Why it’s prudent to retain core competencies

Earlier this month, Sears announced it is in negotiations with CSC for a $2 billion 10-year outsourcing deal, worth $200 million a year. The contract, which is expected to be signed in the second quarter of this year, would include the outsourcing of Web site systems, servers, laptop and desktop computers, networks, and IT risk, asset, and help desk management. While it is likely that such a deal could satisfy the customer’s objectives of increasing the stability and reliability of its infrastructure at lower cost, it could remove some ability for the company to use these technologies as significant competitive advantages if it does not retain core competency in the use of technology.

This kind of business decision illustrates that the differentiation of technology into value classifications becomes extremely important to ensure the retention of appropriate expertise.

At the heart of the service provider and outsourcing business models is the concept of core competencies. Core competencies are those specific areas of knowledge and expertise that each customer considers vital to its success. Concentrating on one’s core competencies, the theory goes, provides business focus while avoiding expending energy on less vital areas. In fact, it is often argued that you actually get better results from those other areas by using service providers that deliver services through their own core competencies.

Federal Reserve Chairman Alan Greenspan’s education testimony on March 11 brought this to mind as he focused on the education necessary to keep up with “the accelerated pace of high-tech equipment installations associated with the large increase in productivity growth in recent years.” One of the points that he was making is that, like it or not, we all now operate in the context of a global marketplace for products and expertise. As a result, education becomes the hallmark of a successful society. It is also the hallmark of successful service providers. After all, specialized education, experience, and equipment differentiate service providers from their customers and their competitors. A question that is vital to the success of every organization is this: in what areas do we invest, concentrate, and educate? The converse is equally important: which areas are not worth our investment and to whom shall we go to fulfill our needs?

While much of IT has been a target for outsourcing, there are components of IT that are mission critical and strategic for most businesses. An example is the specific use of technology to address inventory management, pricing, and other retail industry competitive advantages. Outsourcing all of IT within such an organization may create the loss of the expertise necessary to use IT to competitive advantage and thus contribute to an actual downturn in business. Thus, the consideration of core competencies must also take into account the issues surrounding the competitive marketplace and opportunities for differentiation in terms of products, services, and costs. For example, in the Sears agreement with CSC, Sears is retaining responsibility for technology standards, architecture, and service policies.

The balance between core competencies and outsourcing is among the most difficult that IT managers have. In what technology and education do we invest? Which are better to leave to others who are more capable and thus more efficient? Many organizations sign long-term agreements and then do not revisit the potential competitive benefits at regular intervals to ensure that changes in technology do not require revisiting the business arrangements. Sometimes, technology changes present new opportunities for being more competitive and successful organizations will take advantage of them.

For too many years, technology has been an island in the business. Now, given the increased scrutiny that technology is under, there is a demand for synergy between the business and technology so that IT clearly and objectively moves the business forward. To do this, organizations should periodically review the areas of knowledge and expertise that can make a real difference to the business and then make them their core competencies.