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Strategic Outsourcing: Leveraging

Knowledge Capabilities
James Brian Quinn

Strategically
managing knowl-
etlge. innoration,
antl outsourcing
combine to create
tt company's
greatest future
challenge.

James Brian Quinn is y'.s knowicdtic LUi and shareholder \alue gLiins that the
Buchanan Professnr of economy offers innuniLTLihle company — tor internLiI strLictmal or
Management, Emeritus, (or well-run companies to increase profit.^ ]i()liticai reasons — could not othens'ise
The Amos Tuck School. ilirough .strategic OLit.soiircing.' Emphasis acliie\'e.
Dartmouth College. is rapidly shihing from outsourcing paits.
conifionentry, Linti hardware subsystems
toward ilie e\cn grealei" Line.\]iloited Outsourcing Knowledge-Based
potentials tliat intellectually-based .systems Services
offer:" The drivers tor these trends are formida-
ble. As the service sector has grown to
• Obtaining higher value, more flexible, embi'ace 80 percent of all U.S. eniplcjy-
and more integrated sen ices than internal ment. specialized service firms have
sources tan offer, become ven- large and sophisticated rela-
• improN'ing tlie company's capacities to ti\'e to the scale and expertise that indi-
stay current and to inno\ate by interacting \'idual staff and service groups ha\'e with-
with "best in world" knowledge sources, in integrated companies — whether in
• .•\chie\ing crt)ss-di\ i.^ional coordination services or iiianLitacturing (set' '/'ahlc 11.

Sloan Managemem Review


Summer 1999
of its sales to larger institutions. Dell maintains dedi-
Table 1
cated knowledge managers for each major customer
Independent Service Providers' Sales versus Internal Staff
Sizes (1997) and an entire staff to track these customers' changing
needs and system configurations. These contact staffs
Internal Service Group Independent Service Providers
ISales in billions) and its interactive .secure "'Premier Page" web sites
enable Dell to save customers crucial months in
Imernal Telecommunications ? AT&T $53 2
design and installation and millions of dollars liy pre-
Internal Software ' E D S 15 2 ccMifiguring each customer's purchases to its specific
Engineering - Construction 1 Fluor Corp, 14,3 system needs. By making ils own prodtiction needs
Internal Personnel ? Manpower Inc 73 and product interfaces transparent to suppliers. Dell
10 lowers suppliers' innovation costs and risks, encour-
Internal Accounting '> ADP Services 4.1
ages more cu.stomer-responsive innovations, and in-
Internal Maintenance ? ServiceMaster 3.9
creases suppliers' probabilities of commercial success.
Source OneStiurcB Informalian Services Ire fntiiinp ?7 April 1998 op 92-?19. F-1 - F-7D The suppliers, rather than Dell, provide botii the
scale of investment antl depth of expertise needed to
These specia I ist.s can develop greater knowledge deptli support innovations across a range of technologies
invest more in software and training systems, be more and cu.stomer demands that Dell could nol satisfy alone.
efficient, and hence offer higher wages and attract
mure highly trained people than can the indi\'idiial Outsourcing for Intellectual Value, Not Just Cost
staff grcuips of all but a few integrated companies. Executives increasingly understand that outsourcing
Given this greater knowledge deplli and wider range for short-term cost-cutting does not yield nearly as
of customer interactions, they can also become much much as outsourcing for longer-term knowiedge-
more innovative than tliL'ir internal counterparts niiglu. ha.sed sy,stem or strategic benefits — like greater
Companies as diverse as Hiitish I'ctroleum, Diil^jnt, inteiiectual depth and access, opportunity scanning,
MCI, Uell Computer, Beaumont Hospital, Kord, State innovatitjn, reliability, quality, value-added solutions,
Street Bank, Ameritek, Nike, and Argyle Diamonds or worldwide outreach. Clearly, companies go to out-
dramatically illustrate potentials. Properly developed, side litigation, tax. advertising, or medical specialists
strategic outsourcing substantially lowers costs, risks, primarily for such benefits rather than for lower costs:
and fixed investments while greatly expanding fiexi-
bility. innovative capabilities, and opportunities for • Royal Dutch Shell seeks outside expeits" tiilferent
creating liigher value-added and shareholder returns.' views and more specialized knowledge for the .sce-
Dell Computer provides a classic example of how- nario building that is central to its renowned strategic
strategic outsourcing can revolutionize an industry: planning activities. Oil and mining companies hire
profes.sional real estate firms to de\-elop and manage
• Dell has grown at an 89 percent compoimded rate their surface land resources. Some pharmaceLitical
for some years, achieving $700,000 of sales per companies have found that 30 percent of their pre-
employee in its fast-moving, competitive business. competitive research fimds invested externally will
Dell concentrates its own resources on a superb cus- produce 90 percent of their better leads. Ford has
tomer knowledge and support system downstream used ABB to develop new plants at 70 percent of its
ancl a shared information system that deepens its usual in-house cost. With shorter cycle times and
rckitionships with suppliers upstream. Outside suppli- its database of some 20 million installed units,
ers provide virtually all Dell's componentry design ServiceMaster can maintain certain equipment special-
and innovation, software, and (non-assembly) pro- ties with such lower cost and higher quality than its
duction for its computers. It inve,sts only where it sees clients that it often is willing to co-invest with them
an oppfjrtunity for unicjuc value-added and avoids to lower their investment costs as well. Companies'
the huge inventory, facilities, and devek^pment risks finance groups routinely outsource their international
assumed by more integrated competitors or supply exchange, tax, pension, and custodial activities to
specialists. accounting or financial houses better able to keep
track of the enormous complexities involved.
Knowledge management is at the heart of Dell's strat-
egy. By serving its customers directly. Dell captures In a landmark study. FriceWaterhouseCo(.)pers found
crucial information about the market. With 70 percent that (outsourcing had moved markedly from perform-

