Management Speak: It’s a high-level model.
Translation: It’s wrong.
— This week’s anonymous contributor is right.
The most recent example is New York Times analyst Paul Krugman. In a recent editorial, Krugman blamed the Enron fiasco on its leaders’ preference for guru-driven theories over business realities. Enron was, after all, led by Jeff Skilling, a former McKinsey consultant, and McKinsey is notorious for only handling the inspiration slice of the genius pie chart. Doesn’t that prove the point?
Sorry, but no. Enron’s problems apparently stemmed from old-fashioned fraud: when you show the cash, but hide the debt — as has been alleged in this sorry debacle — it’s easy to post good numbers.
Krugman is, however, right about one thing: Enron built its entire business on the popular core v context theory. If you’re unfamiliar with the terms, core activities differentiate you from your competitors, while contextual activities do not. Core/context theorists contend that you should outsource everything that isn’t core. The theory is especially popular among outsourcing companies, because ... well, that’s obvious, isn’t it?
The theory suffers from flaws, one fatal, the other merely grievous. The fatal flaw is that it’s just plain wrong: context activities can differentiate you.
Oh, not in a good way — nobody chooses a vendor because its invoices are always accurate. But context activities sure do differentiate you when you bungle them. They drive customers into the arms of competitors.
And since it’s harder to manage a vendor well than to lead employees (vendors are more adept at hiding problems, and more motivated to do so), it’s hard to understand how the core/context theory leads to business benefit, except when an outsourcer has economies of scale unavailable to you.
That’s the fatal flaw. The grievous one is more basic: this isn’t a theory, it’s a hypothesis.
Dig deep and you’ll find that the theorists are relying almost entirely on two high-profile test cases: Nike and Enron, both of which leave the doing-something-useful-that-creates-real-value aspects of running a business to others. Nike markets very well; Enron traded very well, or so we all thought.
Now we’re down to a single test case, and that’s awfully limited evidence on which to bet your company.
Treat this theory with caution. Outsource very selectively, and only when you can quantify clear financial benefit, when you can build strong mechanisms to manage additional risk, and when you can construct a clear exit strategy in case the outsourcing arrangement sours.
That’s the best advice I can give you. If you ignore it, please don’t blame the consultant.