In a LinkedIn discussion at https://www.linkedin.com/groupItem?view=&item=5912670423937478660&type=member&gid=84758&trk=eml-b2_anet_digest-hero-4-hero-disc-disc-0&midToken=AQFNSRpfQ-416Q&fromEmail=fromEmail&ut=1PAPLXT2WvyCo1
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 http://fredacummins.blogspot.com/2013/02/value-delivery-modeling-language-vdml_4878.html
. 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.