What is your basis of competition? Or what can you safely outsource?

Mike Atwood, Expert Contributor for IT Outsourcing, Horses for Sources

There was some great discussion recently on why outsourcing in competitive times tends to lead to a redistribution of human capital, as opposed to a reduction.  Companies during downturns get polarized on driving out cost (and none more so with the nasty recession we’ve just endured), while companies in times of renewed opportunity seek to invest in new growth opportunities – with as little cost to themselves as they can avoid. 

Today’s current climate is all about renewed opportunity, but the ongoing uncertainty is driving firms to pursue the dual strategy of cost-elimination with increased focus on sharpening their competitive edge.

When the core issue is purely cost-elimination, the aging theory was to focus on outsourcing non-core processes and retaining the core, however, HfS analyst Mike Atwood invokes some interesting theory that the old core/non-core argument isn’t weighing up to much in this economy – it’s more about making outsourcing decisions based on your basis of competition. 

What is your basis of competition?   Or what can you safely outsource?

This seems like an easy question, but many people don’t seem to know what it is, or accept that it may be changing.  Quite simply, your basis of competition is that reason why your customer chooses you over your competitor. It can be color, feature, function, style, availability or a host of other things. It is crucial that you know your basis of competition and then concentrate the resources of your enterprise into being the best in the world at whatever that is.

Using the automotive industry as an example, the car’s, features, function, and appearance were initially the most significant characteristics in the buying decision of most consumers.  However, in the recent past the dealership experience and service after the purchase have become more important to a significant portion of the market.  The American auto companies appear to have missed this shift.  The big three still devote most of their capital and management talent to developing new products, when they should be concentrating a significant portion of those resources into making the dealership experience more “user friendly”; just as their competition has.

 This “basis of competition” becomes the basis for making outsourcing decisions. This has often been confused with the idea of “core” and “non-core”.  I think these designations are confusing.  Core invokes images of support pillars and foundations and weight bearing beams, while outsourcing seems to imply that you don’t believe these things are important.  Clearly this isn’t correct.  They are important, they have to be done well, and they must be performed in a timely and transparent way to the organization. However, if a function isn’t your basis of competition, you still need to have it done the in the most effective and efficient manner that you can.  Whether or not you do it in house or hire someone to do it for you doesn’t matter, as long as it is the most effective way of getting it done.

The beginning of any outsourcing project is a strategic plan for your business. You need to understand what markets you are going to be in both functionally and geographically.  You also need to understand how you are going to win in those markets.  Why is your offering going to be the most appealing?  This may be as simple as no one else is in that particular market or it may be something distinctive about your product or service.  Whatever it is, the distinction won’t last long and pretty soon someone will show up offering something similar, so you must plan the changes you will build into the offering going forward in time.

The forward looking plan will require capital, management attention, and an understanding that you will have to adjust when something unexpected happens.  Given that you are in this rapidly changing game, you need to look at those functions that you are currently doing that take time, capital, other resources and determine if you can find a way to do those things with less. This is where outsourcing comes in.

Outsourcing isn’t new. It has been going on since the industrial revolution. The simplest example is electricity.  The Ford River Rouge Complex built by Henry Ford to be a model of modern efficiency, generated its own power and fed it to every part of the complex, including Henry’s house.  As local utilities developed, every company in America found it easier and cheaper to buy that power from the utility and not have its own power generating capability, other than for short term emergency situations. No one today would think of building their own power generating capability.

In the mid 1960’s, as computers were becoming a ubiquitous business tool, many upper and mid level managers were struggling to understand how to use these tools. Everyone wanted one or more of these tools; the expense was a new line item they didn’t understand and the budget requests were growing exponentially year over year. 

Into this environment, companies like EDS began to offer what would today be called BPO services. They made the capital investments and more importantly had the technical management talent to not only manage information technology resources, but to take advantage of the capabilities that were offered. The interesting innovation here was beginning to sell services, rather than software. Initially, this was attractive to banks and insurance companies where the outsourcer processed claims or kept bank records.

As these companies expanded, they simply did not have the expertise to find more and more innovations to the processes of the industries they were try to penetrate. Eventually they began selling operating the computer infrastructure as a service, as well as larger and larger contract programming projects. This made the Information Technology environment a utility. Soon there were standard resource units and comparison shopping was facilitated.