Qimn Sloan Management Review


Summer 1999
ing a single function more efficiently to reconfiguring an integrateti knowletlge and outsourcing strategy
or rebLintlling wiole professes in new ways xo gener- tan mitigate these risks,
;ile grciiler sh;iri_ holder \;ilue ;Ki"oss the enteii:>ri,se,'
A.s a con.sequente, lhe ck-cision on whether antl how .\s companies disaggregate intellectual activities inter-
to outsource is steadily mo\ ing LI]) ihe organization nally and outsource more externally, they rapidly
to the CFO, COO, and CHO levels.' As out,sourcers' approach a true \'iiiual organization with knowledge
capabilities impr;)\e. the strategic i,ssLies are, increas- tcnicrs inieracling largely ihiough mutual interest and
ingly: Why iial oLitsoLirce? Where can we ftjcus our electronic — rather than authcMity — sy.stem.s, Hach
own resources to create unique value? How can we notle of their organizatit)n form becomes a knowl-
best leverage our outsourcers' capabilities!' How (.an edge soLiife; some nodes are internal, and some
we managt-' poknlial oLitsoiia ing relationships lor exteinal i.'<ce l-iii^iov I>. In these circumstances, how 11
greaiest ,sliaieho tier xaluc'r' can managers create the kinti i^'i focLis a genuine
strategy rec^uires?
Special Problems in Intellectual Outsourcing
Certain iiniqiie li_-atures charatierize (outsourcing of
intellectual acti\ itie,s. Because the provider typically Strategic Focus in Knowledge Strategies
ha,s more knowl.-'tlge tiepth than the buyer — antl Companies with successful knowledge strategies fol-
such experts may regartl theniseKes as highly Irainetl low ceitain well-acteptetl principles" by: < 1) concen-
elites superior tc their client's personnel — the buyei' trating more power than anyone else on a few capa-
cannot guide it by direct orders." Furthc-r, it is impos- bilities that cLisfomei's genuinely care about; (2) inno-
sible to specify desired outcomes precisely in \ating constantly to ensure that their performance
ad\ance (e,g,. an ad campaign oi' biiikling tiesign), antl \alLie-added sta\- ahead of competitors: (3) devel-
and costs are dilficult to estimate, K\en after the fad. oping conscious Hexibilities to deal with changing
it may be impos.iihle to preci.sely measure tlie impact competitor pressures and opportunities; and (4) lever-
ol the sLijiiiliers contribuiions. In these ciitiim- aging their re.soLirce.s significantly by using the capa-
stances, clients ('tten tiistiiist their capacity to strike a bilities antl in\fstnients of others,
balanced deal with the cx[")erts, ikiyers are aiso legiti-
mately concerneJ about losing the skills that they "CAjre c()mpetency witli outsoiircing' strategies enable
outsource, becoming o\-erly dependent on the companies lo:
provider, creating an internal backlash from siaff peo- • Hot us antl flatten their organizations by concentrat-
ple who fear oiiisourcing, nt)t acliieving the respt)n- ing their limited resources on a relatively few knowl-
siveness they think they coultl from inteniLiI units, etige-based core competencies where they can devel-
losing contiol o\er liming and ([uality of outjiuts, ojT best-in-world cai")abilities.
ha\ing the provider sell or leak tlie client's solutitMis • l.e\'erage their internal innovation capabilities by
to competitors, being "whipsawed" by a supplier at hundred.s or thousands of times through effective
crucial times, an^l being able to effectively balance personal. IT. and moti\-ational links to t)utside knowl-
lioth short-term ' c^ost) and long-term Ivalue-adtleci) edge sources."
goals. These are \alitl ct)nLeriis, [^ut 1 will show how
• eliminate inHexibilities of fixed o\'erhead. bureau-
cracy, and physical plant by con,scientiously tapping
Figure 1 the more nimble re,sources t)f both their customer
The Real Knowledge Organization chain downstream and iheir technology and su[")ply
chain Ujistreani.
• f-'xpand their own knowledge antl physical invest-
ment caf^abilities by ortlers of magnitutle through
exploiting the facilities and piiigram inv'estmcnts of
outsitle sources.

Creating a Best-in-World Focus


The essence ol creating focus in a knowledge .strate-
Specialized IndependEnt knowledge centers (within and outside the gy is lo tievelop a small number of intellectually-
company) tend to interact personally and electronically without formal baseti knowledge acti\'ities — important to customers
authority or ownershifi tinks.
— to best-in-world le\'els." Starting with an analysis (jf

Sloan Maiiagemenl Heview Qumn


Summer 199S
the company's value chain'" and staff support activi- tions." At least one of these competencies must con-
ties, executives develop a fcv^ critical activity group- nect directly to understanding the customer.
ings where they are, can he, or must i:>e best-in-worid
to compete effectively. These — and these aitmc — Once a company develops a tnie best-in-world core
are their core competencies (see the sidebar). They competency, it never outsources it and may even
define the very essence of how the company delivers buiid defensive rings of essential competencies that
its value proposition and why customers and employ- customers insist it have or that protect its core —- as
ees prefer its outputs or operating concepts to those Honda does by not outsourcing design, parts, or key
of competitors. The most effective core competency equipment for its core competency, i.e., design and
.strategies focus on a few (two to tour) cross-function- manufacture of clean, efficient, small engines. Other
12 al, iniellectualiy-based service activities or knowledge than its core and essential competencies, most com-
and skill sets critical to customers, where the compa- panies can reap great gains by prioritized outsourcing
ny can build and maintain best-in-world capabilities of many activities where they are less than best-in-
and provide a flexible platform for future innova- world. If it is not best-in-world at an activity (includ-

How to Think about Core gives up competitive edge by not buying What to Outsource?
Competencies that skill from a best-in-world source. A
best-in-world target forces the company {1}
Core com pete ncJes are not products or to think clearly and explicitly about strate-
"those things we do relatively well"; they gic advantage and (2) to look laterally at Strategicallv
control
are those activities — usually intellectual- other enterprises not in its own industry (produce
ly-based service activities or systems — when seeking performance comparisons internally)
that the company performs better than any and improvements.
Moderate control
other enterprise. They are the sets of skills
needed (special
and systems that a company does at "hest Intellectual or service-based competencies venture or contract
in world" levels and through which a com- — like product design, software, or mainte- arrangements)

pany creates uniquely high value for cus- nance — can be acquired from any external
tomers. Low control needed
source in the world, whether a specialist (like
|buy off ihe shelf)
FrogDesign, EDS, Enron, or ServiceMaster),
• Developing hest-in-worid capabilities is consulting firms, or an Integrated company Strategic Risk of Outsourcing
crucial in designing a core competency seeking to leverage a specialized knowl-
strategy.* Unless the company is best-in- edge group's skills within its own integrat-
world (including transaction costs) at an ed value chain (as FedEx sells its logistics target that creates identity, cohesion, and
activity — whether within a function or management or telephone answering ser- emotional satisfaction for talented people,'
interfunctionally — it is someone else's vices to others). For a variety of reasons — No successful coach or battle commander
core competency, not its own; the company including tradition, emotion, and incapacity ever takes the attitude that "tomorrow we
or unwillingness to evaluate its internal will be one of the two best teams on the
transaction costs and risks objectively — field-" The very act of defining "best" and
What Is Core?
companies may continue to perform many actively seeking "winning" performance
uneconomic activities in-house. But they creates a clarity of purpose and unifying
Best-in-world suffer unnecessary costs and risks for not challenge that allows clearer delegation to
capability buying the activity from best-in-world small self-motivated innovation groups,
(including transaction costs) external engenders much higher creative responses
sources. from them, and forces consideration of a
wider range of options than benchmarking
• Seeking best-in-world performance offers — i.e., just matching the best. Bench-
povwerful recruiting, motivational, and inno- marking can merely ensure competitive par-
vative benefits. The best people want to ity or mediocrity, not being best at anything.
work for the best company — hence an
•For a discussion ol numerous in-deptli meitiods. see
Intel, Bell Labs, or Sony can attract better J B Ouinn, K.A Zein. and J J. Baruch, InnovaWn Explosion (New
personnel for their core competencies than Vork free Press, 19971, chapter 7, "Creating Best-In-World'
CapaBiliIies." pp IB7-215.
can competitors for whom such activities tJ H Quinn, P Anderson, S. Finkelslein. "Managing Protessionai
Intellect Getting ttie Best From the Best," Harvard Business Review,
Demanded by are peripheral. Once on board, such people volume 74, March-April 1996, pp 71-80.
Consider outsourcing customers or to find "distinctive leadership" a more attrac-
defend tbe core
tive target than being "among tbe best"
companies in the industry. Being best is a

