Monday, July 05, 2004
Offshoring the Consultants
BCG publishes a report (PDF) arguing that massive offshoring is the source of market advantage, and that "the largest competitive advantage will lie with those companies that move soonest...Companies that wait will be caught in a vicious cycle of uncompetitive costs, lost business, underutilized capacity, and the irreversible destruction of value". The Post panics.
Look, BCG is trying here to recreate the dynamics of it's experience curve argument - that moving down the (whatever) curve sooner is an almost irreversible source of advantage, and that there are positive feedback effects (old version: to market share; new version: to 'value creation'). There are two very big, very simple problems with the thinking behind this argument.
First, as Porter's pointed out almost nauseatingly often, operational effectiveness is not strategy. Strategy in Porterian terms is distinctive linkages between value activities - doing things not just differently, but also better. This is something that clearly cannot be achieved if everyone's shifted almost every value activity to the same offshore players. Generic improvements to your supply chain - whatever the consultants may sex them up as - are not a source of advantage.
Second is Nassim Taleb's Black Swan problem. The consultants of course argue that they have identified and can help you 'manage' the risks of offshoring. But just because we haven't seen a Black Swan, don't mean one doesn't exist - this is something the trading community learned the hard way in the last 15 years or so. So massively reducing 'costs' through offshoring where the risks are 'managed' is a bad bet - not only because we are just discovering the hidden costs, but also because what's much more potentially hazardous are the unknown risks
Look, I am no anti-offshoring zealot - but you should think twice if you think that call-center operators are cogs in your organization machine. They're not - execs who think in these simplistic terms are missing the fundamental point of post-capitalist business: it's massively interconnected (the flipside is hypercommoditization). Think about open-source, and why it works. This means that more than ever what counts is not saving costs, but building (honest) relationships, instead of trying again and again to pull a Cheney.
Instead, in a post-capitalist economy, value is created in the dyadic relationship between consumer and producer, the implicit contract they sign with one another, and the information that flow from one to another. This is what Prahalad's been arguing - and it's the opposite of offshoring - it's saying look upstream, to your consumers, not downstream. That's because the real problem isn't that firms cant make things cheaply, it's that they don't know what to make: it's that firms can't efficiently search the massive possibility spaces they create.
I had similar opinions a few years ago when CRM and ERP software packages were seen as the holy grail. For the first movers, perhaps there may have been a competitive advantage for a few months, but as all of ones competitors implemented similar backoffice functionality, CRM/ERP became a very expensive cost of doing business.
Just as you are not an anti-offshoring zealot, I'm not a pro-custom software zealot. However those who think they can mix/match packaged software, or lightly customized packaged software to do anything more than industry standard is dreaming. In the rush to commoditize software development, I believe many have given up the competitive advantages that some custom software can provide.
Sadly, "pulling Cheneys" seems to have worked pretty well for Cheney. Any thoughts on that?