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> In the case of information technology-related manufacturing, research, development, and marketing are the most profitable areas to specialize. Fabricating the

> In the case of information technology-related manufacturing, research, development, and marketing are the most profitable areas to specialize. Fabricating the units and linking critical components is a low-margin race to the bottom. Inspired by this theory, companies like Boeing aim to specialize in high-margin activities and outsource the rest. This is the core point which the author seems to be trying to make, that outsourcing necessarily raised costs because it's a de facto defective strategy for improving margins. What the author fails to delve into is precisely why subcontracting failed to deliver as imagined - did subcontractors fail to deliver airplane parts within tolerances? Were the specifications provided to subcontractors faulty? Did the outsourcing contracts fail to require compensation for failing to deliver on-time and within tolerances; did such requirements exist but in reality such financial obligations caused subcontractors to run out of money / go bankrupt and default on their obligations? Was no insurance purchased to hedge against these risks, so that costs would not explode along with delays? Part of smile theory is that when you decide to outsource lower-margin operations, the ability to outsource effectively in and of itself becomes part of your core competency. That Boeing executives failed to reduce costs as planned through outsourcing is less proof that outsourcing is inherently poor practice and more proof that competency at shifting numbers around on bean-counting accounting sheets is not the same thing as competency at outsourcing.

jl2718 7y ago
There are different kinds of outsourcing. One is where a subcontractor has an existing and superior product, which incurs integration cost, but results in a superior product. The other is exporting a core competence to an inexperienced subcontractor for less cost, which incurs training costs, integration costs, loss of intellectual capital, logistics loss, and results in an inferior product.
- solatic 7y ago
  > which incurs training costs, integration costs, loss of intellectual capital, logistics loss, and results in an inferior product What I'm arguing is that, in order to effectively outsource, one must get good at the so-referred training and integration costs, while hedging against logistics issues. Otherwise you will get, as you prophesy, an inferior product. But I'm not convinced that's inevitable. Of note, keeping everything in-house can result in its own logistics issues, as the organization becomes necessarily larger and must pay related overhead costs. So deciding to keep processes in-house doesn't mean you get to completely ignore "logistics loss" because you're paying a similar price in its stead.
  - jl2718 7y ago
    But it's still top-down, which means that existing processes are interpreted imperfectly at best, and there is no accumulation of knowledge and incentive for innovation. Spin-offs used to be popular for this reason, but that seems to be out of favor with Wall St today. It seems they'd rather watch startups kill their empires than plant their own seeds.
  - lumost 7y ago
    It's hard to view a given strategy as being successful or unsuccessful for a given business without counterfactual's over time. If Boeing hadn't outsourced they may have struggled to remain cost competitive; alternately they may have produced more innovative and dominant products over the relatively long time horizon of ~20 years. Most of the modern case studies I've seen on outsourcing deal primarily with dominant players that would likely be alright regardless of any decisions they made over the course of 10 years. Are there well known examples of companies starting as a low to mid-tier player in their sector, and gaining market share through the use of outsourcing?
  - rsj_hn 7y ago
    > What I'm arguing is that, in order to effectively outsource, one must get good at the so-referred training and integration costs, while hedging against logistics issues I think by now we have demonstrated that this is false, no? In the 1960s, it was a popular idea (especially among managers) to assume that a company can have a core competency of "management" rather than making products or services. If true, such a core competency would mean 1) You can take a great manager at an Ice Cream making company and move him over to an Aerospace company and he'd still be a great manager. 2) Rather than being facilitators who helped to coordinate talented people, managers had their own talent at "managing" and so you can pay them the kind of superstar wages that were previously paid to superstar performers. 3) The above two skills could be efficiently measured and identified to allow scaling them to a large organization. This idea was obviously very popular, and so a business structure called the "conglomerate" arose where one huge company would buy and own many different smaller companies all with completely different product lines, because the competitive advantage of the conglomerate was viewed to be "managing" rather than producing, and thus the superior managers would improve margins at pretty much anything they were put in charge of. But unfortunately what ended up happening was that the conglomerates underperformed. There are still some conglomerate hold outs, like Berkshire Hathaway, but everyone knows that this is because of Buffet's investment acumen, not because Berkshire has a stable of excellent managers. Perhaps there is such a thing as pure "management" skill, rather than say, "Engineering Management", but if such a skill exists, it's sufficiently difficult to measure and/or replicate from one product area to another that none of the businesses who thought they had this skill as a core competency actually had it. This remains the case today -- there are many well managed companies, and many talented managers, but 'management' has never been and cannot be a core competency of any firm. So this idea that Boeing can shed its core competency from building planes and replace it with a "coordination" core competency is a rehash of the conglomerate dream with the same disastrous outcomes, and many people who saw what Boeing was doing knew exactly what this would lead to.
wetpaws 7y ago
You should never outsource your core competency, it's a recipe for trouble.
Haga 7y ago
But that race to the bottom.. Are your eyes as a company. You see improvement potential, you know when a method has reached its peak and innovation is necessary for a leap. Anyone can do that iterative grind towards perfection ?