Quinn Sloan Management Review


Summer 1999
ing transaction cost) and continues to produce that define "winning" strategic performance and focus suf-
activity in-liouse the company gives away a competi- ficient investment and human resources to marshal
tive edge that it c-ould have had. the knowledge depth and support systems needed
for that purpose. Thinking in these terms has impor-
Upon serious inv'estjgation, mo.st companies will find tant impact, not just on use of fiscal and human
that 60 percent t:) 90 percent of their in-hou.se activi- resources but on the capacity to leverage these
ties are services'' that are neither being performed at resources much farther through outsourcing. Once a
best-in-world levels nor contriliuting significantly to company achieves a true core competency of best-in-
competitive edgf — and are not very risky to carefully world capability, it has a "strategic block" that keeps
outsource. These should be the first targets for analysis. its suppliers from bypassing the company and attack-
ing its markets directly. The strategic block that core 13
Figures of Merit: Creating a Strategic Block competencies create enormously elevates the bargain-
To make the concept of "best in world" more explicit, ing power and .security of the buying company in
all the leaders in my "most creative company" stud- dealing with suppliers.
ies'' went beyond benchmarking (matching best com-
petitors) and used some variant of another approach At a more detailed level, studies of productivity from
— figures of merit" — to define '"best."" Figures of IT investments ftjund that those IT users tliat defined
merit look ahead and set forth a few crucial econom- strategic superiority (not equality) as their target
ic and technical characteristics that "if hit, will win" in obtained both the highest returns from their IT
competition. They define economic-performance tar- investments and the highest overall corporate perfor-
gets sufficiently above normally expected trend lines mance levels."' Those that achieved marginal or nega-
to ensure the company has a competitive advantage tive returns did not use such targets. For example:
that will attract customers to switch over to it, rather
than stay with competitors (see the sidebar for several • State Street Boston's CEO Marshall Carter recog-
examples of suci figures of merit). nized the custodial opportunities and problems that
the emerging mutual funds industry would pose and
Most successful <nowiedge strategies also carefully set out to develop a unique competency to handle It.

Figures of Merit • At Sony, CEO Masaru Ibuka repeatedly whole new wave of both process and prod-
set figures of merit for performance and uct innovation. A six-sigma quality target
• At Hewlett Packa'd, Bill Hewlett started price that drove that company's marvelous means that the probability of error must be
a "figure of merit" practice that is still innovation machine. In the 1950s, he set only 1.74 in a billion. Intuitively — and with
widely used. When ^/isitlng the benches of the seemingly impossible target of a "pock- substantial staff help — Galvin and others
the most talented n^^w engineering employ- etable transistor radio" that changed the realized that Motorola's strategy of "preem-
ees, Hewlett would ask them about their industry's characteristics. He then quanti- inence in mobile wireless communications"
projects and the targets for those projects. fied a succession of specific performance would require the capacity to handle trans-
After commenting on how delighted HP challenges that defined Sony's "unique missions accurately at gigabyte rates, espe-
was to have them aboard and how impor- product of our own" and "superior technol- cially in high-volume and value applications
tant the project wa*., Hewlett would go ogy" targets, motivating Sony's small inno- like international financial services. It was
away, leaving the nijw employee feeling vation teams to revolutionize the television, essential that error rates be kept compati-
important and appreciated. A few days tape recorder, digital-audio recorder, ble with both fiber optic transmission band-
later, Hewlett would reappear and say that CD-ROM, videocam, and other industries. widths and with increasing customer needs
he was very excited about the project, "but In each case, he set combined economic for reliability. Later, under George Fisher
the target is wrong." Based on his knowl- and technical targets that, if hit, would give Motorola set a "10X" goal for all its innova-
edge of the field, he would then set a much Sony a distinctive market position in a tion programs — to shrink the time each
higher target (perhaps a 50 percent newly emerging field. Knowing these tar- element took in the innovation cycle to one-
improvement in perormance instead of the gets couid take more innovation and invest- tenth its former time. Once again, rather
15 percent targetedl. The startled new ment resources than Sony could generate than extrapolative thinking, 10X called for
employee would ha/e to totally rethink all internally, Sony started one of the earliest totally new approaches to problems, simu-
the basic underlying technical and perfor- and broadest outsourcing strategies in lating much greater cohesion of purpose,
mance relationships, seeking substantially Japan.* innovation, and performance levels.
new solutions that enabled HP products to
be genuinely useful and to outperform — • At Motorola, Robert Galvin set a "six
• H Minttberg and J B Quinn, "Sony Corporation Inroualion
System" (CaseI, The Sttaiegy Process [Inqtewood CUiis, NewJersev"
not just match — cjmpetitors. Sigma" quality target, which created a Prentice Hall, 1996), p 595.

Sloan Mfliiagemsni fini/mw Quinn


1999
In a joint venture with DST Systems, Inc.. Statf Sux'ct staffs can concentrate on special prohlem.s and per-
aLilomated its custodial handling prtKcsscs, hiivel toj")- sonalized contacts with more employees.'''Forexample:
flight IT people to fill six of its seven top posis,
closed 90 peixenl of ils brLinches. -Ani] oiilphiccd or • Arlluir Andersen notes ihat ils client.^ often initially
shut down many ot" its traditional hanking businesses. oLilsoLirce to ohtain higher value in a specific funt-
Within a few years, it had S3 percent of mutual funds' tion — like auditing complex financial derivatives —
CListodial husiness and now has more than $4 trillion v\here ihey Uuk critical mass or deep expertise.
under it.s nianagement. Its sfietial lompeienty allows However, lhe hig payoffs occur when Andersen can
Stale Street to partner in a variety of mutual fund help lhe client align lhe full range of its risk-monitor-
and investment management seivices and provides a ing and -management processes with its corporate
14 unitjue skills and knowledge hase for constantly strategies worklwkle. Andersen CLUT help clii.'nis not
innovating along with its knowiedgeahle dienls in only lo reduce risks hut lo gain competitive advan-
their rapidly mo\ ing husine.sses. tage and eniiance shareholder value through integrat-
ed risk management and control (e.g., internal audit,
compliance monitoring, credit Lind regulatory review,
Three High-Leverage Outsourcing and so on). Andersen and the client together identif)'
Opportunities husine.ss risks across multiple geographies, functions,
Once the company's strategic lilotk is in place, it can and operations; relate the risks lo specific proce.s.ses;
fiilK' exploit three high-le\'erage ai'eas for inielleciual and utilize the hest control practices to manage them.
outsourcing. In increasing order ol imjiorlance, these Andersen's intranet site KnowJedgeSpace'^' captures
hest-practices knowledge ahout operating [•)rocesses
are:
worldwide to reduce risks and costs acro.ss multi-unit
1, Componenis (or all) of traditional lunciional or ser- acii\ ities — like manLiging procurement glohally from
vice activities performed in-house (e.g., accounting. sourcing lo credit analysis, logistiis, and accoimts
IT. payroll, or employee henefits functions). payahle controls.
2. Coniplementarv, in(egraii\e. or duplicative activi-
ties that need to he coordinated across the enterprise 2. Integrating across Divisions
hui are lodged in many different grou[^^ across the i'eihaps ilic leasi exploited and highest-value opp(.)r-
tLinities for strategic outsourcing are activities that
3. Those discifilines, suhsystems. or s\siems where coLild he [^rofitahiy integrated hut — for various his-
outsiders have much greater expertise or capahiiities torical reasons — are dispersed among many differ-
for innovati(m hecause of access to wider or difteix'nt eni functional, regional, or divisional groups across
sets of customer needs or more specialized knowledge. the company. The costs can he high. Typically, the.se
smaller units seriously lack ihe depth of knowledge,
1. Outsourcing Functional Specialties highly c|ualified specialists, or information systems
Oiiisourcing (.)! specialties v\iihin a tunttion (like thai lhe hest outside sources have. For example:
liuman relations) is relaiively common and can slill
he vt^iy produciive. Kor example, in a recent sample • hi Hurope. British Petroleum and Mohil Oil liad t(}
of human relations activities, nioie than 75 percent deal with six lo eight different tax and statutoiy
of companies outsourced manageEiient of their retire- regimes for tax, accoLinting, and financial reporting,
ment plans, lO j^iercent lo Si) jiercent outsourced l-'intiing it difficLill lo develop needed tiepih and
reimhursemenl and payroll activities, and approxi- coordination in their variou.s divisions, the companies
mately one-third OLitsoiirced health and welfare man- oLilsoLured these acti\ ities to FriceWaterhouseCoopers
agement activities,'" Companies often find ihai func- (PWC), which cons{)lidated them in a "cenier ot
tional suppliers can [provide much greater ex[iertise. excellence" in Koiierdam, ,saving 4(1 jiercenl ol costs
more curreni innovations, and more detailetl knowl- in lhe first year and pa\ ing the way for future savings
edge ahout regulatory and reporting requirements on the eLiro. PWC has also esiahlished centers of
than can all hut the hesi insitle sources. Kmployees excellence offering other gloha! ser\ices like environ-
have acce.ss to the iirovider seven tiays a week, hui mental or system compliance audits. It now provides
the company does not have to jiay fora full-time staff. such services to hrand- and socially-conscious con-
Providers can aLitomate high-volume, lovx-value activ- sumer product and enlertainmenl companies workl-
ities that in-house groups tannot. And inlernal (IK wiele (verilying iheir siipplieis' compliance lo glohal

