Wal Mart, the giant retailer, owns all the trucks that move its goods across the length and breadth of the U.S. Bharti Airtel, the biggest telecom services provider relies heaviliy on its partners for many activities such as IT, network management and call centre operations.
Both Wal Mart and Bharti Airtel are incredibly successful companies. Though they have widely different approach to outsourcing.
So how should a company decide what to outsource and what not?
Where are the boundaries of the core, Ravi Aron professor of operations and information management Wharton Business School has developed a concept of “Revenue Distance” that helps in taking these decisions.
Revenue distance measures how far removed a process is from a company’s revenue generating activities. The farther an activity is, the easier is the decision to outsource.
Ultimately companies generate revenue from their customers, therefore any activity that strengthens a bond with the customers has a shorter revenue distance and it should therefore be kept in-house.
Take an example of search engine marketing activity that involves product knowledge, keyword research capabilities, optimization of the campaign, bid management & managing account.
Since product knowledge, keyword optimization has a shorter revenue distance because it is highly domain specific and requires through knowledge of the product and hence should be kept in house but bid optimization and campaign operational aspects can be outsourced.
It is always a function of relative contribution of the process to the value a company creates for its customers. and what does this process support the ability if the company to monetise the value that is created for the customer.
Process which are high on both are low on revenue distance and hence should be kept in-house. And process low on both should be outsourced.
Important to note here is that this models says companies in a rapid growth phase will focus more on value creation for its customers and those on mature industries will focus on revenue capture.
Take the same example of Wal Mart, logistics is several steps away from the revenue generating activities, however retail is a mature industry in the US and value capture is more improtant. To reduce the time to service the order and goal is to cut down the time that goods stay on shelves, for these reasons complete control over logistics gives them flexibility to deliver value to the customer and hence can not be outsourced.
On the other hand Airtel, is in a rapidly growing industry and its focus is on creating customer value through responsive sales, service and new product development. At this stage of the industry’s lifecycle, it is less important to get value capture from the activuties like network management, tower management it infrastructure. And outsourced to third party or like they have opened another company to cater that and hence for better management to provide 360 degree value proposition, it bacame a sister concern company of the Bharti Airtel.
This deserve a party of course so i am heading to Kalsi Tomorrow for long weekend to chill my self with some nice drink and bit of cards to start of Diwali season…