Famous words from the founder of modern management, Peter Drucker.
Drucker’s belief was that we should build on our strengths, not our weaknesses. If we spend significant time, money, and effort trying to build something when the best we can achieve are only marginal benefits for our efforts, we are making a major misallocation of our always limited resources.
Competencies, outsourcing, supply chain resilience
Understanding our businesses’ core competencies – what we do best – is of course critical to understanding how and where we should focus our efforts, ensuring we are spending our time and money on what we are good at. That is as integral to good strategic planning as it is to overall business management.
Drucker used the example of a “front room” and a “back room” of each business: a company should be engaged in only the front room activities that are critical to supporting its core business, as reflected in its core competencies. ‘Back room’ activities should be handed over to other companies, for whom these tasks are the front room activities. One business I worked with had great concepts for a business offering which required a particular IT platform to support its core business and had built an in-house team to develop the software. Software development was not a core competence of their business, and the cash burn and failure to achieve project milestones was horrific. Overlaid with managerial hubris and they had the making of a disaster. Learning to ‘focus on what they did best and outsource the rest’ was critical to the survival and ultimately the success of that firm, and the project.
What then of ‘supply chain resilience’?
It’s as been fascinating as it has been frustrating to observe what has happened in outsourcing over the years, not least our more recent experiences showing the vulnerability of global supply chains to disruptions we ‘never thought would happen in our technologically advanced civilisation’ (pandemics, threats to the rules-based international order, war in Europe…).
The impacts of these disruptions are felt in many different ways, from the potential of starvation in African countries to the ‘tragedy’ of brand-new European cars arriving in New Zealand without seat warming functions because the manufacturers couldn’t get hold of enough computer chips (I guess we all live in our own versions of reality, don’t we?).
One thing that should be clear by now however is those outsourcing decisions purely driven by cost factors – which were never the intention behind Drucker’s advice – have their own inherent costs which exists within their risk profile – whether they have been priced in or not. Many businesses have suffered for not accurately pricing this element of risk into their outsourcing decisioning analyses.
The intention of this article is not to explore how to achieve supply chain resilience however, rather it is intended to explore outsourcing more generally. That said, there are clearly some approaches to outsourcing which will inherently lead to more resilient supply chains.
To outsource, or not to outsource – that is the question
Concepts of outsourcing actually date back a long way – with Adam Smith, the father of modern economics writing over 200 years ago “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry employed in a way in which we have some advantage.”
We have seen that model applied in many companies with results that range over time from increased profitability to complete inability to obtain key components to their manufacturing processes (think semiconductors, aluminium, food products, plastics, building materials…).
More recently the concept of understanding a businesses’ transaction costs was extended to include accounting for all costs in any business or outsourcing endeavour – what we now call Total Cost of Ownership – the idea of looking beyond price and embracing a total cost of ownership approach when making outsourcing decisions – including the costs of entering into and executing contracts.
The idea is ‘it’s not how little you pay, it’s how much you get’. So instead of squeezing suppliers for lower material, component or labour prices, companies seek to partner with suppliers who have the expertise to look at the complete picture; suppliers who can see how their products or services impact their customer’s operations and make specific recommendations for improvement or better engagement. The value of these improvements can add substantially to the bottom line—much more than gains from price concessions – and more sustainably.
This is where real competitive advantage can be created.
The high-water mark in these relationships is where the procurer and the supplier create close alliances that extend beyond price and focus on developing a real-world, win-win approach to business where they work together to create value. The foundation of their relationship is built on sound economic principles designed for long term sustainable success – not short-term approaches solely aimed at price reductions.
If your core competencies are around effectively employing, training, leading and deploying people and capital equipment to execute project works or maintenance programs against agreed rates/prices/times, how does the competence to excel at writing tenders align to those core competencies?
I saw a court decision recently in which one party’s claim relied on their interpretation of wording in a document they had drafted. Because of a missing comma (called an ‘Oxford comma’, in case you’re interested), they lost their case. Makes one wonder if punctuation should be taught in schools after all. More seriously, this is another example underscoring the importance of using specialists in the right places.
Over two years ago now in introducing myself to the team here I wrote:
“It’s pretty simple:
‘if you don’t get to the table, you don’t get to negotiate…’
You don’t have to be a fan of outsourcing to understand Peter Drucker’s advice to General Electric CEO Jack Welch “make sure your back office is their front office” to see how well the advice applies to winning tenders.
And, if you don’t have a winning Tender – you don’t get to the table.
Of course, having commercial and estimating teams in-house is critical – they hold your core IP.
Having the best bid strategists and writers in-house though?
Well, that depends.
Sometimes an outsider’s perspective with an insider’s resources makes the difference between winning and losing, where the outsider’s expertise combines with the knowledge of people inside the business to ensure the best outcome. Between benefiting from ‘team-think’ and suffering from ‘group-think’.
For smaller businesses total outsourcing of such specialist activities becomes a no-brainer. Larger businesses may benefit from more of a mix and match solution to ensure the team is always ‘changing it up’.”
Two years later, I can’t help but agree with myself.