Quinn Sloan Management Review


Summer 1999
lahor. health, ani.l environmental standards), lowering ing units, managing construction proces.ses, and pur-
the clients' costs of verification, increasing olijectivity chasing energy raw materials. Each unit has com-
and external cre-Jitability, and ensuring use of world- pletely different performance measures and incen-
class measurenunl and risk-prevention technic}ues. tives relative to energy. Building designers want to
achieve maximum functionality at lowest initial ccxst:
More importanti'/, the corporations' or the dispersed construction oversight groups focus on building costs
entities' incentivi^s may strongly mitigate against rather than long-term operating expenses; line units
effective cross-d visional .solutions. Energy, communi- using the building seek lower near-term co.sts; main-
cations, and computer services are typical ot high tenance groups seek reliability and lowest repair
payoff area.s where history, incentive structures, or co.sts; and raw materials purchasing units seek lowe.st
politics make it virtually impossible for decentralized commodity ccjsts with reliable supply. When corpo-
internal groups to achieve a corporate optimum. rate interests lie in lowest long-term costs (including
Despite well-intentioned empowerment or reengi- cost cif capital), ihese suhoptimizations repeatedly
neering prograns, middle- to lower-level employees lose ten.s of millions of dollars annually for even mid-
often wili not reL'ommend truly hasic changes or out- sized institutions.
soLircing. fearing, [hey may lose their johs, he out-
sourced them.seK'es, or lose power or compen.sation Often the most effective (or only) way lo achieve
if components of their units are shrunk or out- desired effectiveness is to outsource the entire activity
sourced. Results are almost always sulx)ptimized by — be it energy, computer, communications, distribu-
cross-divisional consensus-huilding proces,ses, failure tion, auditing, or facilities design, construction, or
to alter management and incentive .struclures to make operation — to a group that has tlie needed special-
changes effectivL* and sustainable, and refusal hy all ists yet can flexibly adapt outputs to meet internal
parties to reallocate the capital essential to support divisional needs. Eor example:
the agreed-on tl irusts. Frequently, there is no feasihie
way to implement or enforce needed systemwide • Enron Energy Services uses its specialized capabili-
perspectives witiiout outsoiircing. For such reasons, ties and experti.se about energy sources and costs,
for example: advanced financial instruments, and energy use man-
agement to optimize trade-offs among energy con-
• EDS took c;>ve:' all information processing tor seven- sumption, capital investment, and variable costs
ty of South Australia's government departments that (labor, maintenance, and energy) across a client's
had neither the capability' nor the incentives to devel- multiple facilities. If the system is fully outsourced to
op a common s'/slem, for a .savings of SlOO million. It Enron, ii can provide predictable and susiainahle sav-
developed and operates the ELIROPARL Internet sys- ings that the client otherwise coLild not rvalize. First,
tem for the European Parliament that provides the Enron can achieve greater economies cjf .scale (for
diverse countries' staffs, representatives, and citizens financing, eqLEipment, and commodity purchasers, as
a common communication platform they could not well as technol(.)gical know-how) than the client.
have achie\ed individually or iointly. EDS enahled Second, the client (rightfully) wanls to focus its
Illinois Central t j move from a mainframe to a client- invesiments on its core competencies and not be bur-
sei"ver environment, supporting hoth its traditional dened with the nuisance, support, and fcjllow-up
railroad operations and its aggressive plans for growih investments on a numher of diverse energy projects
into highly diversified new services. And at Hong Kong's that it can manage only marginally well. This gap in
new Chek Lap Kc;>k and Las Vegas's McCarran air- interest and capacity to manage provides a large
ports, it is providing fully integrated datahase-sharing profit oppoitunity for hoth parties lo share.
systems for gate, terminal, and funcUonal (finance.
HR, and maintenance) operations. Neither airport Decreasing Costs and Risks. If done properly, inte-
fould have achieved its aggressive cost savings and grated outsourcing can hoih decrease costs and lower
timing targets without cro.ss-divisional outsourcing. risks. Clearly, outside suppliers undertake investments
and development risks that the outsourcer avoids: by
Many companies and institutions have entirely sepa- sharing these risks among multi]3le clients, the suppli-
rate organizations fc:)r generating and di.strihLiting er lowers costs for all its clients. However, risk man-
energy internally, designing huiidings, maintaining agement itself has now become one of the critical
these facilities, operating the facilities as profit-mak- new tools and henefits of outsourcing. For example:

