The Uncertainty of Outsourcing

Opinion: A Harvard professor questions the wisdom of today's decisions.

It came practically as an aside in the course of an hours presentation by one of the most quoted business school professors in the world today: "How many of todays seemingly wise outsourcing decisions will turn out to be similarly fatal?" asked Harvard Business School professor Clayton Christensen, in a keynote speech in Orlando, Fla., at the Gartner Outsourcing Summit the week of April 2.

Christensen, who hit the jackpot with his book "The Innovators Dilemma," preceded his question by noting that when IBM outsourced the guts of the original IBM PC to Intel and Microsoft, the move was praised as brilliant by business gurus at the time. As we all know, in the time since the deal was struck some 26 years ago, Intel and Microsoft have gotten rich beyond anyones imagining, while IBM hemorrhaged cash on the PC business for years before finally selling the business off to Lenovo.

Christensen has made a living off irony—finding business models and business practices that looked bulletproof at the time and showing how they led inevitably to the practitioners demise. Its something like a Greek tragedy, in which the hero does what each of us might have done under the circumstances, only to come to a horrible end.

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Christensens thesis is that companies hand over tasks that seem noncore, usually to boost profitability. But the tasks often become the source of business advantage to their recipients. Could the outsourcer that handles IT infrastructure, application development or, which may be more likely, BPO (business process outsourcing), end up dominating the business of the company that handed it the work?

Indeed it could.

There are different ways that Christensens scenario plays out, but the basic idea is the same: A small company establishes itself in a niche neglected by a big player and then takes over from the big company when there is a business paradigm shift.

In the case of IT, the Indian outsourcing industry already seems to believe that it will do in IT what Japan has done in automobiles: start small with pieces of the market that are not wanted and then build a huge business that overwhelms the lumbering incumbent dinosaurs. Its hard to foresee what the Indian companies will be like in 20 years, but they are certainly trying to move up the food chain from being low-cost coding mills to becoming global partners of the Fortune 500 along the lines of IBM and Electronic Data Systems.

Similarly, its probable that a BPO company could take over certain processes so that it would become more important than the company from which it took them over. A BPO company that is handling mortgage processing for a bank is headed in that direction, since to you, the customer, the processor might as well be the bank, as it is sending

you your bills and late notices. Not only is the bank not in touch with you directly, but it also doesnt even have your mortgage anymore, since that has been, in all likelihood, sold to Fannie Mae.

Christensen was asked how a company can avoid the long march to oblivion. His answer: Set up a separate company to capture the growth of new markets. But its not easy to do because a company must tolerate two separate business models under one roof. Dayton-Hudson did it with Target in retail, but there arent many other examples.

Listening to the professor enumerate the list of "sure thing" companies that have been superseded by nimbler competitors gives the listener a sense of fatalism. There is, of course, the entire minicomputer industry, once led by Digital Equipment, which was upended by the PC industry. Then there are the big steel companies, which have been superseded by the new mini-mills. In medicine, implant makers are commoditizing orthopedic surgeons.

So, go ahead and outsource. Its all part of the circle of life.

Stan Gibson can be reached at

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