Outsource or Insource? Beyond Your Core Competency

As the business press is buzzing about companies bringing back call centers and other services to the U.S., businesses should be thoughtful about what services they outsource and which they keep close to the vest.  Much has been written about keeping within a company’s core competency, but this trend is waning as evidenced by the rebirth of vertical integration. As margins are squeezed, companies are looking to recapture profit upstream and downstream.

In assessing which services to keep in-house, entrepreneurs need to look past their core competencies, and to those functions that their customers deeply value.  In the case of a call center, it is not only the quality of the service that needs to be considered but also the relevance of it.  If the purpose of a call center is for upselling and counseling customers, it has more inherent value than one that replaces warranted parts. In the case of the former, it may make more sense for the business to insource. Services that require some specialized knowledge (known as “tailored services”) may require more finesse and are appropriate for insourcing.

One must also weigh the strategic consequences of such decisions.  Will any short-term savings in costs (through outsourcing) be countered by any long-term ramifications?  Costs cannot be considered in a vacuum. Cost savings can only be considered relative to any price premium that can be realized through more meaningful customer touches and the like. A vast majority of the time, when a business outsources a function, it loses uniqueness (as any provider could do the same).

The topic of what is “core” and what is not is somewhat misunderstood. Many businesses have tried to boil core competencies down to the bare minimum under the premise that to do so improves execution.  The premise may be correct, but the question becomes, execution against what? If the core offering is perceived to be the same as all other competitors in a given market space, there is no competitive advantage. Competitive advantage is realized when the tailored services provided are the ones that most deeply resonate with a client.

Thus the outsourcing question must be considered in the overall ecosystem of the business. Business owners are always looking to optimize the deployment of their resources but such considerations need to be made within the context of what services deliver unique benefits.

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Adapted from Understanding Michael Porter by Joan Magretta

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