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Paul Laudicina of A.T. Kearney: Rethinking Outsourcing


Whether we are truly emerging from recession—as a Wall Street Journal survey of economists and other reports contend—or are setting ourselves up for another reversal, one thing seems clear: When the global economy awakes from its long nightmare, there will be "a new normal." In short, it won't be business as usual. To get a sense of the changes afoot, I talked with Paul Laudicina, chairman of the worldwide consulting firm A.T. Kearney and an expert in business strategy.

MARIA BARTIROMOWhat kinds of changes—for both countries and companies—do you see coming out of all this turmoil?

PAUL LAUDICINAThe whole global supply chain is being reassessed. Before the crisis, we knew that energy was going to be more volatile at best and more costly at worst. Now we have increasing concern about carbon content in terms of regulation and consumer resistance to products with a high carbon content. We also have the prospect of market interruption from protectionist measures. There are a whole range of things that have been accelerated and compounded by the crisis and are prompting a reassessment. That's going to be part of the new normal as companies reassess what they produce where and at what cost.

What's behind this altered thinking about outsourcing—knee-jerk nationalism in the face of economic pressures or a real rethinking of outsourcing's competitive advantages?
I think it's less a knee-jerk political reaction and more a hard-headed, sharp-pencil assessment of the costs and benefits of outsourcing certain activities as the dynamics of the new normal present themselves.

Do you worry that will mean more protectionism and less globalization?
I do worry that if we make decisions about outsourcing based on politics rather than competitive economics, everyone [will ultimately suffer]. But there are many other reasons to reexamine almost all of the fundamentals in light of this new normal.

Recent signs suggest we are starting to put the Great Recession behind us. Besides China, what countries, especially among emerging-market nations, do you see coming out of the slump in a position of strength?
Some emerging markets, of course, didn't go into the trough with quite as great a disruption as others. India, for example, didn't suffer the same dislocation, and therefore it's coming out of it more quickly. Certainly the same can be said for China. But also, as we look at the industrialized players, the latest statistics both from the Institute for Supply Management and the Chartered Institute of Purchasing & Supply in the U.K. suggest that the U.S. and especially the U.K. are coming out of this fairly quickly. So I think all of the indicators—even for Japan and Europe—show that at a minimum the decline has slowed and in some cases, like the U.K. and China, we actually have positive growth.

Is the China price—China's competitive advantage as a manufacturer—eroding?
It has eroded already, in part because the cost of doing business in China has understandably gone up as the country has developed. And when companies become more concerned about prospective interruptions in supply and the cost of sourcing because of energy and environmental requirements and so forth, all of these things tend to shift the cost of doing business in certain parts of the world. This is a much more risk-averse environment in which manufacturers of all kinds are trying to protect themselves. And that means sometimes diversifying the source of production.

We've talked a lot about The Reset Economy, a term popularized by Jeff Immelt that refers to companies using the recession to reposition themselves for recovery. What companies are doing that best?
Well, Jeff Immelt's GE (GE) is perhaps the poster child for companies that have been preparing for the post-recession. But there are a whole series of companies that have been making the right kinds of investments. Certainly companies like Procter & Gamble (PG) have been making smart decisions about managing inventory as well as repositioning themselves for what new consumer demands are likely to be. High-tech companies like Siemens and others have been positioning themselves for the requirements of the new economy. Wal-Mart (WMT) has also managed to both address the bottom line and think about what the new consumer impulses are going to be and how they're going to effectively get out ahead of them. There are many examples. And as we've seen from the past, companies that use a recession wisely, not only to manage the bottom line but also to reposition themselves in the marketplace, succeed. I think we're going to see a burst of productivity enhancements come out of this recession and help drive economic growth.

You know, Peter Drucker used to say that companies fail not because they do the wrong thing or because they do the right thing poorly, but because they fail to understand a fundamental shift in the theory of business. Immelt calls it an economic reset. Drucker called it a change in the theory of business. But you could call it a fundamental transformation. The most important thing any company could or should be doing now to prepare for the post-recession environment is to look at all of the fundamentals and reexamine what changes in the theory of business might mean for their core competencies, for their ability to meet the new consumer demand.
Maria_bartiromo
Maria Bartiromo is the anchor of CNBC's Closing Bell and writes the blog, Maria Bartiromo's Investor Agenda, at http://investoragenda.cnbc.com.

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