With all the debate about protectionism, the media has been buzzing about outsourcing and offshoring. As margins are squeezed, companies are looking for control over lead time and costs, and want to recapture profit upstream and downstream. The risks of offshoring (notably execution risk, currency risk and poor customer experience), leave many management teams in conflict about how to scale.
Managers are very aware of the importance of keeping core activities close to the vest. With the rebirth of vertical integration as a growth strategy for small and large companies alike, managers may rethink their definition of core.
Consider the case of a call center; it’s not only the quality of the service that needs to be considered, but also the relevance of it. If the purpose of a call center is upselling and counseling customers, it has more inherent value than one that replaces warranted parts. In the case of the former, it may make more sense for the business to insource. Services requiring specialized knowledge (known as tailored services) may require more finesse and are appropriate for insourcing.
The topic of what is “core” is somewhat misunderstood. Many businesses have tried to boil core competencies down to the bare minimum under the premise that to do so will improve execution. The premise may be correct, but the question becomes, “To what end?” If the core offering is perceived to be the same as all other competitors in a given market space, there is no competitive advantage. Competitive advantage is realized when the tailored services provided are the ones that most deeply resonate with a client.
One must also weigh the strategic consequences of such decisions. Most of the time when a business outsources a function, it loses uniqueness (as any provider could do the same). Will any short-term savings in costs through outsourcing be offset by lost competitive advantage?
Thus, the outsourcing question must be considered in the overall ecosystem of the business. Such discussions often boil up in a strategic planning process, and the use of strategic planning tools can assist in such decision making. Business owners are always looking to optimize the deployment of their resources, but such considerations need to be made within the context of what services deliver unique benefits.