Core Capability Outsourcing

“Core Capability Outsourcing is the identification of those functions that are not core capabilities within your organization and outsourcing those functions to outside organizations for which they are considered core capabilities.”
Concept Summary

Core capabilities are the drivers of an organization’s success story. They are the backbone of an organization’s competitive advantage and as such the focus of organizational leadership should be to maximize the value derived from these core competencies. Functions that do not represent or do not benefit from the core competencies are unnecessary and can be a source of waste. The more functions an organization manages the less organizational focus can be provided to each one. Core competencies often do not get the attention they deserve. Therefore those functions that do not benefit from those core competencies should be removed from the organizational focus. Outsourcing for Core Competencies is a way of maximizing the value of each function through careful examination of what is and what is not a core competence. Those functions that are categorized as directly related to the core competency or benefit from the core competency should remain within the organization. Those that cannot should be outsourced and the function purged in order to increase organizational focus on those areas which are core competencies.
Core Competency Focus – An organization should always primarily focus on what it considers to be its core competencies.
Focus on Maximizing Competency throughout Organization– An organization should strive to maximize the level of competency in all of its activities whether this is be done organically, through acquisition, or by outsourcing.
Outsourcing to Maximize Competencies – An organization should not hesitate to outsource those activities which do not fall within its range of core competencies. The retention of such activities is an unnecessary and unproductive use of managerial focus and diminishes the potential value of an organization.
Core/Non-Core Competency Areas–An organization should be able to identify which areas fall within its core competencies and which do not. It should regularly assess these findings given that core competencies are often dependent on subjective factors such as workforce competencies, which can be affected by turnover or attrition.
Value Added Destruction– An organization should not hesitate to remove, through outsourcing, those functional areas that do not fall within its range of core competencies.
Organizational Focus– Organizational focus is limited to the level and ability of leadership. The larger an organization’s scope, the more organizational focus is required to manage it. If an organization has several divisions or areas that are diverse or unrelated this organizational focus can be spread thin. Conversely if the level of leadership is high and the organization is limited in scope then organizational focus is maximized and the returns from this focus will be high.
Higher Core Competency Investment–Through the act of outsourcing core competencies, the organization can focus on investments in technologies and leadership within the core competencies that it holds.
The Situation
Organizations have always seen size as one of the definitive measures of success and leaders have eagerly sought the additional challenges and benefits of expansion. They seek to add divisions and capabilities to their organization in order to control as many aspects of its operations as possible. Organizations do benefit from size as costs are reduced, leverage is increased, and additional sources of revenue are developed from their expanded capabilities.
One of the problems with expanding organizations is that while the size and scope of the operations may be growing, the capacity for the Head and the Brass to manage it remains roughly the same. Organizational Leadership Focus is a finite resource limited by the abilities of the Head and the Brass. Successful delegation, project management, and time management all can help to expand that focus and Organizational Leaders are well advised to maximize the value derived from those sources. However the fact remains that there is only so much attention that can be provided by the organization’s leaders in a given period of time. The larger an organization the less focus can be provided to any one individual component.
With every organization also comes a set of core capabilities that provide the source of competitive advantage. These are capabilities in which the organization has a substantial advantage over competing organizations and can be utilized in order to create value. Often though core capabilities are not given the attention they deserve and as such the advantage derived from it diminishes over time. Rather organizations expand based on the initial success those core capabilities bring and find themselves a much larger but blunted organization down the road. The business graveyard is littered with such organizations that had lost focus as to the capabilities which made them great.
On the other hand leadership focus may be exclusively dedicated to those core capabilities allowing other areas or divisions to decline and lose value due to lack of investment and recognition. This leads to an uneven organization where some parts are considered great, others adequate, and others poorly run. Over time this inequality reduces the value of the organization as leadership focus inevitably will have to be focused on those poorly run areas.
A risk also for organizations when expanding their product or service offerings is that of diminished quality. Often one of the key components for a core capability is a high degree of quality within a given area. When expanding to a field which may not be related to one of the organization’s core capabilities than  the organization may find itself with uneven offerings in terms of quality which risks diminishing brand value and customer satisfaction.
Organizations should continually try to shed those offerings and segments in which it cannot provide a product or service which is in level with those that are a result of a core competence. This shedding increases leadership focus on the organization’s core capabilities and allow it to continue to invest and leverage those capabilities in order to build sustainable competitive advantage.
