Peter Drucker (1954: The Practice of Management, plus 37 more management books), espoused decentralization in management. He first thought of “Outsourcing” as a business practice towards the faster growth of the business. He proposed “Management by Objectives” (MBO) whereby the company focused on its core business, and back-room activities (non-core) should be handed over to other companies, for whom these tasks are the front room (core) activities. Outsourcing would cut costs for the firm, Drucker pointed out. It was possible and logical, as the global economy was just then opening, and there were cheaper supply sources abroad.
But the 1979 energy crisis, caused mainly by the Iranian War disrupting the world oil supply, caused high prices and world inflation and dragged many countries into debt crises. In 1982, the World Bank declared a “global recession” that lasted until at least 1985. Globalization was stalled.
That was where Tom Peters and Robert H. Waterman (1982: In Search of Excellence) were coming from — there needed to be a change of strategy in the microeconomics of the business firm, forced by the chimera of the New Normal in the world recession.
Analyzing “what works” for 43 “excellent” publicly traded companies at that time, Peters and Waterman identified common characteristics which they argued were responsible for the success of the chosen corporations. Basically, the excellent companies were people-oriented (focused on employees and customers) and kept their ears to the ground — “Management by Walking Around” debunked Drucker’s textbook slogan of “Management by Objectives.”
Against the backdrop of the world recession, the basic “what works” for a business was never more crucial:
• “Stick to the knitting” — remaining with the business the company knows best.
• Simple form, lean staff — few administrative layers, few people at the upper levels.
• Simultaneous loose-tight properties — being adaptable, but always in line with core values of the company.
In other words, a business must “KISS” goodbye vanities for going big and let “Big” happen because of good core values and ethical and fair management practices. “Keep It Simple, Stupid!” is what KISS stands for, one of the cutesy acronyms of the MBA classes and smooth-talking business executives of the 1990s.
And the advocations of the sage Peter Drucker (then 73+ years old) were upstaged by the practical solutions of the younger generation (40+ at that time) business thinkers Peters and Waterman, who sold 3 million copies of In Search of Excellence in the first four years, the most widely held monograph in the United States from 1989 to 2006. Debunked was Drucker’s prescription for outsourcing as a main business strategy: “Do your best and outsource the rest,” which Drucker wrote in his Wall Street Journal (WSJ) article entitled “Sell the Mailroom.”
Peters and Waterman proposed “Insourcing” or keeping operations and processes within the organization for direct availability, surer control, and tighter security and confidentiality. It is congruent with the business strategy of vertical integration in which a company acquires or has control over the operations of its suppliers, distributors, or retail stores in order to control its supply chain, reduce costs, and improve efficiency. “Stick to the knitting,” Peters and Waterman exhorted, know your business well by doing all yourself.
In the crunch of the world recession of the 1980s decade, that was good advice. Be self-sufficient to survive when market forces have gone crazy: supply is down, demand is down, prices are up-and-down because even inflation itself does not know how high it has gone. Not the time to depend on others to plan your life! DIY (Do it yourself) is the operating instruction.
But the booms and busts in the net-OK of the world economy after the 1980s crisis encouraged new business strategies supported by the new technology for processes and quicker market information. Supply-side economics that fed consumerism stirred competition in business and whetted gourmand appetites for profits. Outsourcing has been the ready tool again for the business strategist who wants to multitask marketing, sales and promotions, and cut costs in production. Governments seem not to notice rampant mergers and acquisitions, in horizontal integration of businesses to expand market share that may lead to monstrous monopolies.
Comes the COVID-19 pandemic in March 2020, which has lingered for one and a half years, and going. The world economy is down — in a deep recession. Businesses have closed temporarily or permanently. Workers are restricted to rotation reporting (with no work, no pay) or outright lay-offs from their companies. The protocols of the pandemic have gravely affected labor and materials supply as well as delivery of products and services. Demand for most goods and services (except for food and necessities) has sunk, in the fear and anxieties of the people about health and survival.
Business strategies must be reviewed and new tactics implemented. Some companies have realigned jobs and reversed to insourcing in the forced vertical integration of processes and materials. Many outsourcing contracts from abroad for Business Process Outsourcing (BPOs) for the over 700 BPO companies in the Philippines have not been renewed, in the same uncertainty suffered under the malingering COVID pandemic. Sub-contracts for freelance workers have lessened in the realignment of dislocated regular employees to jobs vacated by hapless others who resigned, are on forced furlough, or were made to go in the cost cutting of floundering companies. Feels like déjà vu of the 1980s world recession and its aftershocks of financial crises.
“In terms of the coronavirus pandemic’s impact on businesses and households, the Philippines had it worst compared to Indonesia, Thailand, and Laos,” according to a study by Asian Development Bank (ADB) financial sector specialist Shigehiro Shinozaki (Rappler, Sept. 16, 2020). It showed that 70.6% of micro, small, and medium enterprises (MSMEs) in the Philippines were forced to temporarily close due to the COVID-19 outbreak. Philippine MSMEs also noted the most cancellations of contracts (19.1%) and delayed delivery of products and services (35%) during the lockdown. Note that the work-from-home setup is “not a serious option for MSMEs,” with only 13% to 21% of businesses in the four countries adopting the scheme. This means that small businesses adapted to the pandemic through temporary layoffs, rather than implementing work-from-home schemes that governments have encouraged. These MSMEs were mostly serving outsourcing contracts, while subcontracting products and processes to other MSMEs and individual contractors.
The 2020 List of Establishments of the Philippine Statistics Authority (PSA) recorded a total of 957,620 business enterprises operating in the country. Of these, 952,969 (99.51%) are MSMEs and 4,651 (0.49%) are large enterprises. The statistics emphasize the extreme vulnerability of the Philippine business sector to recessions and economic downturns, with the 99.51% MSMEs as most easily infected by financial and production factor crises. Size matters.
Indeed, technology has dramatically helped to somehow level the playing field for businesses, and the inter-dependency in globalization has reciprocal gains, but in the end, as a crisis shows, it’s every man for himself. Self-sufficiency is still the best strategy for a business.
Amelia H. C. Ylagan is a doctor of Business Administration from the University of the Philippines.