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Core Competency and Market Chaos

Published
  • March 31 2006, 9:31pm EST
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We hear loudly and often that organizations need to understand key business processes that underlie any sort of planned technology automation. This after all is the precursor to what we're calling "operational" business intelligence, which seeks to optimize the use of information in the unique context of given business users. But, ahead of this, most businesses don't clearly define and prioritize the core competencies they ought to be controlling internally, and which they should partner or outsource. Leveraging core competencies for growth - and wringing maximum efficiencies from non-core tasks - sounds simple enough, but we see exceptions all the time: overtaxed IT departments that can't deliver a report or build a Web site without months of lead time; a key R&D innovation stuck in the pipeline for lack of attention. How important was that report or Web site to a company's immediate differentiation? Why did an important innovation get lost? It makes one very doubtful of a company's ability to react to incremental business dynamics in what we all agree is a fast-changing world.

Tom Koulopoulos, president and founder of Delphi Group, tries to tackle these questions from an executive perspective in his new book, Smartsourcing: Driving Innovation and Growth Through Outsourcing. This book, written with EMC's Tom Roloff, deals with global dynamics that more often will require sensible, trustworthy and profitable partnerships, but to our eyes it is equally a manual for project portfolio management. Interestingly, the book says almost nothing about leveraging internal information assets, and that seems to be on purpose. Instead, Koulopoulos provides a historical and forward roadmap for building strategic partnerships, sharing risk and optimizing innovation. It starts the need to nail down the five or 10 things that are key to a company's growth - and separately understanding that core competency is a moving target. The responsibility for this can be placed nowhere but at the feet of senior executives.

Let's start with identifying core competencies, and an exercise in the book that deals with establishing two parameters: Process Importance and Process Performance. By identifying core processes and observing the success with which they are executed, companies can immediately built a roadmap for optimizing, reengineering or outsourcing. "Having gone through this framework with dozens of executives, I am absolutely astounded at the degree to which we don't ask the basic questions of the day today," Koulopoulos tells BI Review. "These are smart and successful people; they are not laggards in terms of competency. They just haven't asked the questions, or they find the answers self-evident but have made a big mistake by not communicating the priorities as only the CEO can."

By "questions of the day," the authors are saying that roadmaps of competency can and do change and thus require regular examination. The first section of the book mostly defines the difference between risk and uncertainty: that while risk can be quantified, uncertainty presents outcomes that could not have been bet on in a probabilistic sense. "You accept that probability, risk and uncertainty can coexist and you can develop techniques and be excellent in your probabilistic thinking, but you have to accept a level of uncertainty you must somehow prepare yourself for." As an example, Koulopoulos points to insurance companies, which are proficient at risk management yet can be devastated by uncertainty. "You have to accept there are things that will come at you from middleware that you can't predict or anticipate and you still have to have an organization, an attitude and an approach, a method that will allow you to outlive uncertainties." In fact, he makes the case that that markets can change by themselves in ways that are actually sophisticated. "We say to ourselves there is value in the effort we put into an organization, therefore the organization can provide better results than an open chaotic free market system, and that's not true. Disconnected, uncoordinated chaotic systems can come up with some very intelligent solutions to problems. All you need to look at media and see how it's being replaced one brick at a time by blogs and wikis." While these efforts are uncoordinated and still lack trust, Koulopoulos sees a trend of increasingly reputable participation.

This partially explains why the authors stay away from conventional data thinking. Too often, these systems are "closed" rather than "open" and depend on introspection, Koulopoulos believes. "[Peter] Drucker said several times, we build all these systems, not just technology, but business and management systems that are all internally focused. We're all brought up to believe in the voice of the customer, but the behaviors of most organizations don't reflect that." In taking a narrow path to his thesis, Koulopoulos admits he ignored some contemporary business intelligence strategies, but if he had to make a bet, he'd say the transaction-centric systems of today remain mostly closed systems. "If I had to pick a standard I would say right now much of that information you'd think would give us intelligence about the market really gives intelligence about preconceived notions we have about the market."

The authors extend Drucker's concept of value chain to the "digital value chain" and the shift from vertical integration to the connection of information-based activities, both internal and external. This creates both dependencies and opportunities for sharing uncertainty across industries. The simplest way to look at the partnering equation is as a matter of risk transference. "In the same way you have folks in house that manage risk in general in large companies, you need someone to manage the risk of sourcing. Lately, a lot of VC money has come with the caveat that investors want to see the outsourcing plan. How do you focus on what you're good at and how will you partner for everything else? It's a startup strategy for VCs and it's going to become part of how we run our business."

In the process, core competency will be redefined and redrawn by changes in market forces. That means some competencies that were outsourced will necessarily come back to internal ownership. "When the FBI tried to outsource their case management system, they realized they were better off building and owning it." Things shift over time, the authors say, all the more reason to understand and embrace uncertainty. "Running a cafeteria is never going to be a core competency, Koulopoulos says, "and yet Google hires extraordinary chefs to help them retain people, which is a core competency for them. Nothing is off the radar."

In this way, companies will find themselves deconstructing and reconstructing corporate hierarchies as market circumstances dictate. The authors suggest senior executives build a baseline schematic of process elements that can be emphasized or de-emphasized to respond to the effects of uncertainty and even to capitalize on the effects of market chaos. (For a different kind of high-level process map, see sidebar "Node by Node" in our recent profile of Maxtor. -ed) "It requires some pretty strong leadership, that's become obvious," says Koulopoulos. "A lot of folks don't want to step up to the plate because they see some inherent risk in saying 'this is our core competency.' They don't want to set the compass too narrowly, they feel that might inhibit opportunity. But to some degree you have to give it up. Quantum physics tells us the closer you get to the truth, the more absurd it becomes to try to pinpoint and control the physical universe." Instead, he says, acknowledge a level of uncertainty and do what you can to prepare your organization for change.

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