Thursday, June 11, 2009


The business pendulum just keeps swinging back and forth year after year after year. The question remains, will we ever learn? I suspect not.

The concept that companies should focus on their core business and use vendors, that are experts, to provide goods and services that are not a company's core business/skill set is not a new concept. Yet, every few years we realize we once again strayed from that concept and headlines appear touting a company that is now going to focus on their core business. So, it is not surprising given the global economic crisis that core business headlines have started to appear in newspapers.

The Wall Street Journal has two related articles on this topic. Firms Shed India Centers to Cut Costs in Recession and India's Tech Industry Must Reinvent Itself. For many years, the outsourcing business has been growing rapidly with services provided by outsourcing firms, consulting firms and IT services firms. Large service centers have been built in India and China and more recently in several other countries. There were two economic drivers, labor arbitrage and a high volume of transactions on a relatively fixed (albeit very large) cost. While this business has been around for many years, the business model is still evolving and maturing and managing these businesses profitably while providing quality services is hard work.

Now back to the pendulum swinging. Before the ink was dry on many of these contracts which led to headlines of how big companies were going to save money and "focus on their core business", someone in that same company started coveting the profit margin that the outsourcer was making on the contract. In many conference rooms around the world, someone pointed out that if the company built its own center in India they could save even more money if they did not have to pay the outsourcer with a built in profit margin. And so began the insourcing trend. Amazing that no one in that conference room asked if this was their core business (remember that was at least in theory one of the reasons they signed the outsourcing contract initially).

But even more troubling, is that no one asked if anyone in the company knew how to run a service center in India, China or some other country. They all just looked at the spreadsheet with the savings calculations and jumped on the bandwagon. Well, now we are back in that same conference room, maybe with different people, a new spreadsheet is being passed around and this time it shows that they can save 25% if they outsource it AND they can get cash if they sell their center to the outsourcer. The pendulum swings again.

Maybe, it is the words that are being used such as core business, outsource, insource, and many others. Instead, let's go for straight talk. Instead of saying companies should focus on their core business, let's say companies should focus on what they know how to do. They should then be the best in the world at doing it.

Maybe the global financial crisis could have been avoided or at least mitigated. If over the last few years, executives in conference rooms all over the world that were looking at spreadsheets showing that if they invested in derivatives, credit default swaps and added leverage had asked a few more questions the result may have been different. A few questions that might have asked are as follows:
  • What is a credit default swap?
  • How does a credit default swap work?
  • What are the three biggest risks?
  • What is our mitigation plan?
  • Do we have anyone in the company that knows how to do this?
  • Is this our core business?
  • Shouldn't we be spending time in this meeting talking about how to be the best in the world in our core business?
  • Shouldn't we spend time in this meeting talking about new markets for our core skills/products?
  • If we are going into new business areas, do we have or can we hire experts to run it? When we hire them, how will we evaluate their performance if we do not understand that business?

But instead the pendulum just continues to swing. Maybe the pendulum is the real engine for the economy?

Are you focused on your core business? Are you asking these questions when you are in the conference room?

Until Next Time,


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