung in
its ability to compete with outsources because corporate management is
still telling them exactly what to do in every little detail. This
creates an arrangement that superficially looks like free enterprise, but
isn't; the competitors can determine prices, staff according to their
perceived needs, etc., but the internal department can't. This comes back
to the fundamental point that Lloyd Nelson has always brought up; you
can't get results that are significantly different from what you're
currently getting if you continue doing "more of the same." If
departments are expected to compete for business as if they were
autonomous entities, then senior management has to be willing to give up
most of the control they currently exercise over those departments.
-- Eric Bohlman (ebohlman@netcom.com)