Wednesday, April 13, 2011

Capability Sourcing - Really the future?

My blog post this week is about to one of the readings - 'Strategic Sourcing: From Periphery to Core'. The article introduces the concept of 'Capability Sourcing' where the company heavily outsources its functions to achieve success.

As I read the article, I was hardly convinced if 'Capability Sourcing' is the way forward for all the firms. I do understand that some of the examples that have been listed in the article are nothing short of impressive. But this, I believe, is not proof enough that all companies need to move forward in this direction, or for that matter, this is where the success of every company lies.

The key statement that struck in my head was 'The questions is no longer whether to outsource a capability but rather how to source every single activity in the value chain'.
This seemingly simple statement has not-so-simple implications for a company. Traditionally, companies have identified the non-strategic operations, brainstormed to separate the core competencies and differentiating activities from the more commoditized ones, and have taken steps to outsource the non-value add activities to other vendors.

But as the article suggests, the firms now should think more on the lines of 'Who can do this function the best', and then secure a strong alliance with that outsourcing partner. In my opinion, this is not the correct way for the firm to function. My arguments against this sort of model is the following

  1. This model makes it even more difficult to maintain a differentiator amongst competitors. As everyone finds the best firm to do a certain operations, the competitive advantage of sourcing from the firm diminishes, gradually stabilizing the differences amongst everyone.
  2. The idea of sourcing functions from the one who does it best starts to blur the lines on core competencies. This idea is too easily abused where managers and key executives are only trying to find the best firm to address the needs and forget what is strategic for their own company.
  3. As many of the firms functions are now being sourced by different partners, the risk involved in the operations of the company increases many folds and so does the planning to mitigate these risks. This puts tremendous pressure on the executives of the company and would consume valuable time off their schedule which could've been used to further the firm in many improvement areas.
  4. Many functions are easy to monitor and control, for example, HR processing. The metrics to monitor these process can be derived easily and the vendor offering these services can be held responsible in cases where they fall short. I feel that there are many functions of a firm which cannot be reduced to metrics easily enough, such that the function can be outsourced and be monitored. I believe some functions are like a black box which can be easily moved around, from one vendor to another and others are more fluid and cannot be easily detached from the company and be passed around from vendor to vendor.

Furthermore, the example of 7-Eleven in the article goes to great lengths to prove the point of 'Capability Sourcing'. But at the end of the article, I cannot help but feel that 7-Eleven moved from one extreme to another extreme. Initially, it was a vertically integrated company and at the end of 'Capability Outsourcing', it comes out as a company that has spread itself too thin.
The frameworks provided by the end of the article seems valid to me, though I could hardly see them as something that aid 'Capability Sourcing' as explained by the authors. They seem to match the frameworks that are traditionally used to identify functions to outsource.
The business relationships that 7-Eleven was able to forge with partners like Hershey and Anheuser-Busch is possible in traditional firms too, and they have been around since a long time. Such partnerships cannot be really credited to 'Capability Sourcing'.

I do believe that outsourcing is key for a company to be competitive in today's economy, but I do not believe that capability based sourcing is the future. I believe outsourcing has allowed the key differentiators of firms to become more pronounced, as firms outsource different aspects of the same business, leaving them with different core competencies.

As I end my article, I would like to ask my peers what their opinion on 'Capability Sourcing' is. Do you believe 'Capability Sourcing' is the future?

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.