Never Outsource Competitive Advantage

I felt it was worth jotting down this axiom in my notebook, because recently I've seen a few articles advocating a bad practice - and over the years, I've seen (and worked for) a number of companies who undertook this very practice, and the outcome was never happy.

"Never outsource competitive advantage" seems like a straightforward statement, and is a basic concept of strategy, that there are certain qualities of a business that make it a leader in the field, whose customers prefer it over its competition and evidence that preference in their choice of vendors.

But in operations management, where fast and cheap is the order of the day, outsourcing seems like a good idea: if you buy an off-the-rack solution and tweak it a little bit, you can gain capabilities (or streamline operations) very quickly and cheaply.

And in general, there's nothing wrong with that ... so long as what you're outsourcing isn't the very thing that gives your company an edge over the competition.

For example, unless you're an accounting firm, your ability to do payroll and tax accounting isn't what gives you a competitive edge over the competition. It's a routine task that needs to be addressed, and done with a reasonable amount of competence, but doing it a little better or worse, faster or slower, isn't going to harm the top-line revenue.

But on the other hand, if your company's competitive advantage comes from having a highly efficient logistics system to streamline the movement of raw materials through the production lines in a just-in-time fashion, you definitely don't want to put this into the hands of a vendor, who will provide you a solution that's not significantly better than the competition, because you've immediately lost your competitive edge.

This is especially true of user experience: unless you have a unique product offering, or the absolute lowest prices on the Internet, the quality that attracts new customers to your business and keeps your current ones from jumping to a competitor is the relationship they have with your company, which itself is largely derived from the user experience they have, each time they visit your site.

If you put that site, or some significant component of it, into the hands of a vendor who provides a standard solution, no better than what anyone else is using, then you've lost your edge. And in a competitive environment where one difficult transaction or one botched order will cost you the business of a few customers, then a few more, then a few more, the cost you save in hiring a vendor to roll out a shrink-wrapped solution will be undermined by the damage you'll do to your top-line revenue as customers, who once thought you were better than the rest, find that you're no different in the ways that they most value.

And so, it bears repeating: never outsource competitive advantage.