Sloan ManagKmenl Review Quinn


Summei 1999
• Enron, under its fixed long-term contracts, specificalK" needs to support its bread-and-butter goals and
assumes the three critical energy risks that a client rewards systems and, as a result, may grudgingly
mighi have: (1) commodity price shifts. (2) consump- relcLise only second- or third-tier people. Outside pro-
lion (weLither-relaled risks), and (3) lahor cost or fessional firms, hy contrast, are generally organized
investment risks. Two ot Enron's core ccjmpelencies f(;r ihis specific purpcjse worldwide. Eor example:
are evaluaiing energy risks and tailoring pricing solu-
lions to lit the client's different divisional needs. • When a financial services client was mov ing inio a
Wholesale electrical and fossil energy costs are among new area — account managemem for trusts — hut
the mosl volatile c^f commodity co.sts. Nevertheless, ditl not have the internal experience or time hefore
through advanced financial and logistics techniques, launch to set up adequate risk-nianagemenl practices
16 luiron can pi{)\ide clients guaranteed energy supplies and controls, Arthur Andersen assemhied a team of
at a fixed or predictable cost tailored lo lhe client's world-cla.ss experts to design, in.stall, and coach man-
specific needs. It can offer energy prices per Linit of agement in essential practices within only a fevs' weeks
output in manufacturing, per building or .square foot rather than the years that the client would have oth-
tor offices, and jier room in hotels — stabilizing erwise needed. In operation, its installed hest-prac-
prices to suit the client's key operating controls. To tices sy.stems across multiple geographies achieved
achieve maximum client value, Enron generally must higher consistency, lower cost, and greater local flexi-
take over all the client's energy activities, including hility than years of internal development might have.
opL'Ritions and invesfments in energy facilities on a
long-term (more than ten years) fixed-price basis — Outside suppliers can also adtl enormous v'aliie to
as it did recently for Pacific Bell Park. their [:>hysical products hy pro\ iding rapid-response
integrated services for clients. For example:
• Arthur Andersen has developed a comprehensive
prcx'ess for organizational assessment and risk man- • iiec;iuse of its extensive customer and supplier
agement around a comprehensive set of tools (e.g,, knowledge hase. Dell can quickly specify and deliver
Cilohal Best l^ractices KnowledgeSpace'""' intranet site, up-to-date comjiLiter .sy.stems — using lhe most cur-
Business Risk .Model,'^' Business Proce,ss Auditing rently availahle subsystems — tailored to a cus-
Methodology,'" and Business Risk Management tomer's specific needs, existing equipment, and soft-
Integrator'''').'" Recognizing that the mosl effective risk ware. Enron can design and deliver an integrated
management is risk prevention, Andersen first analyzes energy system tor a shopping mall, industrial center,
the full range of client risk for a particular operation. or building complex, obtaining maximum economies
Then it a.ssemhies in the same room all the key peo- of scale on ecjuipment (chillers or boilers), infra.striic-
ple in\'oK'ed in the husiness process to ensure that ture (pipes, vents, Lind tunnels), and energy com-
ihe risks are imcierstood and ihat appropriate person- modities {gas and electricity) purchases for all clients,
nei a.ssLime responsihility for controls. I'sing a cro.ss- yet pricing t!ie energy to lhe specific uses, needs, and
func-iional team antl special methodol(\gies. the group strategies of individual occupants or divisions. To
codesigns needed risk-conlroi practices and measure- help its clients |-)lan antl keep their strategies up-ttj-
ments vvitli Andersen, so that process managers heller the-minute, Schkimherger — through its SNET — can
appreciate the nature of the risks — and hoth sides give its clients information about all availahle and rel-
can identify and fix "holes" that the other might over- evant drilling activities, costs, di.scovery and flow
look. Often clicnls ha\e neither the hackground to rates, and trends across its manv fields.
assess complex risks nor lhe technologies or method-
ologies to facilitate needed cross-unit solutions.
Increased Innovation
3. Assembling Expertise Quickly The ability of providers to assemhie diverse expertise
Anolher reason for integrateLl outsourcing is that most rapidly can have enormous impacts on anolher criti-
large companies find il almost impossihle lo cjuickly cal sirategic factor — the timing and amplitLitle of
assemble highlv' diverse expertise for special inter- innovations. Many companies now ouisource largely
unit projects, especially when the.se resources are to tap into the much richer innovation skills that out-
several layers down in different divisions or geogra- sitie suppliers can offer. By using stjptiisticated out-
phies. Each unit is reluctant to give up its key people sourcing and new electronic comniLinications, model-
to such proiecis when it has so man\' other pressing ing, anci monitoring technic|ues, companies can

Qtiinn
decrease their innovation cycle times and co.sts hy 60 capahiiities of a well-managed supplier sy,stem, except
percent to 90 per;ent, tiecrease investments and risks in the few areas that are their core competencies.
hy ecjual amount^., and enhance the value ot tlieir Eord has gone from 70 petcent insourc etl lo ~0 percent
innovalions hy oiders ot magnitude. outsourced, BMW to 80 percent outsoLirced, Dell and
Gateway to essentially 100 percent outsourced, and
In h;isic antl early applied research, the key to such Boeing and Aertispatiale to almost complete electron-
leverage i.s lo have one's own lechnical people elec- ic design ;nid oulsourcing of all hui a few critical sys-
tronically linketl as directly as possihle lo the world- tems — in order to tap the flexihility. expertise, and
wide knowledge sources, puhlications, datahases, antl innovation ofthe hest worldvv'ide knowledge sources.
re.search centers ^\here sLith work is performed.
EortLinately, researchers tend to exchange knowledge The c|Liestion for all hut the mosl sj')eciLilized small 17
freely at this leve..-" But equally important, a supplier companies is not whether hut how to develop the.se
can instantly provide a critical infrastructure kn intro- innovation sources. For managers, in addition to
duction or tliffusi:>n of innt)vations lo new markets. changing attitudes, the keys are: (1) developing and
Eor example; maintaining one's own ct>re competency at best-in-
world depth (to create a strategic barrier); (2) estab-
• When a multin iiional wants to enter a new markei, lishing Ll llexihly ct)mpatible and integrated electronic
it often has to send in expensive teams ot "exjiatri- capability — from cListotiiei" interfaces, through inter-
ates" tt) sel up its hasic administrative, control, report- nal operatitjns systems, to Lipstream supplier ;mtl
ing, and clistrihution systems. PriceWaterhouseCoopers technological knowledge datahases — to capture and
now essentialK' '"'jrates up and delivers" the full range use state-of-the-art knowledge sy.stematically; (3) gen-
of needeti lalciit — often prov iding or [raining local erating figure-of-merii iLUgels to define criiical goals,
personnei h"t)m ils centers of excellence to jump-start focus and .stimulate high-level innovation, and screen
the new market or series of international markets, alternatives; antl (4) imjilementing a recognition-
v\iili world-class systems matched lo ihe client's reward system that encourages the supplier io inno-
neetls. Such outsourcing suhstantially tiecreases the vale on lhe client's hehalf.
lime delays, cost.'., and risks t)t introduction — and
increases the strategic llexihility antl impaet of the Many knowledge suppliers comment that the inflexi-
client's internal innovation capahiiities. hilities antl traditional measurement approaciies of
clients are a maior harrier to new sokitions.
At lhe process or product development level, many Designers, software creators, professit^nal engineers,
companies now open up their own jirocess and consultants, and accounting groups say that cu.s-
protiuct models Hifficienily lo allow selecied potential tomers — accusU)med to lime-hasetl costing for hoth
sujipliers to inmn-ate freely for their needs. This is their internal units and traditionally outsourced activi-
how MCI, TCT, fi lancial services groups, and many ties like aLidits or design — frequently complain or
puhlishing, enter.ainment, Internet, and cc^mputer reject outsourcing when they ctimpare their internal
cotupanies encourage thousantis of external sources hourly rates with the provider's higher hourly rates.
to Lise their own money lo create innovative new Implicitly, such evaluations give no value to the suh-
softvvare, protkic.s, or .senices to sell through tlie stantial worldwide kntnv letlge ha.ses, technological
larger company's netwtjrks. Many large pharmLiteuti- investments, and accumulated learning and training
cai, hit)tech, chemical, health care, and consumer that the prt)vider brings to the party, Enron notes that
product companies use similar techniques to encour- when it takes over a complete energy system for a
age smaller jiotential suppliers to offer them early- client, it must often make huge catch-up investments
stage concepts tl ey can caiiy throLigh lhe expensive in training and e([uipnieni to achieve savings and
final development, clearance, mass produciion, and cjLiality goals that the client never thought feasihie.
witie-scaie tlistril'Ution stages. •^'et, when clients merely compare hourly-hased lahor
costs, they are reluctant to sign long enough contracts
Larger system [iroducers in aeiospace (Boeing, for Enron to realize realistic returns <;n its investments
Aerospatiale). tianspt)rtation (Ford, Newport Nev\s), through its fixed-pricing slrutlures.
communications (AT&T, CiTE). or energy (Mohil,
Enron) have increasingly realized that their central Although clients generallv" want ;i provider to inno-
KcS;[) gtou]")s (.an loi faintiv match lhe innovative vate antl kee[") its operations at siate-oi-tlie-art levels.

