The Compelling Case for Capability Sourcing

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    A friend turned me onto James Robertson's comments about this week's ComputerWorld Q&A with Mark Gottfredson. Of course, the latter referenced an article by Mr. Gottfredson and two colleagues in the Feb. 2005 issue of Harvard Business Review, so I had to trot off and track down my issue, which I hadn't even taken out of the polybag yet.

    Here's the rundown, which is ultimately, all about sourcing. In HBR, Mr. Gottfredson, Rudy Puryear and Stephen Phillips write a fascinating account of what the company of the 21st century may well come to resemble: an organization that's expert in controlling and making the most of critical capabilities, "whether or not they reside on the company's balance sheet." The authors proclaim a "new era of capability sourcing." If you're accustomed to hearing that "core capabilities" need to stay internal, think again, they say. "…Most companies continue to make sourcing decisions on a piecemeal basis. They have not put hard numbers against the potential value of capability sourcing."

    The idea is to determine what functions within your company have the highest outsourcing potential and which should remain under your company's control. Don't make the standard assumptions: "Oh, well, those would be our marketing abilities, or our design abilities, or our customer interaction abilities…" The fact is, there's probably some other company out there that can tackle one or another of these and do a far better job than you can. You have to establish just how a) proprietary and b) unique the function is. The further away from that intersection the function is, the more likely a candidate for sourcing.

    Given that, once you've figured out which capabilities offer the highest potential value from outsourcing, then you need to scrutinize how efficiently your company performs each. The article even suggests that "if your cost per transaction is low enough and your quality high enough, you should be thinking of selling that function as a new business in itself."

    The third broad step is to do a "reality check in which you determine whether a capability that is a strong candidate for strategic sourcing can be carried out at a distance without any loss of quality." The authors call "physical proximity" a "moving target."

    Along the way, you'll read about the efforts in this area of companies like Chrysler, 7-Eleven and American Express.

    I would call the article genius, in the same way that Nicholas Carr's essay, "Does IT Matter?" was genius — whether you agree or not — because it lays out a compelling set of ideas that question the train of current thinking.

    So that's story number 1. Story number 2 is the ComputerWorld Q&A with Mr. Gottfredson. The problem here is that Mr. Gottfredson doesn't come across as nearly as brilliantly as he does in his original article. He provides such jewels as this one:

    If you have a very carefully written contract for a service-level agreement, and if it's not met, there's an immediate financial penalty, so they'll do all they can to make sure you're satisfied. You actually have more control.

    The fact is that service providers write into their fee structures the expectation that financial penalties will surface and that they still need to make money on the deal, whether or not their standards meet your service level expectations. These kinds of clauses in contracts frequently only provide a facade of control for the client. (Granted, without them, you have even *less* control, but there are alternatives, as we'll report in a future article.)

    But even though the Q&A is a poor reflection of Mr. Gottfredson's thinking, story number 3, the blog entry by Mr. Robertson, does even a worse job of communicating the coming retransformation of the corporate organization. The blog focuses on the comments Mr. Gottfredson makes in the ComputerWorld article and doesn't reference the source material in HBR at all.

    Mr. Robertson's bottom line: that offshoring to India for software development is a sucky idea. He makes great points along the way (the time difference between the US and India makes communication hard, salaries of tech professionals in India are going up and people are moving around from company to company a lot, which makes for an unstable workforce, and customer service is a horrible thing to outsource because idiots might end up giving your company a bad rep).

    What he fails to acknowledge — because he's focused on the trees, not the forest — is that the company structure is evolving and what it excelled at last year won't be what it excels at in a decade.

    Do yourself a favor. Check out the HBR article for $6 here. It's a fast, good read that'll get your mind thinking to the future and what roles you — and the rest of us — might play.

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