Competitive advantage is a function of two variables: the amount of customer-valued differentiation between what your company offers and that of its direct competitors, and the sustainability of that differentiation over time. The greater the difference and the longer you can sustain it, the more attractive your prospects for creating above-average returns for investors.
From an investor’s point of view, any business process that creates additional differentiation, or that contributes to increasing the staying power of the differentiation currently achieved, is core. Investors want you to spend their capital to improve your stock price. By contrast, all the other business processes in your company are context–critical to run your business, but not related to creating or maintaining competitive differentiation. Investors don’t want their capital to underwrite these efforts because they can’t improve the stock price.
So how does context work ever get funded? Investors say to expense it, not to invest in it. That is, it’s OK for them to see noncore spending on your profit and loss statement, they just don’t want to see it on your balance sheet.
…Competitive differentiation on context is actually a liability. It requires financial and human capital to create and maintain, without increasing shareholder value.
In the long term, the best way to manage context processes is to turn them over to another company. This is the inherent logic of outsourcing–whether the processes are IT functions, manufacturing processes, payroll processing, or any other function.
If you list all the context processes in your company, you’ll quickly note that many are crucial while others play a supporting role…Most managers conclude that the company simply can’t risk outsourcing a critical process. That conclusion, however, inevitably leads to a slow but inexorable decline in stock price. More of the total assets get tied up in processes that can’t produce a competitive advantage and therefore can’t improve the company’s prospects for increasing future earnings.
…In this new world, the mnemonic for ensuring that you focus on the right variables is QRSTUV, which stand for: Quality, Reliability, Scalability, Total cost of ownership, User control, and Visibility.
Today, for the most part, such control systems for business don’t exist. Instead, both outsourcers and their customers throw human intervention into the mix, leading to a deterioration of the value proposition at both ends.