Sloan Management Review Quinn


Summer 1993
they often unreali.stically demand thai suppliers hoth software "hooks" or make them compatible with t)ther
pass all gains from innt)vation through ttj the huyer Internet products and thus encourage other u.sers,
in their pricing and use the client's own specified suppliers, or producers to inn<jvate freely for their
practices to ensure consistency and c}uality. The results own purposes, creating hosts of new uses and varia-
can he disastrous. Managed care groups' demands on tions they could never have anticipated for their
hospitals and clinics are a majt>r case in point. products. The textile indu,stry has heen revt^lutionized
as huyers, clothing designers, fabric manufacturers,
and cutters work together electrtjnically to supply
The most devastating error that both exactly the prt)duct that the customer wants in eleven
days instead of ten months — simultaneously increas-
18 parties can make is not to encourage ing customer value, cutting costs, and decreasing risks
hy orders of magnitude. Other industries — from
and reward continual innovation at computers (IBM or Dell), to pagers (Motorola), to
autos (Toyota and GM), bathroom fixtures (American
that interface. Standard), and financial products (BankBoston) —
are being stiiictured this same way.
i'roviders rejioit the three practices of oul,sourcers
that are most .stilling to innovation are: (1) their insis- • Tt> match this trend, several maior consultants and
tence on "specified practices," (2) an unwillingness to Big Six accounting firms have innovated industry- or
move from hourly rates tt) value pricing or shared busine.ss-process-oriented service centers to deal with
innovation incentives, and (5) the desire to manage the new interfaces, structures, and complexities that
the "how," not the "what" of outsourcing. Fortunately, such industry-level outsoLircing presents.
as trust and experience with innovation t^utsourcing
grows, new methods of sharing henefits, ensuring
"technology refre.shment." and protecting each party's Management Techniques for Better
proprietary interest in knowledge are al.so appearing. Outsourcing
The richest source of innovation is usually the inter- If supplier markets were totally reliable and efficient,
face of a supplier's techntiltigical and systems depth rational companies would outsource everything except
wirh the new needs and market insights that the cus- their ctjre competencies,^' Unfortunately, most suppli-
tomer firm provides. The most devastating errtir that er markets dt) entail some risks for hoth the huyer
hoth parties can make is not to encourage and rewarti and the seller anci some unique transaction costs, for
continual innovation at that interface. In a short time. searching, contracting, controlling, and recontract-
the huyer will lose the vety things it is seeking in ing." 'Vet an integrated producer, often unwittingly,
outsourcing —• greater knowledge depth, the most enctninters large internal risks and transaction costs
up-to-date .systems, highe.st quality and lowest cost, — like lost inntjvation, introduction delays, subopti-
maximum flexihility, antl no front-end investment on mizations hy internal hureaucracies, and liability,
its part. When done propedy, whole new ranges of product, and lahor risks — it does not recognize,-*
innovation appear. For example;
In each case, the question is not iust whether to make
• In addition to making equipment and energy com- or huy, but how to evaluate and achieve the desired
mcxlity purchases at economies of .scale and with a balance hetween the independence and efficiency
knowledge hase that no single cu.stomer can attain, incentives needed to stimulate a supplier and the
Enron instantly incorporates its accumulated knowl- huyer's needs for control and security. One ofthe mtxst
edge ahout energy management and process engi- ciTicial steps is to shift the huyer outlook to managing
neering into the customer's sy.stem and its operatitjns. "what" result is desired, rather than managing liow"
Using its worldwide knowletlge bases, Enron can the result is produced, A primary reason for outsourc-
guarantee energy supplies and prices to match each ing is to leverage the supplier's greater skills, knowl-
division's special cost, environmental, or competitive etlge hases, investments, and processes. If the huyer
needs and sell off-peak or excess capacity to other specifies how to do the it>b in detail, it will kill inno-
nearby customers, lowering costs and risks even more. vation and vitiate the supplier's real advantage. To
enctJurage innovation, the CEO of a $4 billion com-
• Most hiternet companies provide their products with pany said, "I vvt>n't worry alx;ut how much the

