"Never outsource competitive advantage" is a mantra of mine, an axiom that I believe to be based on sound premises that bears repeating because it is too easily forgotten. Hiring consultants and contractors makes perfect sense from an accounting standpoint - to get a limited amount of the skills for which you do not have sufficient need to have a permanent full-time employee - but from a strategic perspective, it is a mistake: it is the equivalent of divulging your secrets to double-agents in the field of industrial espionage.
The notion of industrial espionage may seem quaint and outdated, but it is very much a practice of the present age and has become so commonplace as to be considered a normal and reputable method for doing business. There is essentially no difference in the motivations of a present-day corporation who hires a consultant to benefit from the knowledge and insight they gained working for other firms and that of the eighteenth-century manufacturer who hired spies to infiltrate his competitors and bring back the "secrets" that made their operations more efficient and effective than his own.
This focuses primarily on the upside of espionage: a firm gets access to the strategy of its competitors for a nominal fee, compared to the cost and effort of developing its own. Even this is a losing game, as a firm that depends on others to show them the way is aiming to be second-best, on the assumption that they will discover how to eventually leapfrog their competition (somehow).
It seems obviously self-defeating, but it has worked for certain firms, particularly in the electronics industry in the Far East. Consider that Japanese brands are not typically innovative - they do not offer entirely new products nor any features or functions that are absent in their competition - but instead they make the same goods more cheaply by a more efficient manufacturing process. The fact that they did not compromise quality to save cost, and in some instances even improved quality, has made them successful. The giants of the electronic industry are essentially making designer knock-offs in greater quantity and lower price. And it has been profitable for them to do so.
The downside of espionage is visited on the innovator - the firm that has been infiltrated by spies loses its distinct competitive advantage when the spies divulge their secrets to others. Or in modern terms, when the consultant leaves your firm and shares the knowledge and experience he has gained there with others, your competitive advantage is instantly lost to your competitors, who have saved the cost of research and development by stealing your ideas. It is essentially the same as if the firms poached knowledgeable employees as a means to recreate your practices.
Essentially, the consultant you bring in-house to help you solve problems is an agent of industrial espionage - or more aptly, he is a double-agent in that he divulges the competition's secrets to you and then divulges your secrets to the next firm that hires him. The consultant is also an independent double-agent in that he has no loyalty to any country (or company), but is an independent mercenary who is seeking his own wealth.
The analogy to espionage fails because espionage was a covert matter, whereas consultancy is done in plain sight. Consultants advertise the firms for whom they have worked, much as a merchant shows off his complete line of wares: here are the companies I have worked for and whose secrets I will sell you. The firm that hires a consultant knows that it is buying those secrets, and should be well aware that their own logo will be on the consultant's resume, and their own secrets will be up for sale to the next buyer.
That said, it's likely possible to have the rose without the thorns if you manage consultants carefully, such that you can extract the knowledge they have gained from their previous employers while maintaining some level of secrecy about your own firm - but this is not common practice. In the early stages, a consultant is brought up to speed, given a complete diagram of your production facility and the blueprint for every piece of equipment (figuratively speaking, but sometimes literally) before he tenders any information or advice. This knowledge becomes part of his inventory, even before he has delivered anything of value to your firm.
The same can be said of contractors, though by definition they should be used for their labor rather than their expertise, they are often used as consultants by firms that do not distinguish between the tasks of designing and building. As such, they function as little spies, whose knowledge of your firm is limited to what they have encountered while doing their job - but in the present day, that can be considerable, and even more valuable than what the consultant knows because consultants discuss what the firm might do, whereas a contractor sees what is actually being done. There can be no subterfuge when hiring a contractor.
The problem with espionage today, as with many things, is not that there are cunning and sinister enemies who are willing to do unethical things to gain access to your secrets. Instead, the problem is your own loose lips - your competition does not need to be cunning and sinister when you are indiscreet and careless.
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