Geoffrey Moore on the Age of Outsourcing

The following interview appeared in the December 2002 – February 2003 edition of CSC World.

The debate about a new economy keeps right on going, long after the New Economy collapsed with the bursting of the dot-com bubble. In the aftermath of the hype, can we take the capital letters away and still point to a fundamental change in the way markets work? And if we can, what does that mean for the way business has to operate?

Geoffrey Moore is one of those who would say we can. What he does not say is that he was right all along. Instead, Moore, the chairman and founder of the Chasm Group and a venture partner at Mohr Davidow Ventures, admits in his latest book that he was overly optimistic about the capital-letter new economy. Nonetheless, although he also speaks of "a chastened technology sector," he still sees technology as the factor that makes the economy new.

As for what this means for the way business operates, Moore says it means more outsourcing. That may be surprising, because there is nothing new about outsourcing. As a business strategy it predates not just the dot-com boom but the Internet as well. We decided to find out more from Mr. Moore.

CSC: Why do you identify the new economy with outsourcing?

Moore: Because companies today have to distinguish between what’s core and what’s context. Whatever differentiates you, whatever gives you competitive advantage, is core. Everything else is context. Context still has to be done, because your customers, the government, or your own employees require it, and, moreover, it has to be done well. But it won’t give you competitive advantage even if you did it brilliantly. Worse, you can do damage to that advantage if you do it badly.

Because context activities have a downside but no upside, companies should do everything they can to insource core and outsource context.

CSC: Surely there’s nothing new about core and context. You could have made the same distinction 50 years ago.

Moore: Yes, but 50 years ago it was cheaper to keep context in house. That probably was still true 15 years ago. For almost all of the twentieth century, the argument was that bigger was better, that economies of scale were a source of competitive advantage. So the strategy for value creation was to insource, and you got big, vertically integrated companies.

In the late 1980s it became clear that you could disaggregate value chains, that you could focus on value-adding activities and let other companies take on the rest. You can see that most clearly in industries such as electronics and retail clothing, where manufacturing has been outsourced very effectively.

CSC: The concept of "core competence" has always been essential to outsourcing. You also mention core processes. What’s the difference?

Moore: Your core competence is what you’re good at. Your core processes are what differentiates you in the eyes of your customers. One of the toughest things in the life of any company is when its core competence is no longer a core process. For example, in the 1980s, big companies like HP and Motorola had Six Sigma capability in manufacturing as a core competence, and it was core, meaning it differentiated them effectively. By the 1990s, smaller companies had the same capability. Now their core competence was no longer core. If the big companies did not want to tie up capital and expertise in something they could no longer use for competitive advantage, they had to outsource it — and they have.

CSC: In discussing outsourcing, you make a 2 x 2 table with two variables: core/context and mission-critical/support. Why add that second variable?

Moore: Because so many of our clients weren’t distinguishing between activities that were core and those that were mission-critical. To them the two were identical. But they refer to different things. Core and context are about differentiating: Core activities differentiate you from your competitors; context activities don’t. Mission-critical and support are about risk: Mission-critical activities pose a direct risk to your fundamental business; support activities don’t.

Put those into a 2 x 2 table and you have core, high-risk activities in the upper left and context, low-risk activities in the lower right. Activities in the upper-left quadrant are the ones you keep inside the company; those in the lower-right quadrant — grounds maintenance, cafeteria — you contract out. Those are easy decisions.

CSC: What does a company do about the other two quadrants?

Moore: That’s not as easy. The easiest to deal with are the core-support activities on the lower left, which we call the partnership quadrant. We at Chasm Group are in that quadrant for every one of our clients. We’re working on a client’s competitive advantage strategy, which is absolutely core to that client. Yet it’s a support process. If we take three extra months or if we write a bad strategy, we hurt the client but we don’t put anyone out of business. Advertising firms do the same kind of work when they do a company’s advertising campaign. But it’s core because a bad campaign means the client’s differentiation in the market is muddied. If mistakes continue over the long run, the client’s business is put at risk.

CSC: Which leaves outsourcing for the last quadrant. Why is that the hardest?

Moore: This is where the distinction between risk and differentiation means a lot. These may be context activities, but they are also high-risk, so companies are reluctant to outsource them. Yet most of the economic advantage that could be achieved through outsourcing is in that quadrant. Most of the capital and people that could be freed for core work is in that quadrant. Companies put good people on those activities because they’re mission-critical, not because they’re core. The activities in this quadrant also are very complicated, which is why things often went south in early attempts to outsource.

CSC: IT is in that quadrant.

Moore: Yes, and what makes IT different from other activities is that it’s hard to imagine any industry today where IT is not at least partially core. It doesn’t matter whether a company’s strategy is operational excellence, product leadership, or customer intimacy because computers have infiltrated all of these.

Companies that outsource their IT have to keep the core part of it in house. No vendor wants to take control of another company’s core processes — it’s not good business for either side. In IT outsourcing, vendors and clients have to work very closely together to separate core from context. That’s not necessary in manufacturing outsourcing because manufacturing is all context and can be standardized.

CSC: Those of us in the IT outsourcing business have learned that the best way to deliver performance improvements to our clients is to make sure that IT isn’t separated from the processes it supports.

Moore: And you have to work with your clients to do that. The smart way for companies to outsource any activity in that upper-right quadrant would be to work with vendors while the activity is still in house. Work with vendors to automate your processes and cut costs while they are still under your control. Then outsource them once you have good control systems and good visibility into their downstream consequences.

Too often, companies outsource only to cut costs. The only kind of control they think about is fiscal control, which they exercise through extremely complex contracts with service-level agreements, penalty clauses and escalations. Contracts like these introduce a dysfunctional element into the relationships on outsourcing accounts. Insistence on fiscal controls makes it much harder to get IT processes under control. But getting those processes under management control is the only way to reduce costs over the long run, whether they are outsourced or not.

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