There’s outsourcing and then there’s strategic outsourcing
. The distinction between the two seems obvious today but professors James Brian Quinn and Frederick G. Hilmer did groundbreaking work that identified and evaluated the core competencies that go into strategic outsourcing decisions in the early 1990s. Their findings are still practical today almost 20 years later.
Quinn and Hilmer collaborated on an article
published by MIT Sloan Management Review that outlined two strategic approaches. Their research found that “when properly combined, [strategic outsourcing] allow[s] managers to leverage their companies’ skills and resources well beyond levels available with other strategies.”
The two approaches outlined in the article are as follows:
- Concentrate the firm’s own resources on a set of “core competencies” where it can achieve definable preeminence and provide unique value for customers.
- Strategically outsource other activities — including many traditionally considered integral to any company — for which the firm has neither a critical strategic need nor special capabilities.
These ideas were considered new at the time but had actually been examined in academic research for many years. They became part of the modern outsourcing playbook, which lead to the concepts of collaborative sourcing and relational contracting based on organizations’ most strategic relationships.
Quinn, who passed away in 2013, was professor of Business Administration in The Amos Tuck School of Business Administration at Dartmouth College; Hilmer was the President and eighth Vice-Chancellor of the University of New South Wales.
They noted that when thinking about what “core” means, “the concept requires that managers think much more carefully about which of the firm’s activities really do— or could—create unique value and which activities managers could more effectively buy externally.”
Their study of successful (and unsuccessful) corporate examples showed that effective outsourcing applied the following concepts:
- Skill or knowledge sets, not products or functions. “Executives need to look beyond the company’s products to the intellectual skills or management systems that actually create a maintainable competitive edge.”
- Flexible, long-term platforms — capable of adaptation or evolution. “Too many companies try to focus on the narrow areas where they currently excel, usually on some product-oriented skills.”
- Unique sources of leverage in the value chain. “Effective strategies seek out places where there are market imperfections or knowledge gaps that the company is uniquely qualified to fill and where investments in intellectual resources can be highly leveraged.”
- Areas where the company can dominate. “Companies consistently make more money than their competitors only if they can perform some activities — which are important to customers — more effectively than anyone else.”
- Elements important to customers in the long run. “At least one of the firm’s core competencies should normally relate directly to understanding and serving its customers.”
- Embedded in the organization’s systems. “Maintainable competencies cannot depend on one or two talented stars…whose departure could destroy a company’s success. Instead the firm must convert these into a corporate reputation or culture that outlives the stars.”
They concluded that companies could substantially leverage their resources through strategic outsourcing by “(1) developing a few well-selected core competencies of significance to customers and in which the company can be best-in-world; (2) focusing investment and management attention on them; and (3) strategically outsourcing many other activities where it cannot be or need not be best.”
They acknowledged there are always some inherent risks in outsourcing, but then there are also risks and costs of insourcing. “When approached within a genuinely strategic framework, using the variety of outsourcing options available and analyzing the strategic issues developed here, companies can overcome many of the costs and risks.”
Quinn’s and Hilmer’s insights into strategic outsourcing resonate strongly today, making the value of outsourcing clear, if it is done the right way through collaboration, trust and shared values.