Companies that successfully create and sustain value year after year
are rare. Many try to, but a recent study of 2,000 companies over 10
years by our consulting firm, Bain & Co., found that only one in 10
achieved sustained, profitable growth. One activity that sets such
winners apart: They often use capability sourcing in more innovative
ways than their competitors.
Outsourcing and offshoring began as cost-cutting measures, but
companies that create real sustained value routinely use them for far
more strategic ends–to gain capabilities that they don’t have in-house,
or to strengthen capabilities they do have. We have found that 85% of
those winners use capability-sourcing broadly and strategically for
everything from developing world-class talent to bringing new products
to market faster and enabling business model innovation. In other words,
they’ve moved way beyond mere cost-cutting.
Based on our research and experience with clients, we’ve found that
leading companies use capability-sourcing to build five strategic
capabilities.
–To tap into global talent. Particularly in emerging markets, shortages of talent can impede a company’s ability to grow.
Texas Instruments
has overcome this obstacle with an R&D center in India that
has not only delivered cost savings but also nurtured a rich talent pool
that has delivered an increasing stream of U.S. patents.
–To build partnerships that both capture value and reduce risk. Even
though sourcing risks have increased over time, many companies continue
to manage their sourcing relationships at arm’s length. The reality is
that they need to exert control. Companies like the toy manufacturer
Hasbro
accomplish this by viewing their external relations as strategic
partners tightly integrated with their domestic operations or overseas
subsidiaries. That’s a major reason why Hasbro was largely unaffected by
the toy industry’s lead paint crisis in 2007. Among its sourcing
safeguards, the company prequalifies and continually monitors its
overseas factories to ensure that quality management systems are in
place. The risk of a quality issue arising can’t be totally eliminated,
of course. The key is to limit potential problems and act quickly when
one occurs to keep it from happening over and over again.
–To seize new local market opportunities. As new markets emerge, companies need ways to establish a presence before their competitors.
AstraZeneca
tapped into the booming Chinese pharmaceutical market by making
large-scale, multiyear offshoring investments in everything from
manufacturing to sales, partnering with local universities, government
organizations and Chinese companies. As a result, AstraZeneca has become
the largest pharmaceutical multinational in Chinese prescription drugs.
–To get to market faster and boost innovation. Bringing out new products ahead of competitors is critical for consumer products companies in a rapidly changing market. When
Procter & Gamble
outsourced some R&D activities it boosted its innovation
productivity by 60%, to generate more than $10 billion in revenue from
over 400 new products. Today, about half of P&G’s innovation comes
from external collaboration.
–To disrupt traditional business models. Since the spin-off
of its contract manufacturing operations in 2000, Acer, the Taiwan-based
personal computer maker, has used capability sourcing to make itself
into the world’s second-largest PC manufacturer. The company’s
executives knew it was good at branding and marketing and chose to
outsource everything it had a harder time with, like manufacturing. The
move led Acer to faster-growing sales and gains in market share. The
company now maintains a strikingly lean and flexible operation. Its
6,800 employees represent a workforce less than a tenth the size of its
largest competitor.
Being a follower has advantages in capability sourcing. Fast
followers can learn from others’ mistakes. There are capability sourcing
models and offshore locations and vendor options today that didn’t
exist five or 10 years ago, providing the chance to catch up faster.
We’ve found that building a local team offshore with an independent
charter and autonomy improves a company’s long-term odds of success. For
example,
General Electric
used offshoring to develop its largest multidisciplinary,
integrated R&D hub, in India. The hub supports the company globally
and has fostered a large Indian talent pool with strong onsite
leadership.
Our experience suggests that if a company doesn’t get a return of at
least 25% on its sourcing investments, it needs to carefully review and
fix its current programs before moving on to new projects. Experienced
practitioners should challenge the status quo. To avoid becoming
complacent, even the most successful veteran outsourcers need to hold
regular comprehensive reviews of their sourcing strategies and programs.
For example, many companies in financial services, an industry with
long experience in capability sourcing, have reevaluated their programs
in the global downturn, as the relative benefits of owning and operating
captive offshore centers has declined and even pioneering firms such as
Citibank and
American Express
have sold off some of those operations.
In some instances, experienced practitioners have used outsourcing
and offshoring to change the game in their industries. The semiconductor
industry was redefined when companies started outsourcing manufacturing
to low-cost Asian foundries. Those pioneers took off because their
outsourcing strategies freed them to focus on R&D rather than
pouring most of their investment into capital-intensive fabrication.
Companies also have developed repeatable formulas that apply what
they’ve learned from their increasingly complex outsourcing and
offshoring activities, sometimes by building an internal organization to
manage partner relationships and transfer experience from one project
to the next.
Cisco Systems
is expert at continuously applying its outsourcing model to new
products and services with remarkable efficiency and effectiveness.
In today’s uncertain business climate, adopting a strategic view of
capability sourcing isn’t an option. It’s imperative if your company is
to have any hope of leapfrogging the competition.
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