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Business Specialization: As a driving factor of the business process outsourcing (BPO) revolution

14 Comments · Business outsourcing

Since the days of Adam Smith, capitalist economists have touted the benefits of specialization as a key to productive exchange among economic agents.

The famous example of the pin factory used by Smith has stood the test of time. His eloquent analysis of division of labor in the production of pins and the vastly greater output that would occur if people each specialized in a part of the process can be applied to nearly any product or service.

As it turns out, in a world where business-to-business (B2B) services have become as common a part of the economy as business-to-consumer (B2C) products and services, the basic economic agent can as readily be construed to be a business firm as it could be a person.

Business specialization has been urged for several decades. Former General Electric CEO Jack Welch, for example, famously stated that GE must be number one or two in the world in a given business or it should get out of that business.

In their popular book Competing for the Future, Pralahad and Hamel called on businesses to focus on their “core competency.” They urged companies to develop a “portfolio” of core competencies around the customers they serve.

The idea of focusing on core competence, if pursued logically, leads to the idea that a business organization should operate as few non-revenue producing units as possible. In the early days of a business, when the firm is small and everyone pitches in to do whatever is necessary for the business to succeed, it is easy to call everything core.

Nevertheless, as a business grows, and as administration and overhead grows with it, there are many things a business does that are expensive but not directly involved in revenue generation.

Accounting, legal counsel, payroll administration, human resources, and other processes are all necessary for the business to operate but not tied directly to the top line of the income statement.

If a business truly focused only on its core competence, it would not operate those units that are not tide directly to meeting customer needs and generating revenue.

This mind shift could easily be overlooked as a driving factor of the BPO revolution, but it is crucial.

Transformational organizational changes – paradigm shifts, if you will – often cannot occur until a sufficient number of managers and executives have changed their thinking about the form and function of their organization.

Such mind shifts can occur through education and experience, but they are far more likely to be a result of competitive pressures.

As B2B operations have flourished, the potential for firms to shed more and more of their noncore activities has accelerated. For instance, it is estimated that 2 to 3 million Americans are currently co-employed in a professional employment organization (PEO) arrangement.

PEOs are operating in every state, and the industry continues to grow at an average of 20 percent each year.

Today, it is estimated that approximately 800 PEO companies are responsible for generating more than $43 billion in gross revenues. Many firms today have simply eliminated their personnel function by outsourcing their employees to a PEO.

The potential for B2B firms to exist and to provide the specific services they do is based entirely in their ability to add value to their clients’ businesses.

If these firms were not able to provide high-quality, lower-cost services, they would not exist. At the same time, they would not be in business without the relatively new concept of core competence driving management thinking and behavior.

Just as quality and customer service seem to be patently correct ways to organize a business today, they have not always been important factors to business managers.

Ford was an early adopter of quality management in the United States, but only because Japanese automakers had begun to erode Ford’s domestic market share.

Until then, American automakers and manufacturers in general did not pay attention to quality as a major factor in their production processes.

Similarly, the ideal of focusing on core competencies – really focusing – did not seem important and strategic until some organizations demonstrated that they actually were able to perform better by outsourcing their internal processes.

Early BPO adopters among Fortune 100 companies include British Petroleum, IBM, American Express, AT&T, and General Electric.

These pioneers were able to risk outsourcing noncore processes. In many cases they succeeded, and sometimes they failed.

But the trail had been blazed by these pioneers, and the lessons they learned along the way now ensure a higher probability of success for those firms that follow the leaders.

Management behavior on a large scale resembles crowd behavior in a stadium full of people at a major sporting event.

An innovator in the crowd decides to start the wave. Rising up out of his seat with arms outstretched, he implores those around him to join in. Some are reluctant, but others decide to join in.

The wave spreads from section to section, each re-enacting the first instance with some early adopters and some reluctant doubters.

The wave picks up steam after a few passes around the stadium until most people have decided to give up fighting its inevitability.

As the BPO wave goes around several times, more companies will recognize its inevitability and join in. It will become less remarkable as it becomes the norm. And then the day will come when we wonder how we got along without it.
 

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