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BPO Journal

Wednesday, August 17, 2005

Function-based companies

A recent article in the Harvard Business Review (sorry - you need a subscription to read it) talks about the rapidly growing discipline of “capability sourcing” which espouses the view that every single activity in the value chain can and should be evaluated as a candidate for externalization. This new paradigm in outsourcing emphasizes the strategic position of a firm as a specialized provider of a set of core functions that drive competitive advantage in its industry, and is giving rise to a new class of “function-based companies” such as UPS (logistics management), Solectron (contract manufacturing) and Hewitt Associates (HR management) that have "transformed their core functions into entirely new industries".

While highlighting the significant benefits of outsourcing and the payoffs from developing scale and skill in a single core function, the emergence of this new class of companies also points to an interesting trend - the growth in non-asset based outsourcing services. Companies like UPS Consulting and Hewitt are increasingly leveraging their asset-based expertise and core capabilities to broaden their service-oriented, non-asset based businesses that have greater margins. This is driven by the better margins at the provider's end, the increasingly strategic role that outsourcing plays in modern businesses, and the allied need for information to make the transition to an outsourcing model.

In this article, Orville Bailey, president, CEO and co-founder of B2eMarkets Inc. provides an interesting perspective on the progress of outsourcing services - "The first is where you outsource the bid-capture piece, different types of negotiation. The market is extremely comfortable outsourcing that piece." Second, "The hot area for the next 12 months is outsourcing request for information, request for proposal, request for quote. Managing the back and forth piece with the supplier. The market is getting more comfortable outsourcing that part."

The third stage in this sequence is the outsourcing of strategy formulation. Traditionally the domain of consultants, this is where the function-based companies are moving in. The article states that B2eMarkets hopes to "cannibalize" the consultants by offering learning tools and "content sensitive coaching" licensed from Accenture and others, to reduce the level of skill required for effective sourcing.

It is interesting how this keeps the sourcing process both outsourced and proprietary at the decision level. What is more interesting is the continual dissolving of firm boundaries. It seems that soon, important decisions will relate, not to ownership and protection of capabilities, but effective coordination alone.

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