By Nicholas G. Carr
It's an old puzzle: How much of your company's work could be done by somebody else? The fashionable answer is, Plenty - so we're going to outsource. And that, too often, is the wrong answer.
The question no one seems to be asking is whether an outsourcing partnership always makes sense. Sure, it may allow you to impress Wall Street with your robust return on assets, but the decision to partner is far more complex than most folks care to admit, and failing to address it head-on could undermine your operation's long-term viability.
True, the Internet has helped to reduce intercompany transaction costs dramatically. But few would admit that they outsource just to save a buck. Typically a deeper rationale is at work - it goes by the term "specialization." According to this theory, if your company can concentrate all of its investment and energy on the one thing it does best and hand off everything else to partners, it can achieve unprecedented levels of efficiency, speed, and quality. The core competence can be almost anything - from brand management to product design.
Given how the concept of core competence dovetails with Internet technology, it's no surprise that so many tech gurus fervently promote radical visions of corporate specialization. Soon, we're told, individual companies will cease to exist - replaced by vaunted "business webs," or "econets," or "e-cologies."
It sounds logical enough. But there are at least two fatal flaws in this thinking. First is the simple fact that the core units of economic activity in our capitalist system are not - and will never be - ill-defined, ever-shifting blobs of commercial protoplasm. They are individual companies, with discrete income statements and balance sheets. The walls between companies may become increasingly permeable to the flow of information, but they will not fall. Businesses are not suddenly going to shed their corporate clothes and run off to join communes. And if executives start concentrating on the results of a broad network of companies, rather than their own operations, they run the risk of making decisions that undermine the economics of their businesses in the long run.
The second pitfall is subtler. It lies in the assumption that it's always in the best interest of a business organization to specialize. A true core competence is not a single, narrowly defined activity or capability; it's a unique system that in total is more valuable than the sum of its parts. And quite often it defies any realistic or logical fragmentation.
As soon as you turn your company into a perfect self-contained module, it becomes a commodity. Big profits typically lie in complex internal systems. Wal-Mart, for instance, is a great company not because it's masterly at procurement, pricing, merchandising, or site selection, but because it does all those things - and much more - in a tightly integrated way. If it were to start outsourcing pieces of itself, it might enjoy a brief boost in productivity, but it would doom itself to a long-term erosion in distinctiveness and, hence, profitability.
So should you strive to be vertically integrated, like the Ford Motor Co. of old that owned rubber-tree plantations in Brazil? Of course not. There's little doubt that outsourcing plays a major role for any corporation, but not at the expense of innovation or competitive advantage. Your long-term strength ultimately comes from within - don't sacrifice it for short-term gain.
Originally published in February 2002.
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