The concept of ‘core competencies’ has been developed from the resource-based view theory. Core competencies are the ones that afford the firm a sustainable competitive advantage. Non-core activities are the ones that support the core activities but by themselves do not afford the firm a sustainable competitive advantage. Many organisations have made strategic outsourcing decisions by drawing on this wisdom. The logic that has been followed is that the organisations should outsource the activities and functions that are not core to their organisation in order to free up capacity to focus on their core activities. This idea is an attractive proposition, for it promises reduced headcounts, increased efficiencies, and since we’re effectively sourcing from suppliers with expert knowledge, more effectiveness as compared to if the service would have been managed in-house. Certainly then, such engagements should be considered beneficial, for we’re getting more for less, right? As Professor Paul Cousins and I have uncovered in our work, this is not always the case.
In our research, we observed that mindless outsourcing of so-called non-core activities can, and often do, lead to suboptimal outcomes. As organisations start outsourcing these activities, they expect themselves to be free of the ‘cost’ of managing them on a day-to-day basis. Little do they realise that what they have outsourced is essentially a problem, instead of procuring a solution. Since they have not specified the required solution well enough, they often play into the hands of the supplier. The most common specification, in this case, is the time-and-materials (T&M) specification, which in the academic literature is known as an input-based specification. Under the auspices of such a contract, the client requests for certain resources to be made available for a certain time. An example of this could be, ‘I want 3 engineers deployed on my site- 8 hours a day, 5 days a week’. Clearly, the responsibility of the supplier begins and ends with making sure there are three engineers available at the client’s site at the requested times. The responsibility of getting value out of these three engineers rests with the clients. And don’t even get me started on the SLAs!
The outcome of such engagements is that the client ends up spending even more time and resources than before to get some value out of the contract. For example, what if the supplier decides to replace an engineer with which the client has developed a relationship with another engineer? The client-specific, tacit knowledge that the engineer has developed is lost. The client will then need to re-develop the relationship and knowledge with the new engineer. In our research, we observed that the client had to invest significant time and resources ‘upskilling’ some of the new engineers to compensate for the lost knowledge. This is not a new phenomenon. Who doesn’t remember Sainsbury’s IT outsourcing story in the early 2000s? Sainsbury’s outsourced its IT function to Accenture, who was a relative newcomer to the UK retail sector. Accenture, a technology consultant, made up for its lack of functional knowledge by hiring a lot of Sainsbury’s personnel and training them on technology. Over the next couple of years, Sainsbury’s became increasingly dependent on Accenture. Years later when Sainsbury’s wanted to terminate its relationship with Accenture, it had lost all of its tacit knowledge to Accenture. Therefore, Sainsbury’s had to invest a lot of time and resources to rebuild its IT capability from the scratch. Compare this with its rivals such as Tesco and Wm Morrison, who in spite of being in the business of retail, never outsourced their IT functions.
So, the next time you decide to outsource a function, think carefully beyond the core- and non-core function so the service and more about the transaction costs- the cost of managing the service in-house or in the market. Is this really a non-core activity? Is outsourcing it really an efficient and effective decision?