Saturday, September 20, 2014

Does a company have a capability if the capability is outsourced?

In a LinkedIn discussion at the question was raised, if a capability is outsourced, is it still a capability of the outsourcing company?  Capability analysis has gained attention from capability maps.   Capability also is a key concept of the Value Delivery Modeling Language (VDML), see .  Capabilities are fundamental to a high-level understanding what a company has or requires to deliver its product or service.  I think the LinkedIn discussion suggests that we do not have a shared definition of outsourcing.
To me, outsourcing is engaging an independent business entity to provide a commodity product or service. The outsourced operations represent a required capability, but the implementation is a black box to the purchaser.  The outsource provider is free to perform/implement the capability as it determines best to meet its obligations on delivery of the product or service and be competitive.  

Consider that the outsource provider may, in turn, outsource some of its needed capabilities.  Furthermore, the outsource provider should also be free to provide the same capability to other purchasers/consumers, including competitors of the purchaser—that is one way it can achieve economies of scale not available to its consumers.  The provider also will try to develop its capability in a way that gives it a competitive advantage over its competitors.
The product or service must be a commodity because the purchaser cannot put its key business capabilities in the hands of an external source to be shared with competitors.  That provider might not have the capacity to meet demand of increased business of the purchaser.  Furthermore, the provider may decide it is advantageous to devote increased capacity to the purchaser’s competitor.  If the provider fails to perform, then what? 

The purchaser must be able to find an alternative source.  Of course the provider may fail as a business, and the purchaser must be able to obtain the product or service elsewhere.  The purchaser should obtain the outsourced services through competitive bidding which ensures appropriate pricing as well as the availability of alternative providers.  The purchaser might be well advised to obtain the product or service from multiple providers. 
If a company needs to engage in defining or managing the details of an outsourced operation, then the capability should not be outsourced.  However, the company does need to invest in managing the relationship with the provider to ensure that the provider meets expectations such as product specifications, responsiveness, product quality, risks, and security that might adversely affect the company’s business.

If we are not dealing with a commodity product or service, I would characterize the arrangement differently.  For example, a franchise involves engaging outside business entities to provide necessary capabilities, but the franchiser will generally require an exclusive franchisee, and control over much of the operation so that there is consistency in the end product or service, and multiple franchise operators (as well as the franchisee) can benefit from economies of scale achieved by the franchiser.
If the purchaser needs critical capabilities for a new business opportunity, it may not be able to develop the capability, or it may not have the necessary intellectual property to be competitive.  Then the needed product or service is no longer commodity.  The purchaser cannot simply engage a black box, and it is desirable to have an exclusive arrangement to exclude competitors.  A joint venture is a possible arrangement.  The participants recognize their interdependence, and they make commitments to working together.  Typically there will be shared benefit from the success of the joint enterprise.

Engaging contract personnel might be considered another form of outsourcing.  Contract personnel may be engaged to increase capacity but with their activities restricted to protect key activities.  However, the company may obtain important special skills from contract personnel, and may more directly control the work products and intellectual property used or created by the contract personnel to preserve competitive advantage.  However, this is a weaker form of possessing the key aspects of an essential capability.
This might be a good time to consider the difference between a capability and a competency.  When a business has or develops a competency, that means it controls the key capabilities to be competitive, or realize competitive advantage.  This includes possession of the key resources, intellectual property, relationships, etc.  An enterprise may obtain a capability through outsourcing, but it cannot realize a competency through outsourcing.

So a capability may be outsourced if it is a commodity and outsourcing achieves economies of scale and/or relieves the outsourcing company of the burden and risks of managing an internal capability.  It is still a capability that is part of the company business.  A competency cannot be outsourced.  There are other alternatives to realizing capabilities from external sources that are essential to a competency, but these involve more collaborative and exclusive relationships that protect the competency and preserve competitive advantage.

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