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> 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

> 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.
- solatic 7y ago
  > 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. No, that isn't the argument at all. A manager at an ice cream factory doesn't need to understand aircraft manufacturing tolerances. If a manager at an ice cream factory outsources the production of chocolate, and the chocolate that arrives as an input is slightly off-grade, it's not going to cause thousands of tons of aluminum and human flesh to come crashing out of the sky. Risk management has its similarities across disciplines, just as the principles of Lean Manufacturing are similar across disciplines. But you can't effectively outsource something you don't intimately understand, which (by the way) is why it's impossible to outsource research.
  - rsj_hn 7y ago
    I guess I don't understand your point. First, you say "that's not the argument", but then you make the case that Ice Cream production is qualitatively different. Yes, exactly! You don't have the depth of the supply chain or the level of interconnectedness in the ice cream factory as you do when you are building a jet with pieces outsourced that are moving parts that need to work together. A slight flaw in the wing tip will change the stresses on the plane, the fuel efficiency, will require software updates, and will trigger changes throughout many other components. Now change that from "flaw" to unknown factor. In that environment, it's really impossible to specify what the tolerances on everything should be in full precision, you need a team of people with a common purpose and short communication paths who can collaborate on fixing these issues in a cooperative manner rather than in a contractual vendor/supplier relationship. E.g. if there is a problem discovered in the design, perhaps you need some changes in the wingtip design and in 1000 other parts, and everyone needs to work together to make that change. Now, what happens when these are 1000 different companies working to spec, with lots of lawyers poring over the details of what was required. It becomes an unworkable nightmare. Only a true coordination talent with heavy doses of prescience could try to solve that nightmare, Boeing thought they had this coordination talent, but they didn't because no one does. Such a talent is not a core competency of any firm. More importantly, such a manufacturing process is incompatible with innovation, where you have to be able to make lots of mistakes as you stumble towards a better design iteratively. It only works when everything is known to spec before the contracts are signed -- e.g. when you are not innovating. This type of design agility can't be extracted from the minds of conscientious engineers working together on a shared vision, and parceled out to for profit contractors looking to do spec work. Similarly risk management certainly adopts a common language, but the idea that you can actually manage risk in a quantitative way is not something borne out by experience. Rather, you can cover your a$$ and say you have sign off from you GRC people so that when stuff breaks down you can point the finger at someone. We just exited a massive financial crisis, and we see security breaches on a massive scale, most of which happen in firms with well funded GRC teams. Again, wishing that you can control these variables does not make it so. Putting together a bureaucracy to control something doesn't mean that it's controlled.

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.

solatic 7y ago
> 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. No, that isn't the argument at all. A manager at an ice cream factory doesn't need to understand aircraft manufacturing tolerances. If a manager at an ice cream factory outsources the production of chocolate, and the chocolate that arrives as an input is slightly off-grade, it's not going to cause thousands of tons of aluminum and human flesh to come crashing out of the sky. Risk management has its similarities across disciplines, just as the principles of Lean Manufacturing are similar across disciplines. But you can't effectively outsource something you don't intimately understand, which (by the way) is why it's impossible to outsource research.
- rsj_hn 7y ago
  I guess I don't understand your point. First, you say "that's not the argument", but then you make the case that Ice Cream production is qualitatively different. Yes, exactly! You don't have the depth of the supply chain or the level of interconnectedness in the ice cream factory as you do when you are building a jet with pieces outsourced that are moving parts that need to work together. A slight flaw in the wing tip will change the stresses on the plane, the fuel efficiency, will require software updates, and will trigger changes throughout many other components. Now change that from "flaw" to unknown factor. In that environment, it's really impossible to specify what the tolerances on everything should be in full precision, you need a team of people with a common purpose and short communication paths who can collaborate on fixing these issues in a cooperative manner rather than in a contractual vendor/supplier relationship. E.g. if there is a problem discovered in the design, perhaps you need some changes in the wingtip design and in 1000 other parts, and everyone needs to work together to make that change. Now, what happens when these are 1000 different companies working to spec, with lots of lawyers poring over the details of what was required. It becomes an unworkable nightmare. Only a true coordination talent with heavy doses of prescience could try to solve that nightmare, Boeing thought they had this coordination talent, but they didn't because no one does. Such a talent is not a core competency of any firm. More importantly, such a manufacturing process is incompatible with innovation, where you have to be able to make lots of mistakes as you stumble towards a better design iteratively. It only works when everything is known to spec before the contracts are signed -- e.g. when you are not innovating. This type of design agility can't be extracted from the minds of conscientious engineers working together on a shared vision, and parceled out to for profit contractors looking to do spec work. Similarly risk management certainly adopts a common language, but the idea that you can actually manage risk in a quantitative way is not something borne out by experience. Rather, you can cover your a$$ and say you have sign off from you GRC people so that when stuff breaks down you can point the finger at someone. We just exited a massive financial crisis, and we see security breaches on a massive scale, most of which happen in firms with well funded GRC teams. Again, wishing that you can control these variables does not make it so. Putting together a bureaucracy to control something doesn't mean that it's controlled.