Management Fundamentals by Steven Cohen

Author:Steven Cohen
Language: eng
Format: epub
Publisher: Columbia University Press

WHEN YOU SHOULD MAKE INSTEAD OF BUY: WHEN CONTRACTING IS A BAD IDEA

Deciding what kind of work to keep in house requires an organization to define itself and to determine the irreducible core of its being. This is, again, that concept of distinctive competence: What do we do that no one else does that is key to attracting resources? For example, we work at Columbia University, one of the world’s great research universities. While the university contracts with Barnes & Noble to run our bookstore, we would never contract out teaching or research. Those two functions define the university and are the main sources of the institution’s revenue.

Organizations evolve and their distinctive competence evolves with them—a service, function, or product that was once central to the organization may become less important over time. For example, IBM once dominated the personal computer market, but in 2005, it sold that business to a Chinese company called Lenovo. IBM was no longer making enough money making PCs and wanted to focus on more profitable consulting services and information networks.10 But a decision to drop a major product is unusual and difficult for most organizations. IBM made the strategic decision to shed the PC business.

An organization should not purchase a service, good, or function if doing so would impair the organization’s capacity and distinctive competence. It is also dangerous to contract for capacity when it does not yet exist, unless, as noted earlier, the contract is to develop the capacity, which would then be “owned” by the purchasing organization. If one attempts to contract for something that does not exist, the odds are that you will not receive bids that allow you to purchase whatever you are seeking.

When deciding to outsource, we suggest addressing (at a minimum) the following questions:

How central is the function to the organization?

How much new capital is required to perform this function?

How much existing capital was invested?

How much capacity do we have to perform this function, and what are the risks of involving other organizations in the work?

Is the capacity to perform this function common or rare?

Does the capacity to perform this function need to be developed and, if so, would it be better for us to have another organization do this?

Can someone else do this better and cheaper, and are they willing to sell it to us at a good price?

Does the contractor have a monopoly, and does contracting with them leave us vulnerable in any way?

Is reliable and punctual delivery assured?

Are there political, marketing, or other external relations reasons to do this ourselves?

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