Companies pay a heavy price in lost capabilities when outsourcing a function. Is this out-weighed by the savings?
There is a fascinating piece of research recently issued by Harvard University. The Atlas of Economic Complexity aims to explain and rank the depth of productive knowledge in economies.
The central thesis behind this is measuring productive knowledge through charting the economic complexity within a country. The diversity of different productive activities also reflects the range of competencies that exist within the country. The more complex the economy, the more productive knowledge to manage these various activities and therefore the higher the future growth potential.
The report’s view on the economy is summed as below:
“One way of describing the economic world is to say that things are made with machines, raw materials and labour. Another way is to emphasise that products are made with knowledge. ...When we think of products in these terms, markets take on a different meaning. Markets allow us to access the vast amounts of knowledge that are scattered among the people of the world. ... Products are vehicles for knowledge, but embedding knowledge in products requires people who possess a working understanding of that knowledge.”
This also underlines the ‘value chain’ thinking behind supply chain analysis. Value is not derived in objects like gold or computers, but the knowledge that is applied to them to provide consumers with a service that they desire.
Interestingly, the report’s authors argue that the trick of modernisation often lies in how this knowledge is managed. As skills in different areas combine, additional value is created through the manifestation of new valuable products – e.g. gold beautifies and computers access emails.
If this works for countries, why not companies?
The trend of corporate strategy has been to shed ‘non-core’ functions, outsource ‘transactional’ activities and generally to steer the company to a narrow collection of specialised competencies. The exemplar for this has been Apple, which eschews its own manufacturing base for a highly designed and marketed product.
The model is not terribly complex. Nor does it require a broad set of skills. Although this makes the best use of current competencies available within its organisation, how does this bode for its growth potential?
Other companies with fast manufacturing and distribution bases quickly move into the markets that Apple created. The value that consumers seek is met and the market moves on.
But how can such stream-lined companies develop in the future? If Apple’s market is saturated with cheaper competitors, can it continue to thrive?
Another famous switch from recent times is IBM. The computer manufacturer had been at the centre of global technological development for much of the 20th century. Now, the company is almost a services specialist, offering outsourcing and consultancy advice to its clients. Yet, this switch was only enabled through the complexity of its internal structures and divisions. Its expertise in managing its own productive allowed IBM to recalibrate its output to maximise profits to match the changing needs of the public.
This would have not been possible had the company outsourced its own managerial functions to consultancies in the past. Indeed, it would have seen absurd that the ’Big Blue’ could have transformed into the company that it is today. Yet, had IBM engaged in a series of hard-nosed make-or-buy decisions in the 1980s, its nascent services capabilities may have been spun off. And now it may have just been a memory.
The future path of large organisations can never be predicted, because these changes always reflect the altering needs of consumers in the future.
However, productive knowledge is routinely shed because unimaginative procurement professionals do not presently perceive the value of retaining in-house knowledge. But once this is lost, not only is the knowledge itself lost, but the potential for benefits of this knowledge interacting with other areas of the company’s portfolio is also lost. We saw also in our CPO Strategy 2012 report that once local suppliers are replaced with off-shored production, they are lost forever.
Given the unpredictable nature of the future, are organisations disabling themselves from coping with future change by removing productive knowledge? Arguably, procurement has been at the centre of this trend, warring against complexity and administrative burdens. But will this come at a higher price in the future when the commercial landscape invariably changes?
Perhaps it is time to stop thinking of cost centres and be more mindful of managing centres of productive knowledge?