Tuesday, October 18, 2011

Outsource this!

In theory, organizations should focus on their core competencies and outsource everything else. The problem with that theory is the difficulty in deciding what is a core competency and what isn't. If I run a business making concrete, I want to focus on making concrete and selling concrete. Those are my core competencies and everything else should be outsourced. Typically accounting and IT can be done by specialty organizations. Let a company whose core competency is accounting or IT do my it for me.

Generally speaking, concrete is a classic commodity business. Nothing fancy or complicated. Like any commodity business, the product and its manufacturing process have not changed in decades. Unlike the music industry where iTunes revolutionized the distribution channel, concrete is not likely to see technology radically change its physical shipping methods.

In this type of business (and arguably any type of business) accounting techniques are legally required to be identical in every organization.  There is no point in making it a core competency. In the concrete business the final product is so similar among manufacturers that there is no competitive advantage in accounting. Accounting is the classic outsourcing target.

But is accounting just like IT? They both may not look like core competencies, but IT warrants further scrutiny. First of all, it is not legally required to operate the same way across every organization. That gives IT some room for creativity and innovation. Second, IT can have a multiplier effect in global economies and within corporate cultures. The multiplier effect of technology means the right IT investments can have disproportionately large impact on profits.

How does innovation occur in your organization? In a culture that respects new ideas, innovation can take hold. Even in the example of a commodity business like concrete, there is always room for new process ideas and creativity. Maybe the final product is boring and simple concrete. But there is an unlimited amount of room for improving internal methods.

Any organization can create sustainable competitive advantage by continuously, rigorously, and ruthlessly examining their internal processes. All process improvements are driven by information changes and new knowledge. Inevitably, new information systems technologies are demanded to support and often drive these changes. An internal IT organization that understands the intimate details of the business model is infinitely better suited to drive such innovation than any outsourced IT organization. That makes IT a core competency.

What you outsource should never be cast in stone ... or concrete.



  1. From Chris Wood:

    In my mind, there are two significant problems with outsourcing unless it is simply maintaining "steady state", and let's face it, in these times we live in, there is no such thing as "steady state",

    1. The primary interest of the outsourcee is maximizing profit and this is rarely in the best interest of the outsourcer. The attitude that "we will be successful if we make our customer successful" was not something I observed.

    2. The communication pipe is too constricted. In a non-outsourced environment there is usually freedom of communication between the business and IT, with a constant exchange of ideas, to culminate in the best cost-effective solution. In an outsourced environment, the business gets one-shot at specifying in excruciating detail what they need. If, God forbid, they need to add something after sign-off or make the smallest change or clarification, then the outsourcee calls it a change request, which they can price with impunity.

  2. Amen to your comments, Mark & Chris.

    I've been on both sides of the outsourcing equation, and it rarely seems like there's an intrinsic desire to service the customer beyond the basic needs. The prevailing attitudes seemed to be 'deliver what the customer requested' (which might not actually be what they *need*), and quickly move on to the next project. Loose ends seemed to be the norm, as well as no incentive to help bridge areas where efficiency could be realized (AKA the "not my job" attitude).

    Treating everything like a commodity is going to get you commodity-level service and results.

  3. I particularly love the last paragraph and it is so true, with the exception of the last line. IT can be a core competency, but it is also important to note that "not all IT is created equal". Commodity IT, may not always fit in that category.

    I'm working with a community/networking group that has spent considerable time and money developing their own, proprietary social media network. Just an example of how not all IT needs to be identified as a core competency.

    Great post Mark! Keep em coming!

  4. Good point Scott. By saying IT is a core competency, I don't mean to imply all IT has to be part of the centralized IT organization. The central and distributed groups need to work together as close friends.