Quini Sloan Management Review


Summec 1999
p r o \ " i d e r m a k e s f " o m t h i s t r a n s a c t i o n . . . . I vs'ill c o n - tions from many sources, they improve their knowl-
slanlly w a n t m k n o w h o w o u r relationship with t h e edge bases significantly beyontl those that internal
[")r()\iLlL'r i.s niLikirij; /is more [iioni.'y ihan w e would grou]")s could provitie. With [iro[")er nionitoiing. com-
lKi\e wilhoLil [he anangeinenl." panies repeatedly find that — instead of lt)sing
knowledge capabilities —- the sum of outside suppli-
[low lan a company be.st manatee lisks and (.le\elop ers" knowledge, the stimulation and insights they pro-
tile kill polenlial- ot intelleetiial OLiLsoLneinji? SLIC- vide, and the sokilions ihev' devflop will vastly
cesslul oLilsoLireer.s carefully develop and implement exceed the potentials of any inside group, unless that
certain crucial nianaj^ement controls. In addition to group is the company's core competency.
the .strategic block of core competencies tlesciihed
a!n)\e, ihese con.i'ols include; • Including all insourcing transaction costs and 19
actively measuring the benefits intended from
• Ensuring goal and value congruence. Managers the outsourcing relationship. A most common
tind thai time .spt'nt in early .st;iges to in\estigate antl error Is to ignore the internal costs ol non-innovation,
ensure the congruence of the .supplier's and buyer's missetl ojiportunities. delays, managetiieni time
\alLie systems Lin'_l incenti\e strucUires is invaluable."' ex|X-ndilures. and inefficiencies due to internal sup-
in their sei'V'ice a;»rc'enients, oLitsourcer.s and supplii-Ts pliers' having an ensiireti customer. Companies typi-
often jointly tievtlop written goal statements tor the tally collect no informahon on these topics anti are
relationship, specific agreed-on output measurements, shocked or distru.sting when outstjurcing proposals
incentives to ensure that goals stay aligned, and ways surpass this mag- nitude. The backup and manage-
to [periodically review that alignment. Without goal ment investments necessary to bring or keep the
congruence, tonlrol losls become e.\ces.si\e for both internal ()[")eration up to best-in-world levels are also
[tarties. With it. I'enL'tiis nuiltiply and cosis plunimet,' consistently ignoretl. Instead of being in contact with
customers or interacting with people in their eore
• Building a much more professional and highly operations, top executives in integrated companies
trained procurement and contract management lentl to spenti aboul 70 pcrcenl of their lline on
group. Man)' outsourcers find that neither tlieir oper- |^|•obienls focused vvithin a tew yards of their office
ating noi' iheir purchasing managers ha\'e the kind of tioors — often staff conflicts.-' Yvl for eiiiotional or
long-term relationship-management skills neetled for political reasons, ihe provider is often loadetl with all
successful oLitsoi rcing. As the number and c(jniple.\i- possible risk and transaction costs, creating a costly
ty of outst>urcing arrangements increase, there is bias in tiecision making.
need for a highly skillexi corporate-le\'el office capa-
ble of evaluating boih insoLircing and oLit.soLircing • Developing feedback systems to leverage and
option.s objectively: capturing the knowledge, suc- share knowledge and innovation in hoth direc-
cesses, and patterns of problems from past outsourc- tions. Innovation occuis when tv\o previously disas-
ing; developing tlie strategic and operating monitor- .sociatcd matrices of thought intersect for the first
ing skills anel systems needed for efrecti\e ouisourc- time. Tlie cusioiiier-proclLiter interface is ihe inosl
ing; ani.1 acti\ely st;iying Lit the frontier of outsourcing protluctive source for such innovaticjns;"' studies
management teclini{[ues. Some have urged that these show that more tluin SO percent of all innovation
be centered in the office ot a t hief resources officer occurs at this interface. ' As Dell Computer antl oilier
reporting to the iA-.O or COO.-" exam[">les have shown, consciously developing inter-
active capabilities and knowledge sluiring at both
• Developing a ^;reatly enhanced strategic and supplier anti downstream partnering levels can easily
operations information system at both the strategic leverage a company's own innovatit)n antl knowl-
and operations level. Strategic monitoring ensures etlge resources by factors ol ten to 100. Some of the
that the supplier is not moving in directions inimical greatest values of OLit.sourc ing are the opportiiiiistic
to the buyer's interests.-" In addition, successful out- ideas iliat the company otheiAvise would never see.
sourcing com|")anies move aggre.ssively to de\'elop
detailed know ledge-based operations tiata systems • Creating a mutual three-level contact system.
(hat collect, evaluate, and ride circuit on changes that To fulhll these iiossibilities. suctessful large-stale out-
the best possible outsitie suppliers and experts are sourcers carefully design Lind implement three levels
making.-'' By con-.tantly evaluating besi-in-breetl solu- of iiitormalion exthange and |ierst)nal ctintacts

SiDan Managemenl Review Quinn


among: (1) the top managers who can lireak l^ottle-
necks or ensure responsiveness when lower-level As outsourcing moves from cafeteria or
misunderstLindings occur, (2) champions on both
sides of the relationship whose careers depend on mail-room functions to more creative
the success of the relationship, (3) numerous bench
and operating-level personnel who develop the per-
or strategic levels, the higher the responsi-
sonal relationships and knowledge exchanges that
hility for the activity must move.
solve problems before they occur or fester. Without
wt'll-developed reflations at these three levels, the
tacit knowledge of how things really get done, loss of jobs, prestige, or power. As outsourcing moves
20 advance warnings of problems, and rapid conflict res- from cafeteria or mail-room functions to more cre-
okitions thai maintain a joint outlook disappear. And ative or strategic levels, the higher the responsibility
people with occasional iirm's-lcngth confrontations for the activity must move. To achieve the kinds of
may dominate the relationship, making costs and benefits described, providers constantly .say that an
apparent difficulties soar. Champions of both parties executive at least one level higher than those affected
need to consciously broadcast and amplify successes must become the champion.
internally, or resistance-minded politics will escalate
inevitable minor difficulties and relationship problems Equally important, the outsourced operation mu,st not
to crisis levels,'- later be overseen by someone who has a vested
interest in the way things were done hefore. Such
• Companies like Nike, Ford, and Sony have devel- people can easily become critics, not champions, and
oped these capabilities in depth. For example, Nike quietly sabotage the relationship. As one CEO said,
frequently brings its suppliers' top people to its "There are a thoLisand ways any operating manager
Beaverton, Oregon, headquarters to exchange details can undercut such relationships if he or she wants to."
about future opportunities, needed capabilities, and To cope with this, Arthur Andersen has created a
operating philosophies. Nike maintains full-time "pro- human relations '"transitioning methodology" to
duction expatriates" on its major suppliers' premises decrease outsourced people's fears and to explain
and keeps elaborate track of both present and poten- precisely what the move means to them, the new
tial new suppliers" design, development, and produc- skills they will acquire, and how the provider can
tion capabilities as the latter make proposals for create whole new opportimitics and career paths for
future production contracts. Its information system them. When this transition management and. later,
carefully captures selected data and innovative ideas three-level oversight of the relationship are properly
from all these .sources, giving Nike an innovative handled, PriceWaterhou.seCoopers found that more
edge substantially beyond its own internal capabili- than 90 percent of the parties surveyed found the
tie.s. Meanwhile, its core competencies of supericjr out.sourcing "very SLiccessful."" Fortune found that a
feedback of information from the marketplace, spe- vast majority of the mid- to lower-level executives
cialized marketing capabilities, and its product design transferred during outsourcing or downsizing increased
center (which can attract more talent and commit their job satisfaction and incomes as a result.'"
more resources to design of athlciic siiocs than any
other company) both leverage the.se capabilities and Increa.sed out.sourcing will be a natural outgrowth ot
create a strategic block between Nike's suppliers and our competitive system as it continues to globalize
its marketplace. and move to knowledge-based services. For those
who anticipate and manage these changes strategical-
ly, the gains can be enormous. For those who resist
A Top Management Issue too long, the costs vv'ill be tragic. While nothing can
All this dictates that outsourcing has to become a top eliminate all the personal displacement costs or psy-
management, not operating, issue. Recommendations chological pain of outsourcing, these negatives can
for the outsourcing of intelleccuai, innovaticjn, and be substantially mitigated by proper management.
cross-divisional benefits are unlikely to come from Strategically managing knowledge, innovating, and
bekjw. Tn fact, lower- to intermediate-level managers outsourcing will be among the greatest and most
tend to be actively ho.stile to ouLsourcing — fearing rewarding challenges of the new era.

