Harry Potter and the Outsourcing Industry

The last couple of blogs have been about Business Value creation. Specifically Business Value being a function of both capability and usage (BV = C x U). The last blog concluded that capability merely represented potential until and unless that potential was put to consistently good use. If we take this logic to the ultimate conclusion, maximum usage of not a lot of value will still not be worth much.

This is a particular issue for outsourcing. Should companies only outsource activities at the margin or should they be brave and go for areas where outsourcing could add real value ? Accepted wisdom suggests that only non core activities should be outsourced. The industry had its roots in catering and security services being "offloaded" ( ...rather than outsourced) to 3rd party service providers - clearly non core. Since ITO and BPO have been gaining ground the real debate about core vs non core has assumed a real relevance. My view is that companies need to be really brave. Outsourcing peripheral activities smacks of abdication rather than strategic decison making. If companies want to generate real value, then real exploitation of areas of genuine value should be considered for outsourcing.

A good example of this is the Hollywood film industry. Now I hesitate slightly about using La La Land as a good role model for anything, but the facts deserve consideration. In the film industry, the "core" item is the Intellectual Property of the story, whilst the unit of business is "the Film". Everything is outsourced. The studios put up the cash and handle the distribution ; the actors are all freelance ; the Production companies deal with finance, sets, make up, electrical contractors etc, but all on a bought in service basis. The flip side of this is that all those concerned are " Multi client Service Providers" that come together for a particular film and then disperse to different films on completion. In some cases these are merely projects that barely get off the ground. Others start small but become enormous undertakings in their own right (Titanic was just that in film terms as well as the size of the ship). Others become a long running "franchise". There are some good examples immediately to hand this summer - Spiderman 3 and Shrek 3 have already been released, and of course the film of the moment - Harry Potter and the Order of the Phoenix. This is film 5 in the series - and with the 7th book due for publication on 20 July, then it is not beyond the wit of man to believe that there are another 2 films coming. And as for the James Bond franchise......The point here is that certain film activites, and hence these associations of service providers have a lifetime as long as as many "real" companies.

Moving away from films, the Phamaceutical industry is an interesting example of brave outsourcing. The core value generation activity in this industry is research - yet this is outsourced. The big Pharma companies see their real core skill not as doing the research itself but as managing a portfolio of research activities. In another case, the story of the Xerox patents running out a number of years ago and then the company being surprised when the Japanese camera companies moved into the photocoying business and nearly putting them out of business is well known. The point ? Xerox saw their core skill as "copying" - the camera companies saw theirs as "imaging".

With the growth in multi sourcing, companies that rely on IT and see it as their prime area for business advantage may wish to take another look. Banks and Retailers come to mind. Banks would wish to keep control of the development of new products, whilst in retail, buying goods for resale and till operations are vital. However, outsourcing desktops, networks and basic server infrastructure should not be a cause for concern.

So, my recommendations are:

Clients: Be brave - have look, a really good look at what you can outsource.

Service Providers: Look at your "sweet spot" and see how it can be applied to other industries and client types.

For me personally ? Before I hang up my calculator and shuffle off onto that great golf course in the sky I am determined to run a business that genuinely understands its core capability and is brave enough to outsource the rest, all done out of leased office space of course. Any takers out there with a good business idea that needs a creative business operator ?