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Strategic Outsourcing: Leveraging Knowledge Capabilities

July 15, 1999 | James Brian Quinn | Strategy

Today's knowledge- and service-based economy offers companies a chance to increase profits through strategic outsourcing of intellectually based systems. As companies disaggregate intellectual activities internally and outsource more externally, they approach true virtual organization with knowledge centers interacting largely through mutual interest and electronic -- rather than authority -- systems. In this article, Quinn outlines an integrated knowledge and outsourcing strategy that can mitigate the risks and concerns associated with outsourcing.

Companies with successful knowledge strategies follow these well-accepted principles:

-- They concentrate on developing "best in world" capabilities that customers genuinely care about. An effective core competency strategy focuses on two to four cross-functional, intellectually based service activities or knowledge and skill sets that the company can build and maintain at best-in-world levels to provide a flexible platform for future innovations (at least one directly connected to understanding the customer). Such core competencies become "strategic blocks" that prevent a firm's suppliers from directly attacking its markets and increase the firm's bargaining power and security.

-- They leverage the capabilities and investments of others by exploiting three areas of intellectual outsourcing: (1) traditional service or functional activities performed in-house (e.g., accounting, IT, or employee benefits); (2) complementary, integrative, or duplicative activities scattered throughout the company; and (3) disciplines, subsystems, or systems in which outsiders have greater expertise or capabilities for innovation.

-- They innovate constantly. Links to outside knowledge sources that are able to assemble diverse expertise greatly affect the timing and amplitude of innovations. Sophisticated outsourcing supported by new electronic communications, modeling, and monitoring techniques enables companies to reduce innovation cycle times and costs by 60 percent to 90 percent and decrease investments and risks by equal amounts.

-- They eliminate inflexibilities, such as fixed overhead, bureaucracy, and physical plant, by tapping the resources of the downstream customer chain and the upstream technology and supply chain.

How can a company best manage risks and develop the full potential of intellectual outsourcing? Successful outsourcers carefully develop and implement certain crucial management controls that Quinn describes. Outsourcing also must become a top management issue because lower- to intermediate-level managers tend to be actively hostile to outsourcing -- fearing loss of jobs, prestige, or power.

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