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A bunch of stuff has hit my desk recently. It all seems related somehow. See if you can find the thread that connects them:

While cleaning out old magazines I found the October issue of Darwin magazine, which published its “Fittest 50” list. Yup — there was Enron. Still, Darwin is a fine publication. Lots of others fell for Enron’s buzz, too.

Speaking of magazine articles, one in Twin Cities Business Monthly by Burt Cohen caught my eye. It wasn’t the first article I’ve seen excoriating the common business practice of placating Wall Street by focusing solely on this quarter’s results no matter how much you mortgage your future, but Cohen did say it well.

Which leads us back to Enron. How? Among the many guilty parties identified in the ongoing blamefest is Wall Street. Turns out that many of those analysts who insist on great this-quarter results looked at Enron in more friendly terms. Why? Their employers wanted Enron’s investment banking business, that’s why. With luck, Wall Street’s analysts will lose some of their clout and we can all stop being deliberately stupid just to please these geniuses.

USA Today printed something useful, too: A piece by Stephanie Armour about companies that refuse to lay off employees just to make the numbers. In it she cites a study by Watson Wyatt (www.watsonwyatt.com) showing, among other happy conclusions, that excellence in recruiting and retention results in increased shareholder value – nearly 8% more, in fact.

Back to Twin Cities Business Monthly, which profiled Joel and John Schwieters, who own eight local companies in the home construction industry. They frame and finish houses twice as fast as most construction companies; their projects lack the debris that usually litters construction sites, they’re known for exceptional quality, and they’re growing by more than 20% per year.

How do they achieve these results? Unlike nearly every other construction company, they don’t subcontract their workforce — they employ their builders, paying them a regular salary, excellent benefits, and a shared bonus pool. Even more interesting is that they’re expanding into their supply chain. Where the popular core/context theory applauds companies that prefer outsourcing any activity that’s “non-core,” (that is, not a marketplace differentiator) the Schwieters understand that controlling the supply and delivery of doors, trim, pre-built staircases and such will improve their margins.

I suppose I should mention — they’re innovative in their use of information technology, too.

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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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