Strategic Outsourcing: Leveraging Knowledge Capabilities

Today’s knowledge and service-based economy offers innumerable opportunities for well-run companies to increase profits through strategic outsourcing.1 Emphasis is rapidly shifting from outsourcing parts, componentry, and hardware subsystems toward the even greater unexploited potentials that intellectually-based systems offer:2

  • Obtaining higher value, more flexible, and more integrated services than internal sources can offer.
  • Improving the company’s capacities to stay current and to innovate by interacting with “best in world” knowledge sources.
  • Achieving cross-divisional coordination and shareholder value gains that the company — for internal structural or political reasons — could not otherwise achieve.

Outsourcing Knowledge-Based Services

The drivers for these trends are formidable. As the service sector has grown to embrace 80 percent of all U.S. employment, specialized service firms have become very large and sophisticated relative to the scale and expertise that individual staff and service groups have within integrated companies — whether in services or manufacturing (see Table 1).

These specialists can develop greater knowledge depth, invest more in software and training systems, be more efficient, and hence offer higher wages and attract more highly trained people than can the individual staff groups of all but a few integrated companies. Given this greater knowledge depth and wider range of customer interactions, they can also become much more innovative than their internal counterparts might. Companies as diverse as British Petroleum, DuPont, MCI, Dell Computer, Beaumont Hospital, Ford, State Street Bank, Ameritek, Nike, and Argyle Diamonds dramatically illustrate potentials. Properly developed, strategic outsourcing substantially lowers costs, risks, and fixed investments while greatly expanding flexibility, innovative capabilities, and opportunities for creating higher value-added and shareholder returns.3 Dell Computer provides a classic example of how strategic outsourcing can revolutionize an industry:

  • Dell has grown at an 89 percent compounded rate for some years, achieving $700,000 of sales per employee in its fast-moving, competitive business. Dell concentrates its own resources on a superb customer knowledge and support system downstream and a shared information system that deepens its relationships with suppliers upstream. Outside suppliers provide virtually all Dell’s componentry design and innovation, software, and (non-assembly) production for its computers. It invests only where it sees an opportunity for unique value-added and avoids the huge inventory, facilities, and development risks assumed by more integrated competitors or supply specialists.

Knowledge management is at the heart of Dell’s strategy.

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References

1. As used here, strategic outsourcing includes both the relatively permanent purchase of goods or services in a particular category from single or many different suppliers. It can include techniques from spot buying to strategic alliances. I have covered the use of these different techniques elsewhere. See:

J.B. Quinn and F.G. Hilmer, “Strategic Outsourcing,”Sloan Management Review, volume 35, Summer 1994, pp. 43–55.

2. T. Elliott and D. Torkko, “World Class Outsourcing Strategies,” Telecommunications, volume 30, August 1996, pp. 47–49; and

J. Greco, “Outsourcing: The New Partnership,” Journal of Business Strategy, volume 18, July–August 1997, pp. 48–54.

3. The first statement of how these elements fit together was in:

J.B. Quinn, T.L. Doorley, and P.C. Paquette, “Technology in Services: Rethinking Strategic Focus,” Sloan Management Review, volume 31, Winter 1990a, pp. 79–87.

4. PriceWaterhouseCoopers, “Global Top Decision Makers Study on Business Process Outsourcing” (New York, London: PriceWaterhouseCoopers, Yankelovich Partners, Goldstein Consulting Group, 1998).

5. J. Barnsley explains the reasons and offers the main arguments. See:

J. Barnsley, “Outsourcing as a Board-Level Decision I,” Directorship, volume 24, June 1998, pp. 3–5.

6. For a full range of intellectual management activities, see:

J.B. Quinn, P. Anderson, and S. Finkelstein, “Leveraging Intellect,” Academy of Management Executive, volume 10, August 1996, pp. 7–27.

7. For the definitions, criteria, and dimensions of effective strategy, see:

J.B. Quinn, Strategies for Change (Homewood, Illinois: Irwin, 1980), chapters 1 and 5.

8. For a view of these methodologies in depth, see:

J.B. Quinn, K.A. Zien, and J.J. Baruch, Innovation Explosion (New York: Free Press, 1997).

9. Several early articles and books developed this concept in depth. See:

J.B. Quinn, Intelligent Enterprise (New York: Free Press, 1992;

Quinn, Doorley, and Paquette (1990a); and

J.B. Quinn, T.L. Doorley, and P.C. Paquette, “Beyond Products: Services-Based Strategy,” Harvard Business Review, volume 68, March–April 1990b, pp. 58–68.

10. Boston Consulting Group and Braxton Associates were the first groups to develop value chain analyses for other purposes. See:

B. Henderson, Henderson On Strategy (New York: Free Press, 1980).

Quinn, Doorley, and Paquette were the first to redefine such analyses for core competency purposes.

See:

Quinn, Doorley, and Paquette (1990b).

