Posted , in Business model
Core versus non-core: Organisations have a new vision of their future
Thirty years ago, business in mature, largely Western economies was upended by the realisation that they didn’t need to do everything. In the old model, an organisation did as much as it could itself, largely because the costs of transacting with other organisations made it uneconomic to do otherwise. As a result, organisations accumulated functions endlessly: Manufacturing companies built housing estates for their workers; oil companies made their own drilling equipment; retailers set up their own logistics operations. But the new model did away with this and much else: Business functions were categorised into core (essential to keep in-house) and non-core (best handed over to a specialist third-party with superior skills and/or technology). The impact on those third parties was profound: From almost nothing a new industry emerged (outsourcing) and that in turn spawned other new industries (offshoring).
Consulting firms also benefited from this because, while consulting projects are shorter than typical outsourcing deals and involve a far less explicit transfer of work from client to firm, it is still predicated on the idea that clients can’t—or shouldn’t—do everything themselves. Indeed, organisations in countries such as France and Germany, where outsourcing was relatively slow to take hold, also tended to be those that invested in internal consulting departments.
So why talk about this now? Because some new research we’ve done in the US suggests that organisations are having a fundamental rethink of the core/non-core issue, and that will have profound consequences for consulting (and outsourcing) firms in the future.
There are, in fact, two changes. First, some functions that, for the last three decades, have been considered non-core are now firmly back in the core. The most important of these is the technology function. Complex, expensive, and opaque, the IT function of 30 years ago was first up against the corporate wall, handed over to third parties to deliver a better service more cheaply. That same function is now more likely than any other to be of central importance to an organisation: The advent of new technology and the way in which customers and employees interact have created an unprecedented level of dependency. Take away an organisation’s technology today, and you pretty much take away the organisation. That points to a more existential, but just as important, shift. The whole concept of an organisation was borne out of the idea that, to get things done, people need to be able to work together. Now, it seems, organisations enable people and technology to work together. The second change is more surprising, though, when you stop to consider it, makes perfect sense. Organisations are decoupling the idea that core functions should be insourced. Again, technology is the main culprit: With the pace of change so dizzyingly fast, few organisations think they can keep up with the skills required, and many suspect that the skills required today will be automated tomorrow.
Put these two changes together and you start to see why this is so important: Organisations will increasingly rely on third parties to do core work. Outsourcing—and I’m using the term in a very broad sense—will no longer be a signal that something is unimportant or a commodity and companies that do the outsourcing will no longer be at the bottom of the value chain. The whole client-supplier relationship will become more equitable and more strategic. High-end consulting firms will find it possible to take over some internal clients processes without damaging their brands. Ecosystems will become more important, as both sides try to tap into the increasingly specialised human and machine resources they’ll need.
And all of this will challenge our notions of what an “organisation” and what a consulting “firm” is.