The Concept
Core Capability Outsourcing is an approach  where leaders identify areas of an organization which do not fall within the scope of what can be considered its core capabilities and then outsource these areas to other organizations in which they would fall within the scope of that organization’s core capabilities. The purpose is to continuously improve each area of an organization to where they would within a core competence either internally or externally.
A simple example might be Human Resources. With the continual advent of new human resource systems and tools it is difficult for a large organization to keep up, given other areas of the organization which have requirements of their own. However there are dedicated organizations that focus exclusively on human resources and can claim that excellence in the field is a core competence. This type of organization will have available the most recent technologies and recruiting methods. It is deeply aware of and probably sets trends for the human resource field. Wouldn’t it make sense that if your organization did not consider human resources as a core competence, to outsource that function in order that the capabilities can be considered as such?
Organizational leaders that retain a component that does not fall within the scope of its core capabilities are often acting against the best interests of that organization. By having to commit focus on areas where competitive advantage cannot be developed, organizations squander their leadership resources. The employees of unappreciated and unrecognized areas of the organization often feel little inclination to provide added value they feel will be ignored or minimized. Outsourcing for Core Competence should be seen as sharpening the competitive blade. By targeting leadership focus almost exclusively on those components of an organization which provides its competitive advantage they are enhancing their organization’s position in the marketplace.
The approach first calls for the identification of core capabilities within an organization. Once these are established then functional areas which fall directly within the scope of those core capabilities should be identified. For example if a company is renowned throughout the industry as a manufacturing leader than any functional areas such as factories might be included in the scope of that core competence. R&D labs would likewise not be considered in the scope of that core competence.
Second the approach calls for identification and classification of the remaining functional areas. These are classified as indirectly influenced by core competence, or independent. Independent means that the functional area stands alone with no real relationship to any of the organization’s core capabilities. Indirectly influenced means that the functional area does receive some benefits from one of the organization’s core capabilities but not so much that is within the scope of that competence.
 Now leaders can see where it might make sense to outsource in order to elevate the functional areas to a point where they can be considered within the scope of a core capability.
1.     List the core capabilities of your organization. Remember that core capabilities are those that provide distinct and considerable competitive advantage. They are not easily replicated and the barriers to organic development of the core capability by another organization are considerable. Examples may include manufacturing, miniaturization, Research and Development, Marketing, etc.
2.     Now list or compile a list of functional areas within your organization.
3.     Categorize each functional area as Core Capability Scope, Indirectly Influenced, or Independent. Ensure that the more influenced a functional area is by one or more core capabilities the higher it is in the listing of those classified as Indirectly Influenced.
4.     Examine those functional areas found to be Independent. Can those areas be outsourced? What would be the potential benefits from raising those areas to a degree that would be on par with an organization which counts that area as a core competence? For example if an organization were to outsource marketing to a professional marketing company what benefits might we expect to see both in-house and externally? In house benefits might be cost savings from the elimination or reduction in size of the functional area. External benefits might be that the organization being outsourced to has the potential to build up a marketing base internationally.
5.     Measure the value of the leadership focus that is given to the functional area being considered for outsourcing. This is often the most undervalued benefit.
6.     Measure these benefits against the cost of retention. Measure it against the potential cost of raising the functional area organically to the desired level.
7.     Beginning with the areas where the difference between cost and benefit is the greatest in favor of the benefits, work out plans to outsource the function. Can employees within the outsourced function be relocated within the organization? How can we best manage the disruption that will ensue as a result of the change?
Luffy Notes
A.   Every functional area desires to see itself as a core capability which makes subjective evaluation more difficult. A general test would be to analyze each functional area and examine whether it would be competitive if established as a business of its own. Using the marketing example above we can ask if the marketing area is at a level where if it were converted to a marketing business would it be successful in the marketplace. If the answer is no than it would normally not be considered a core capability.
B.    Indirectly influenced functional areas should be examined on a case by case basis and by the extent the core capability benefits the area. If the level of influence is high enough, investment or a low cost acquisition might be all that is needed to raise the value of the area enough that it would be considered similar to that which is within the scope of a core capability.

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