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Core Competencies? Outsourcing?

Vern Edwards

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An article in today's (Sept. 27, 2016) Wall Street Journal, "Amazon's Newest Ambition: Competing Directly with UPS and FedEx," the paper reports that Amazon is creating its own delivery system in response to rising shipping costs. An interesting comment:

Quote

To constrain rising shipping costs, the online giant is building its own delivery operation, setting up a clash with its shipping partners...

Amazon’s goal, these people say, is to one day haul and deliver packages for itself as well as other retailers and consumers—potentially upending the traditional relationship between seller and sender...

Inside the company, executives describe, in the words of one senior official, how Amazon “is building a full-service logistics and transportation network effectively from the ground up.”

Amazon’s push into the shipping sector reflects a willingness among today’s powerful tech companies to defy the traditional constraints of business and leap into new ones.

This seems to be a departure from the business model that developed in the 1980s and 1990s, in which a business identifies and focuses on its core competencies and outsources everything else. https://www.caycon.com/blog/2012/10/focus-on-core-competencies-and-outsource-the-rest/

There has even been talk about outsourcing core competencies. http://www.supplychain-forum.com/documents/articles/Premus & Sanders.pdf

Goodness knows, the military has been accused of doing core competencies during the wars in Afghanistan and Iraq. https://www.brookings.edu/articles/outsourcing-war/

The government has pursued the outsourcing model (in its governmental way) for three decades now, and not without problems, as reflected in the misguided foray into "performance-based" contracting. Outsourcing has been administratively costly and time-consuming and has produced somewhat dubious results.

Does the article about Amazon and its comment about the willingness of powerful tech companies to defy traditional business constraints suggest that we might be witnessing the return of an old business model within some industries?

We've had the revolution. Are we seeing the beginnings of reaction? Has the cycle come full circle? Or are we just seeing a bold move by a bold entrepreneur, the kind of thing the government can't do.

Say, isn't the OFPP Administrator going to Amazon? Maybe some of you should check to see if she's accepting resumes.




4 Comments


Vern: Not a direct response to the questions posed, but I cannot imagine that insourcing would be a good decision for the Federal Government, when we already struggle so mightily with our supposed "core competencies" (case in point: contracting). New responsibilities would bring an abundance of new regulations, policies, data calls, and "best practices." A lack of real incentivization would deter the type of talent needed to genuinely "master" a new field.

With regard to Amazon, it is a unique snowflake, even within the business world. I've watched Amazon grow from its origins as a simple online bookstore, often wondering if each venture into new territory is a misstep (e.g., electronic devices, grocery delivery, entertainment production, shipping). I have to think that most companies, were they to follow Amazon's lead, would not fare as well. This is probably due in large part to Bezos' appetite for risk and his willingness to stand firm in the face of shareholder dissatisfaction for so many years.

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Amazon has always functioned well in the actual, physical world.  I do not have the WSJ article, but I assume the work "autonomous" appears in it somewhere?  The "from the ground up" wording should worry the UPS/FedEx folks.

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Successful businesses are constantly seeking ways to differentiate themselves from the competition and find competitive advantage.  They constantly make insourcing and outsourcing decisions.  Whether to diversify or specialize.  I previously worked for GE and while there watched it sell off longstanding parts of its business (GE Capital, NBC, GE Plastics, GE Appliances etc.).  Logistics is a significant cost to many businesses and whether to insourcing or outsource (3rd party logistics) the service can have significant effects on the profitability of the company and satisfaction of its customers. Some very successful companies have operated their own product distribution fleets for years (Wal-Mart, PepsiCo, Sysco, and Coca-Cola), so I don't think this necessarily indicates a larger return to an old business model. http://www.ttnews.com/top100/private/

Rather, I think this is simply the byproduct of a business that is constantly evaluating how it can get better and being willing to take significant risk to do so.  All, while managing the risk and being accountable to its shareholders and stakeholders.  Time will tell if this proves successful for Amazon, but they have some existing models and best practices to learn from. 

Here is a link to a brief article by the Harvard Business Review that discusses the qualities of successful businesses (large conglomerates) that have diversified into dissimilar markets.  https://hbr.org/2012/06/the-coherent-conglomerate

I think the challenge with government being able to apply similar principles itself is that leaders are rarely incentivized to take risk, in part because there is no reward.  There is little accountability to stakeholders and leaders and employees are often not held accountable.  Also, it seems the decision to insource or outsource is often made at a very high level with each new administration based on its inclinations and is not always applied in an manner that promotes the long term success of the organization.  Each agency and certain functions within it should be separately evaluated to determine the cost vs. benefit of insourcing or outsourcing and make its decisions that are in the best interest of the success and efficient operation of the function concerned.  These are just a few things that would have to change in order for the government to optimize its insourcing/outsourcing activities.  I'm not holding by breath.

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Amazon understands the risk to its business model and is trying to limit its exposure. When your core competency is dependent on external forces outside of that competency, it is critical your business looks at ways to minimize its risk to those forces. This is especially true when consolidation occurs in your supplier networks. The Government needs to be aware and consider this especially in SETA contracting for highly technically skilled program offices.

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