Handing Off Non-Core Competencies to… Whom?

Spend Matters welcomes another guest post from Tony Fross of LogicSource.

Back in 1990, Gary Hamel and C.K. Prahalad introduced the concept of core competencies into the thinking and nomenclature of business. Launched initially in the Harvard Business Review and iterated on endlessly since then, the doctrine was an anti-diversification screed (the 80’s having been the decade of diversified enterprises), which directed corporations to only do the things that they did best to generate revenue and profit.

Over the next ten years, companies began sharpening their focus and attempting to migrate up the value chain. This effort initially led to outsourcing activities that were considered “non-core.” As the Asian Tigers and India began to develop their infrastructures, the trend to relinquishing non-core activities naturally continued into the trend we know today as “offshoring.”

The effort to squeeze every last penny of EPS has inevitably had some unintended consequences. Johnson & Johnson, once exemplary in handling the PR disaster of a product recall (which in the pharmaceutical industry can verge on managing a public health crisis), tumbled to being a HBR case study for badly managed product recalls. More than a few analyses pointed to relinquishing control of manufacturing (through both outsourcing and offshoring) as the culprit.

A related trend during the 90’s was an increasingly aggressive focus on “vendor management.” Pushing costs out of house to vendors was step one and the obvious subsequent steps were creating enough competitive tension in the supply chain to keep costs low. Work naturally migrated to lower cost markets as labor arbitrage gave offshore suppliers the upper hand.

Today, certain pendulums are swinging back in some respects. Jason Busch noted recently that some firms are now beginning to reshore functions and capabilities they had previously offshored. Why? Speed, flexibility, and control—the very things J&J and many other pharmas gave up when they let go of onshore, vertically-integrated manufacturing capabilities. On the other side of the pond, Peter Smith, the Spend Matters UK/Europe editor recently suggested that procurement departments should be putting the supplier at the heart of their strategy.

It seems to me that in the 90’s, just as many procurement departments were trying to move upstream and rebrand as “Global Sourcing” or “Strategic Sourcing,” we witnessed the standing of suppliers get downgraded by a concurrent change in nomenclature. They became “vendors” and the discipline of relationship management with those parties became “vendor management.” (Full disclosure: I am equally guilty here. I have participated in any number of VMO initiatives in my career!)

At LogicSource, my colleague Michael Braunschweiger has argued forcefully that we not refer to any of our partners as vendors. Calling them vendors, he maintains, leads to poor behaviors on both sides. We must acknowledge them for what they truly are: suppliers of critical business services that keep our clients’ business moving forward. An important part of our job as a sourcing solutions provider therefore is to align the interests of both parties.

There are three important takeaways at the intersection of Peter Smith’s and Michael Braunschweiger’s opinions:

  1. When it comes to handing off important but non-core portions of a value chain, the entities taking on those activities must be viewed as suppliers, not vendors.
  2. Respective business interests must be well aligned, and that alignment must be continuously measured.
  3. Seen from this perspective, it seems obvious that the discipline of conscious supplier relationship management is a likely source of both business performance predictability and potentially innovation.

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