Quinn
References See: • 23. R. O'Aveni and R. Ravenscraft, "Economies of
Quinn, Doorley, and Paquette (1990b). Integration vs. Bureaucracy Costs Does Vertical
• 1 As used here, strategic outsourcing includes • 11 For a discussion of each and numerous con- Integration Improve Performance'" Academy of
both the relatively perman ;nt purchase of goods or crete examples, see Management Journal, volume 37. October 1994, pp.
services in a particular category from singie or Quinn, Zien, and Baruch (1997), chapter 7. 1167-1206.
many different suppliers I' can include tecfiniqiies • 12. Office of U.S. Trade Representative, U S. • 24. J. Kotter and J Heskett, Corporate Culture
from spot buying to strategic alliances I have cov- National Study on Trade in Services (Washington, and Performance {\^ew York: Free Press, 1992); and
ered the use of these different techniques else- D.C, Government Printing Office, 1983). CA. O'Reilly and M.L. Tushman, "Using Culture for
where See: • 13. Published in a series of articles including: Strategic Advantage: Promoiing Innovation through
J.B. Quinn and F.G. Hilmer, "Strategic Outsourcing." J.B. Quinn, "Technological Innovation, Social Control," m M. Tushman and P Anderson.
Sloan Management Review, volume 35, Summer Entrepreneurship, and Strategy." Sloan Managing Strategic Innovation and Change [New
1994, pp. 43-55. Management Review, volume 20, Spring 1979, pp. York: Oxford University Press, 1996), pp 200-216.
• 2 T. Elliott and D. Torkkc, "World Class 19-30; • 25. R. Garner, "Strategic Qutsourcing: Its Your
Outsourcing Strategies," hiecommunications. vol- Quinn (19801; Move," Datamation, volume 44, February 1998, pp. 21
ume 30, August 1995, pp. 17-49: and J.B. Ouinn, "Managing Innovation: Controlled 32-41, and
J. Greco, "Outsourcing: Tha New Partnership," Chaos," Harvard Business Review, voltime 63, May- M. Useem, "The Lateral Leap." Chief Executive, vol-
Joumai of Business Strategy, volume 18, July- June 1985, pp. 73-84: and ume 136, July-August 1998. pp. 58-59.
August 1997, pp 48-54. J.B. Ouinn, "Innovation and Corporate Strategy," • 26. F. Casale, "The Emerging Role of the
• 3. Tfie first statement of how these elements fit Technology in Society, volume 7, 1985. pp. 263-279. Resource Officer," The Source, volume 4, Summer
together was in' • 14 for perhaps the first systematic presentation 1998. pp. 1-4
J B. Quinn, T.L Doorley, ard PC. Paquette, of this concept for guiding technological activities, • 27 Strategic tracking systems monitor elements
"Technology in Services: Rethinking Strategic see: of the outside supplier's performance that could
Focus," Sloan Management Review, volume 31. J. Bright, Technological Forecasting for Industry affect the viability or direction of the company —
Winter 1990a. pp. 79-87. (Englewood Cliffs, New Jersey: Prentice Hall, 1974). not merely its cost efficiency. Strategic monitoring
• 4. PriceWaterhouseCoof ers, "Global Top Decision • 15. The U.S. Air Force, in the design of combat systems constantly reassess such things as the
Makers Study on Business Process Outsourcing" aircraft, was probably the first institution to use supplier's personnel and facilities investments,
(New York, London. PriceV/aterhouseCoopers, this technique consistently and call it by this term, partnership and marketing positions, changing
Yankelovich Partners, Goldstein Consulting Group, although DuPont used it extensively to establish Strategic risks, and geographic and portfolio invest-
1998) priorities for its 1930s plastics introductions. ments.
• 5. J. Barnsley explains t le reasons and offers the • 16. National Research Council, Information • 28. R. Hiebeler. T Kelly, and C Ketterman, Best
mam arguments. See: Technology in the Services Society (Washington, Practices: Building Your Business With Customer
J. Barnsley, "Outsourcing ;is a Board-Level Decision D.C. National Academy Press, 1994] Focused Solutions {^ew York Simon & Schuster,
I," Directorship, volume 24, June 1998, pp. 3-5. • 17. Hewett Associates Study, reported in 1998).
• 6. For a full range of intfHIectual management "Beyond Benefits: The Changing Face of Hfi • 29. H. Mintzberg, Mintzberg on Management:
activities, see: Qutsourcing." Benefits Quarterly volume 13, first Inside Dur Strange World of Organizations (New
J.B. Ouinn, P Anderson, and S. Finkelstein. quarter, 1997, pp 41-46. York: Free Press. 1989).
"Leveraging Intellect," Academy of Management • 18 R Maurerand N. Mobley, "Outsourcing' Is It • 30. For an amplification of this concept with
Executive, volume 10, Augjst 1996, pp. 7-27. the HR Department of the Future?" Personnel, vol- many useful examples, see'
• 7. For the definitions, criteria, and dimensions of ume 75, November 1998, pp. 9-10: and D. Leonard Barton. Weltsprings of Knowledge
effective strategy, see: S. Lever. "An Analysis of Motivations Behind (Boston: Harvard Business School Press, 1995)
J.B. Quinn, Strategies for Change (Homewood, Qutsourcing Practices in Human Resources," • 31. E. von Hippie, Sources of Innovation (New
Illinois Irwin, 1980), chapters 1 and 5. Human Resource Planning, volume 20, number 2, York: Qxford University Press, 1988).
• 8. For a view o( these methodologies in depth, 1997, pp. 37-47. • 32. Many books bave outlined botb the difficul-
see: • 19. For a description of Andersen's approach in ties of and techniques essential to maintaining
J.B. Quinn. K.A. Zien, and J.J. Baruch, Innovation some detail, see. partnership relationships, such as:
fxp/os/o/i (New York' Free Press, 1997). F. Julien and L. Rieger. "Winning of the Game: F. Contractor and P Lorange, Cooperative Strategies
• 9. Several early articles and books developed this Strategic Risk Management," Bank Securities in International Business [San Francisco: Livingston
concept in depth. See. Journal, volume 7, September-October 1998. pp. Books, 1987);
J.B Quinn, IntelligentEntt'rprise {Uev^'iatk: Free 10-16. J Lewis, Partnerships for Profit. Structuring and
Press, 1992, • 20. For in-depth critical concepts and numerous Managing Strategic Alliancesi^Bw York Free
Quinn. Doorley, and Paquette 11990a): and examples for all phases of the innovation process, Press, 1990); and
J.B. Ouinn, T L. Doorley, ar d PC Paquette, "Beyond see T. Collins and T Doorley, Teaming Up for the 90s
Products: Services-Based Ijtrategy," Harvard J.B. Quinn, J.J. Baruch, and K.A. Zien. "Software- (Homewood, Illinois: Irwin, 1991).
Business Review, volume i38. March-April 1990b. Based Innovation," Sloan Management Review, vol- • 33. PriceWaterhouseCoopers |1998|.
pp. 58-68. ume 37, Summer 1996, pp 11-24; and • 34. J Aley. "Where the Laid Qff Workers Go,"
• 10. Boston Consulting G'oup and Braxton Quinn, Zien, and Baruch (1997), chapter 2. Fortune, volume 132, 30 October 1995, pp 37-38.
Associates were the first groups to develop value • 21. For the classic economic statement, see:
chain analyses for other purposes. See: R. Coase, "The Nature of the Firm," Economica, vol- Reprint 4041
B. Henderson, Henderson On Strategy (New York. ume 4, November 1937, pp. 386-405.
Free Press, 1980). • 22. D. Williamson, "Transaction Costs," Economic Copyright © 1999 by the Sloan Management
Ouinn, Doorley, and Paquette were the first to rede- Organization. Firms. Markets and Policy Control Review Association.
fine such analyses for com competency purposes. (New York. New York University Press, 1986). All rights reserved.

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