11. For a discussion of each and numerous concrete examples, see:

Quinn, Zien, and Baruch (1997), chapter 7.

12. Office of U.S. Trade Representative, U.S. National Study on Trade in Services (Washington, D.C., Government Printing Office, 1983).

13. Published in a series of articles including: J.B. Quinn, “Technological Innovation, Entrepreneurship, and Strategy,” Sloan Management Review, volume 20, Spring 1979, pp. 19–30;

Quinn (1980);

J.B. Quinn, “Managing Innovation: Controlled Chaos,” Harvard Business Review, volume 63, May–June 1985, pp. 73–84; and

J.B. Quinn, “Innovation and Corporate Strategy,” Technology in Society, volume 7, 1985, pp. 263–279.

14. For perhaps the first systematic presentation of this concept for guiding technological activities, see:

J. Bright, Technological Forecasting for Industry (Englewood Cliffs, New Jersey: Prentice Hall,1974).

15. The U.S. Air Force, in the design of combat aircraft, was probably the first institution to use this technique consistently and call it by this term, although DuPont used it extensively to establish priorities for its 1930s plastics introductions.

16. National Research Council, Information Technology in the Services Society (Washington, D.C.: National Academy Press, 1994).

17. Hewett Associates Study, reported in “Beyond Benefits: The Changing Face of HR Outsourcing,” Benefits Quarterly, volume 13, first quarter, 1997, pp. 41–46.

18. R. Maurer and N. Mobley, “Outsourcing: Is It the HR Department of the Future?” Personnel, volume 75, November 1998, pp. 9–10; and

S. Lever, “An Analysis of Motivations Behind Outsourcing Practices in Human Resources,” Human Resource Planning, volume 20, number 2, 1997, pp. 37–47.

19. For a description of Andersen’s approach in some detail, see:

F. Julien and L. Rieger, “Winning of the Game: Strategic Risk Management,” Bank Securities Journal, volume 7, September–October 1998, pp. 10–16.

20. For in-depth critical concepts and numerous examples for all phases of the innovation process, see:

J.B. Quinn, J.J. Baruch, and K.A. Zien, “Software-Based Innovation,” Sloan Management Review, volume 37, Summer 1996, pp. 11–24; and

Quinn, Zien, and Baruch (1997), chapter 2.

21. For the classic economic statement, see: R. Coase, “The Nature of the Firm,” Economica, volume 4, November 1937, pp. 386–405.

22. D. Williamson, “Transaction Costs,” Economic Organization: Firms, Markets and Policy Control (New York: New York University Press, 1986).

23. R. D’Aveni and R. Ravenscraft, “Economies of Integration vs. Bureaucracy Costs: Does Vertical Integration Improve Performance?” Academy of Management Journal, volume 37, October 1994, pp. 1167–1206.

24. J. Kotter and J. Heskett, Corporate Culture and Performance (New York: Free Press, 1992); and

C.A. O’Reilly and M.L. Tushman, “Using Culture for Strategic Advantage: Promoting Innovation through Social Control,” in M. Tushman and P. Anderson, Managing Strategic Innovation and Change (New York: Oxford University Press, 1996), pp. 200–216.

25. R. Garner, “Strategic Outsourcing: It’s Your Move,” Datamation, volume 44, February 1998, pp. 32–41; and

M. Useem, “The Lateral Leap,” Chief Executive, volume 136, July–August 1998, pp. 58–59.

26. F. Casale, “The Emerging Role of the Resource Officer,” The Source, volume 4, Summer 1998, pp. 1–4.

27. Strategic tracking systems monitor elements of the outside supplier’s performance that could affect the viability or direction of the company —not merely its cost efficiency. Strategic monitoring systems constantly reassess such things as the supplier’s personnel and facilities investments, partnership and marketing positions, changing strategic risks, and geographic and portfolio investments.

28. R. Hiebeler, T. Kelly, and C. Ketterman, Best Practices: Building Your Business With Customer Focused Solutions (New York: Simon & Schuster, 1998).

29. H. Mintzberg, Mintzberg on Management: Inside Our Strange World of Organizations (New York: Free Press, 1989).

30. For an amplification of this concept with many useful examples, see:

D. Leonard Barton, Wellsprings of Knowledge (Boston: Harvard Business School Press, 1995) .

31. E. von Hipple, Sources of Innovation (New York: Oxford University Press, 1988).

32. Many books have outlined both the difficulties of and techniques essential to maintaining partnership relationships, such as:

F. Contractor and P. Lorange, Cooperative Strategies in International Business (San Francisco: Livingston Books, 1987);

J. Lewis, Partnerships for Profit, Structuring and Managing Strategic Alliances (New York: Free Press, 1990); and

T. Collins and T. Doorley, Teaming Up for the 90s (Homewood, Illinois: Irwin, 1991).

33. PriceWaterhouseCoopers (1998).

34. J. Aley, “Where the Laid Off Workers Go,” Fortune, volume 132, 30 October 1995, pp. 37–38.