Outsourcing Competitive Advantage?

By Andrew Hedley, Hedley Consulting

Andrew Hedley
Andrew Hedley

There are a number of core strategic questions which firms need to answer when entering into an outsourcing arrangement. The most significant is to what extent a firm should be prepared to outsource areas of potential competitive advantage.

If one takes the view that outsourcing is driven by a desire to reduce costs, by buying into a consistent set of scalable processes which are shared across a number of organisations, then it follows that none of these areas should (or could) be sources of unique competitive advantage.

Once under the wing of a third-party they will no longer be unique but shared. They will also be engineered to the lowest possible cost whilst still meeting agreed service standards – they will be efficient but not necessarily effective.

By all means, outsource elements which are process rich to a provider which can deliver the same output at a lower cost; but we should be clear, in so doing , that the only competitive advantage accruing will be a transient lowering of costs. Any advantage soon passes because it is shared across the provider’s wider client base, some of whom will likely be direct competitors, as well as being easily imitable by other outsourcing providers.

It is an inconvenient truth that, within their particular weight-class, firms are very similar. Opportunities for differentiation will arise most commonly through service-innovation. When large elements of service delivery are no longer under the direct control of the firm (and are being delivered on a lowest-cost basis) it is easy to see how an inherent competitive disadvantage could be unwittingly built into the business model.

This potential for disadvantage doesn’t only apply to outsourced services which have a direct client touch point but also those which facilitate the wider operational effectiveness of the business. These ultimately drive client experience from below the surface, by impinging on the ability of those engaged directly with clients to add value.

As a more sophisticated view of service strategy has evolved, we have seen firms change their approach. Elements of client service innovation and delivery which provide strategic advantage are now being retained, even if these means splitting previously monolithic support functions between those which are process-rich and those which are knowledge-rich.

In considering what to outsource and what to retain, firms need to be clear about which activities add unique, difficult to replicate value and those which do not. By using statistical techniques, such as factor analysis, it is possible to identify the core drivers of client value. These can then be disaggregated to ensure that there is a clear understanding of the relative importance of individual service components in the overall recipe. Analytical techniques such as Service Blueprinting can also be used to explore client interactions fully.

The aim must be to ensure that there is a clear understanding of the implications of wholesale outsourcing before key directional decisions are made. This is far easier than having to pay for the untangling of a complex service breakdown or the mending of a damaged client relationship at some point in the future.