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Monday, August 09, 2010

How can Outsourcing Erode your Competitive Advantage?

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outsourcing?Gary Pisano, Harvard Business School professor and author of the HBR article “Restoring American Competitiveness” points that outsourcing can erode company’s competitive advantage.  Listen to Harvard Business Podcast here.  Outsourcing, which shunts off low value added processes to an external company, has an unintended consequence of eroding skills – some of which might be important for creating and sustaining competitive advantage.  He uses an example of manufacturing outsourcing for battery.  Few decades back battery manufacturing was outsourced from the US to East Asian countries because battery manufacturing had become a ‘low value added’ process.   Fast forward to 2009, a global warming coupled with economic crisis has forced US car manufacturers to develop electric cars.  GM’s Volt that needs a battery now has to import from the same South Asian countries because of lack of specialized skills in battery development in the US.  At the same time the South Asian countries have perfected the battery manufacturing technology.  Battery considered ‘commodity’ few decades back is now a ‘core’ differentiator in building an electric car.
Pisano notes that people will stop developing skills for the job that got outsourced.  Makes sense… Why would you train yourself for a job that is being outsourced?  This is a vicious circle that expedites outsourcing and in turn stops aspiring talented young people from pursuing those skill set. This Pisano contends undermines competitiveness.  Once jobs disappear, it becomes extremely difficult to bring them back.
Now lets focus on IT.  SearchCIO-Midmarket titled “Tech skills gap to fuel IT outsourcing growth among midsized users” points to recent research on IT outsourcing trends among midmarket companies in 2009.  The article notes that outsourcing activities will increase over the next six to eight months, particularly in the areas of application development, hosting and IT infrastructure, as these organizations seek to lower costs and find technical skills they do not possess in-house.  As Gary Pisano writes, IT outsourcing has reduced appetite for young people to take up software engineering in college thus forcing companies to outsource IT.
This is an interesting conundrum.  Outsourcing enables companies to allocate capital to the value added business processes and R&D.  This in turn allows companies to reduce cost, develop new product and continue to be ahead of competitors.  If you stem outsourcing, competition will be able to undercut cost in this globalized hypercompetitive.  So then how do you deal with outsourcing without shooting yourself in the foot?  I think the companies need to do is look at their competitive advantage with a long term perspective.  Some of the non value added or low value added processes may be more important in the long run.  Therefore some of the ‘essential’ non value added business process should not be outsourced.  But still, it’s very difficult for the management to see what is a low value added or non value added link in a value chain in the long run.
 

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