In this IT example, the outsourcer provided value by having a best in class process (or set of processes) to deliver IT infrastructure globally. The outsourcer leveraged economies of scale to spread assets and scarce technical expertise across multiple clients. The underlying process was important to the business, but wasn’t a competitive differentiator. Quite simply, the computers need to run well, but no one ever bought an outsourcer’s client’s product or service because their files were backed up or the clerk’s terminals had a good response time.  If the company didn’t have a good computer infrastructure the company would not function well, but the competitive differentiator is why people buy the output.

Once you have determined what you are going to compete on, then you need to develop a plan to be the very best in the world at delivering that competitive basis. There are many things that you’ll need to do to deliver, but only a few will be absolutely key. How you achieve that basis is something that you most likely will want to keep as secret as possible. You’ll clearly want to do that with your own employees and, preferably, ones that have a significant stake in the prosperity of the company.  Everything else you need to do is important, necessary, and vital, but isn’t something that gives you a competitive edge. It isn’t core.

So, if there is a provider that can do those things for you at the necessary quality levels, then you need to evaluate if they are also less expensively, will  allow you to avoid using your capital, and will give you more hours in the week to focus on  delivering, and improving your competitive differentiation.  If they can, then outsourcing is the best way for you to proceed and enhance your competitive basis.  

Mike Atwood (pictured above), is Expert Contrubutor for IT Outsourcing strategies for HfS Research Ltd.  You can access his full bio here.

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5 Comments

  1. James Wheeler
    Posted April 18, 2010 at 8:16 am | Permalink

    Mike,

    Excellent synopsis of the old “what should you outsource” discussion. You hit the nail on the head here: “Whether or not you do it in house or hire someone to do it for you doesn’t matter, as long as it is the most effective way of getting it done”. Your analogy of the automotive industry sums this up: too much capital investment in areas that are non-competitive (i.e. product as opposed to service) was the core cause for its competitive failure. It’s all about investing in those areas which will make you competitive, and it varies from industry to industry,

    James

  2. Benny Kirsh
    Posted April 18, 2010 at 5:04 pm | Permalink

    I was thinking about this topic this week as I hear more and more companies entertaining the “cloud option”: Google Apps, Salesforce.com, Workdays, etc and I completely agree with Mike’s theory.

    Companies are outsourcing more and more and cloud computing, as an example, is starting to reach the CFOs of the world to save money. It seems that companies are moving applications to SaaS platforms, and are being convinced by the providers that have created the ultimate security solutions, to maintain their systems.

    A “C” level would not hear of it 5 years ago. Whoever thought that your sales information would not be securely kept on premise, not to mention HR? I believe we will see, in the next few years, companies moving their core processes to outsourced providers as Mike suggests. The breakthrough will be financial systems then all other will follow.

    Great article,

    Benny Kirsh

  3. Curtis Greve
    Posted April 18, 2010 at 6:26 pm | Permalink

    I think companies outsource for three primary reasons:

    1. Outsourced function is not a core competency and the service provider will provide a huge leap in technology, service, or some other concrete deliverable.

    2. Outsourcing provides speed to market and flexibility. Outsourcing supply chain operations provides companies with an entire team ready to provide capital equipment, leadership, and over sight in less time than it would take the company to find property to buy which they would build on, months later.

    3. Reduce risk and limit liability. Outsourcing provides a layer of protection, for example, from union organizing efforts or similar outside threats. Outsourcing can also limit liability. In supply chain operations, the customer can have a guaranteed limit to expose to shrinkage, worker’s comp, health insurance increases, and other areas that can be tough to control.

    There are a number of reasons and they clearly differ depending on what you are outsourcing but these three are the primary reasons companies outsource supply chain management functions.

    Curtis Greve

  4. Noel Thomas
    Posted April 21, 2010 at 9:44 am | Permalink

    Mike,
    A great summary of the issues around the outsourcing decision – enjoyed reading it.

    In such discussions I also use the approach: if a function/process does not differentiate the company in the eyes of its customers, then it needs to be performed as efficiently and effectively as possible. That can mean looking at the broad range of options such as outsourcing, shared services, on/offshore etc… to for example drive scale and reduce cost, and so forth.

    cheers,
    Noel

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