Outsourcing BI: Why You Need to Know Your Competitive Basis
Industries are inspired by competition. This is advantageous for organizations relying on outsourcing, with a plethora of vendors vying to provide that harmonious service you are looking for. Then again, do you need to outsource everything? Mike Atwood from Booz & Company looks at why competition has taken on a whole new meaning.
This article was originally published by Enterprise Management 360° and is reprinted by permission.
[Editor’s note: Many enterprises are looking at growing their BI programs outside their organization. This article looks at why understanding your “basis of competition” is the first step in considering whether to outsource your project.]
By Mike Atwood
This seems like an easy question, but many people don’t seem to know what it is or accept that it may be changing. Quite simply, your basis of competition is that reason why your customer chooses you over your competitor. It can be color, feature, function, style, availability, or a host of other things. It is crucial that every enterprise knows its basis of competition and then concentrates its resources of the enterprise into being the best in the world at whatever that basis is.
Using the automotive industry as an example, the cars, features, function, and appearance were initially the most significant characteristics in the buying decision of most consumers. However, in the recent past, the dealership experience and service after the sale have become more important to a significant portion of the market. The American auto companies appear to have missed this shift. The Big Three still devote most of their capital and management talent to developing new products when they should be concentrating a significant portion of those resources into making the dealership experience more “user friendly,” just as their competition has.
This “basis of competition” becomes the basis for making outsourcing decisions. This has often been confused with the idea of “core” and “non-core.” I think these designations are misleading because they tend to be interpreted as necessary and not necessary. However, most businesses do very little, if anything, that the management doesn’t believe is necessary. Every function is important, has to be done well, and must be performed in a timely and transparent way, so even if a function isn’t your basis of competition, you still need to have it done in the most effective and efficient manner you can. Whether or not you do it in-house or hire someone to do it for you doesn’t matter, as long as it is the most effective way of getting it done.
The beginning of any outsourcing project is a strategic plan for your business. You need to understand what markets you are going to be in both functionally and geographically. You also need to understand how you are going to win in those markets. Why is your offering going to be the most appealing? This may be as simple as no one else is in that particular market or it may be something distinctive about your product or service. Whatever it is, the distinction won’t last long and pretty soon someone will show up offering something similar, so you must plan the changes you will build into the offering .
Your forward-looking plan will require capital, management attention, and an understanding that you will have to adjust when something unexpected happens. Given that you are in this rapidly changing game, you need to look at those functions you are currently doing that take time, capital, and other resources and determine if you can find a way to do those things with less. This is where outsourcing comes in.
Outsourcing isn’t new. It has been going on since the industrial revolution. The simplest example is electricity. The Ford River Rouge Complex, built by Henry Ford to be a model of modern efficiency, generated its own power and fed it to every part of the complex, including Henry’s house. As local utilities developed, every company in America found it easier and cheaper to buy that power from the utility and not have its own power generating capability, other than for short-term emergency situations. No one today would think of building their own power generating capability.
In the mid 1960s, as computers were becoming a ubiquitous business tool, many upper- and mid-level managers were struggling to understand how to use these tools. Everyone wanted one or more of these tools; the expense was a new line item they didn’t understand and the budget requests were growing exponentially year over year.
Into this environment, companies such as EDS began to offer what would today be called BPO services. They made the capital investments and, more important, had the technical management talent to not only manage information technology resources but to take advantage of the capabilities they offered. The interesting innovation here was beginning to sell services rather than software. Initially, this was attractive to banks and insurance companies, where the outsourcer processed claims or kept bank records.
As these companies expanded, they simply did not have the expertise to find more innovations to the processes of the industries they were trying to penetrate. Eventually, they began selling computer infrastructure operations as a service, as well as larger contract programming projects. This made the information technology environment a utility. Soon there were standard resource units and comparison shopping was facilitated.
In this IT example, the outsourcer provided value by having a best-in-class process (or set of processes) to deliver IT infrastructure globally. The outsourcer leveraged economies of scale to spread assets and scarce technical expertise across multiple clients. The underlying process was important to the business but wasn’t a competitive differentiator. Quite simply, the computers needed to run well, but no one ever bought an outsourcer’s client’s product or service because their files were backed up or the clerk’s terminals had a good response time. If the company didn’t have a good computer infrastructure, the company would not function well, but the competitive differentiator is why people bought the output.
Determining what your basis of competition is isn’t easy. Many businesses don’t know or haven’t thought about it. We discussed the auto industry and how the basis changed over time. This is a question every senior management team reflects on regularly and envisions ways to change it so as to give them a competitive advantage. For example, I spent some time with a large big-box retailer that was sure that the pricing and store layout were the keys to their success. However, after some reflection and expensive consulting, it became apparent that store location was the key factor in most buying decisions. People just went to the closest store. The firm’s time and capital needed to be invested in finding and acquiring the locations that would make them physically closer to their customers.
Beyond that, they needed to have current merchandise, competitive prices, and clean stores; to pay their bills on time; to close their books; to keep the computers running and response time low, etc. However, these things wouldn’t cause a customer to choose their firm. If selection and acquisition is done poorly, they could cause a customer to go elsewhere.
This gets to the core of the issue. Can you do these things better and at a lower cost than an outsourcing firm? Even if you can’t, you may choose to keep doing them yourself for a host of reasons, but understand why you are choosing to do them yourself. In the current environment, having a Web capability and linking the Web capability to its bricks-and-mortar capability has become key, and those vendors who do that well are flourishing.
Once you have determined what you will compete on, you need to develop a plan to be the very best in the world at delivering that competitive basis. There are many things that you’ll need to do to deliver, but only a few will be absolutely key. How you achieve that basis is something that you most likely will want to keep as secret as possible. You’ll clearly want to do that with your own employees and, preferably, ones that have a significant stake in the prosperity of the company. Everything else you need to do is important, necessary, and vital, but isn’t something that gives you a competitive edge. It isn’t core.
If a provider can do those things for you at the necessary quality levels, then you need to evaluate if they are also less expensive, will allow you to avoid using your capital, and will give you more hours in the week to focus on delivering and improving your competitive differentiation. If they can, then outsourcing is the best way for you to proceed and enhance your competitive basis.
Please note that I said outsourcing, not offshoring. There are many domestic outsourcing providers that provide services from developed countries. These providers have grown up in the U.S. or Western Europe and rely more heavily on the process efficiencies or economies of scale than on lower labor costs. This allows the enterprise to focus its capital, management attention, and talent on those things that will allow it to win in its marketplace.
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Mike Atwood has spent over 35 years in the outsourcing field. He led three major units at EDS, providing outsourcing services to its customers. He spent the last eight years developing and leading outsourcing advisory practices that assist clients as they decide what and how to outsource or offshore.