jl2718 7y ago

There are different kinds of outsourcing. One is where a subcontractor has an existing and superior product, which incurs integration cost, but results in a superior product. The other is exporting a core competence to an inexperienced subcontractor for less cost, which incurs training costs, integration costs, loss of intellectual capital, logistics loss, and results in an inferior product.

solatic 7y ago
> which incurs training costs, integration costs, loss of intellectual capital, logistics loss, and results in an inferior product What I'm arguing is that, in order to effectively outsource, one must get good at the so-referred training and integration costs, while hedging against logistics issues. Otherwise you will get, as you prophesy, an inferior product. But I'm not convinced that's inevitable. Of note, keeping everything in-house can result in its own logistics issues, as the organization becomes necessarily larger and must pay related overhead costs. So deciding to keep processes in-house doesn't mean you get to completely ignore "logistics loss" because you're paying a similar price in its stead.
- jl2718 7y ago
  But it's still top-down, which means that existing processes are interpreted imperfectly at best, and there is no accumulation of knowledge and incentive for innovation. Spin-offs used to be popular for this reason, but that seems to be out of favor with Wall St today. It seems they'd rather watch startups kill their empires than plant their own seeds.
- lumost 7y ago
  It's hard to view a given strategy as being successful or unsuccessful for a given business without counterfactual's over time. If Boeing hadn't outsourced they may have struggled to remain cost competitive; alternately they may have produced more innovative and dominant products over the relatively long time horizon of ~20 years. Most of the modern case studies I've seen on outsourcing deal primarily with dominant players that would likely be alright regardless of any decisions they made over the course of 10 years. Are there well known examples of companies starting as a low to mid-tier player in their sector, and gaining market share through the use of outsourcing?
- rsj_hn 7y ago
  > What I'm arguing is that, in order to effectively outsource, one must get good at the so-referred training and integration costs, while hedging against logistics issues I think by now we have demonstrated that this is false, no? In the 1960s, it was a popular idea (especially among managers) to assume that a company can have a core competency of "management" rather than making products or services. If true, such a core competency would mean 1) You can take a great manager at an Ice Cream making company and move him over to an Aerospace company and he'd still be a great manager. 2) Rather than being facilitators who helped to coordinate talented people, managers had their own talent at "managing" and so you can pay them the kind of superstar wages that were previously paid to superstar performers. 3) The above two skills could be efficiently measured and identified to allow scaling them to a large organization. This idea was obviously very popular, and so a business structure called the "conglomerate" arose where one huge company would buy and own many different smaller companies all with completely different product lines, because the competitive advantage of the conglomerate was viewed to be "managing" rather than producing, and thus the superior managers would improve margins at pretty much anything they were put in charge of. But unfortunately what ended up happening was that the conglomerates underperformed. There are still some conglomerate hold outs, like Berkshire Hathaway, but everyone knows that this is because of Buffet's investment acumen, not because Berkshire has a stable of excellent managers. Perhaps there is such a thing as pure "management" skill, rather than say, "Engineering Management", but if such a skill exists, it's sufficiently difficult to measure and/or replicate from one product area to another that none of the businesses who thought they had this skill as a core competency actually had it. This remains the case today -- there are many well managed companies, and many talented managers, but 'management' has never been and cannot be a core competency of any firm. So this idea that Boeing can shed its core competency from building planes and replace it with a "coordination" core competency is a rehash of the conglomerate dream with the same disastrous outcomes, and many people who saw what Boeing was doing knew exactly what this would lead to.

wetpaws 7y ago

You should never outsource your core competency, it's a recipe for trouble.

Haga 7y ago

But that race to the bottom.. Are your eyes as a company. You see improvement potential, you know when a method has reached its peak and innovation is necessary for a leap. Anyone can do that iterative grind towards perfection ?