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|In: Industry Commentary|Last Updated:

One of the most popular games in the world of business is “Blame the Consultant.” No matter what actually went wrong — bad leadership, poor project management or sloppy implementation — it’s easiest to blame the consultants.

The most recent example is New York Times analyst Paul Krugman, who, in a recent editorial blamed the Enron fiasco on its leaders’ preference for guru-driven theories over business realities. Enron was, after all, led by Jeff Skilling, a former McKinsey consultant, and McKinsey is notorious for only handling the inspiration slice of the genius pie chart. Doesn’t that prove the point?

Sorry, but no. Enron’s problems apparently stemmed from old-fashioned fraud: When you show the cash but hide the debt, as has been alleged in this sorry debacle, it’s easy to post good numbers.

Krugman is, however, right about one thing: Enron built its whole business on the popular core vs context theory. If you’re unfamiliar with the terms, core activities differentiate you from your competitors, while contextual activities do not. Core/context theorists contend that you should outsource everything that isn’t core. The theory is especially popular among outsourcing companies, because … well, that’s obvious, isn’t it?

The theory suffers from two flaws, one fatal, the other merely grievous. The fatal flaw is that it’s just plain wrong: Context activities can differentiate you. Oh, not in a good way — nobody chooses a vendor because its invoices are always accurate. But context activities sure do differentiate you when you bungle them. They drive customers into the arms of competitors. And since it’s harder to manage a vendor well than to lead employees (vendors are more adept at hiding problems, and more motivated to do so), it’s hard to understand how the core/context theory leads to business benefit, except when an outsourcer has economies of scale unavailable to you.

That’s the fatal flaw. The grievous one is more basic: This isn’t a theory, it’s a hypothesis. Dig deep and you’ll find that the theorists are relying almost entirely on two high-profile test cases: Nike and Enron, both of which leave the doing-something-useful-that-creates-real-value aspects of running a business to others. Nike markets very well; Enron traded very well, or so we all thought.

Now we’re down to a single test case, and that’s awfully limited evidence on which to bet your company.

Treat this theory with caution. Outsource very selectively and only when you can quantify clear financial benefit, when you can build strong mechanisms to manage the additional risk, and when you can construct a clear exit strategy in case the outsourcing arrangement sours.

That’s the best advice I can give you. If you ignore it … please don’t blame the consultant.

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|In: Career Management|Last Updated:

Argument by assertion seems to be on the increase.

Following my recent series on outsourcing, which argued against the popular non-core-competency theory (exercise core competencies in-house and outsource everything else), I received quite a few letters presenting the counterargument that you should outsource non-core competencies. Why? Because they aren’t your core competencies, that’s why!

It’s hard to come to grips with logic like that, let alone argue against it. But I’ll give it one more try. The more I try to figure out what “core competency” means, the more murky the whole thing becomes. I’m left with four outsourcing drivers – two positive, two negative:

  • Outsource when the outsourcer can provide the equivalent function for lower cost (or just fire the manager who can’t deliver the function without margins at the same price an outsourcer can deliver it with margins).
  • Outsource when the function being outsourced requires scarce high-value talent (for example, ad agencies).
  • Avoid outsourcing when the cost of changing your mind, also known as the switching cost, is high, as it is with IT.
  • Don’t outsource if your real goal is solving a personnel problem. If you’ve accumulated an inventory of unproductive employees over the years and are really outsourcing the unpleasant task of terminating them, there are far less drastic ways of handling this chore than outsourcing the function.

Nothing is quite this simple, of course, but I can at least understand these four decision factors. Why you’d want to increase the cost or risk of a function because it isn’t a “core competency” — a term whose definition is murky at best — continues to baffle me.

Not only that, but outsourcing doesn’t always solve the problem. Curt Sahakian of the Corporate Partnering Institute (www.corporate-partnering.com), which helps companies create partnership and outsourcing agreements, says many outsourcing deals are structured so badly it’s like drinking seawater when you’re adrift at sea. It isn’t a sustainable solution, and you end up thirstier than when you started.

Sahakian also offers this advice: Since your employers are going to buy their saltwater from someone, why not you? If outsourcing is inevitable, take charge of the situation and suggest a restructuring that turns your existing IT organization into an outsourcing provider, either as an independent or as a joint venture with one of the major outsourcing vendors.

When your choice is whether to be dinner or chef, chef is probably better.

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