● making a significant contribution to the perceived customer benefits of the end product; and
● making it difficult for competitors to imitate.
The focus on an organization’s competency allows for resources to be maximized. Core competencies are like a bundle of corporate skills that cut across traditional functions, such as product or service design, technology creation, customer service and 41
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logistics. It is also suggested that core competencies can be regarded as distinctive competencies with multiple applications.
ITO satisfies cost reduction and enhancement of efficiency. Both the buyer and supplier organizations which are able to focus on core competence will more efficiently utilize resources and, hence, also deliver more cost-effective services. Resource-based organizational theory focuses on organizational business performance that makes efficient use of unique organizational capabilities supporting the creation of sustained performance within industries. Management ideas that stress the importance of downsizing of organizations also focus on key major activities to explain successful corporate performance (Hoskisson et al., 1994).
In the outsourcing context, Alexander and Young (1996) describe core competency as tasks that are traditionally performed in-house; that are critical to business performance; that create current or potential competitive advantage; and that will drive further growth, innovation, or rejuvenation. This definition implies that core activities cannot be relinquished to a third party such as in an outsourcing situation. The question, however, whether IT is a core activity (and hence whether it should be outsourced) cannot be answered in a generalized sense. Core competencies are not seen as being fixed and codified but flexible and evolving over time. As the organization evolves and adapts to new circumstances and opportunities, so its core competencies will also adapt and change. In this way the organization will be able to make the most of its given resources and apply them to new opportunities.
Core competencies are those capabilities that are critical to an organization in its aim to achieve competitive advantage. A competence which is central to the organization’s operations but which is not exceptional in some way should not be considered as a core competence, as it will not enable differentiation of the business from another similar type of business. For example, a process which requires the use of common computer components and is staffed by people with only basic training cannot be regarded as a core competence. Such a process is highly unlikely to generate a differentiated advantage over rival businesses. However, it is possible to develop such a process such that it becomes a core competence with suitable investment in equipment and training.
Performance of the IT function
A plethora of tools and techniques are available which can measure the performance of competing IT strategies and investments 42
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in processes including the outsourcing of the IT function. In addition to metrics like returns on investment (ROI), internal rate of return (IRR) and net present value (NPV), an IT function of an organization must also meet certain fundamental performance criteria including reliability, availability, security and manageability.
Core competencies are a mix of technological specialization, innovative input, and the degree of diversification or specialization of organizational resources (Markides and Williamson, 1994).
Following this argument, core competence suggests the ability of an organization to provide excellent performance, over and above normal standards. Additionally, core competencies include a pool of experience, knowledge, and systems developed by the organization that, together, can be used to create and accumulate new strategic assets. The focus on the importance of understanding the performance of the organization is a result of the efficient use of these distinct capabilities that create sustained performance and competitive advantage.
While the supplier focuses on its core competence in delivering the IT functions, the buyer enjoys relief from not having to focus on non-core competence activities. As both organizations focus on individual core competence or activities (specialization), efficiencies are gained. The view from the literature is that service quality improvement, the need for strategic flexibility and the focus on core competencies are predominant concerns for sourcing decisions. Outsource activity improves operations within the organization through focus on core competence.
The major drivers for outsourcing, however, include cost-effective access to specialized skills provided by the new commercial arrangement. Indirect overhead costs or ‘non-core competencies’ are outsourced to achieve cost-effective operations through economies of scale. Cumulative experience in outsourcing enhances quality improvement, with concomitant cost reduction.
Organizations are now focusing on ‘core’ business in the search for greater efficiency. This effort to focus on core products has also had the effect of reducing costs and exploiting new channels of distribution, such as the Internet.
If these claims were to be viewed from a more pragmatic perspective, then having a competence alone does not, on its own, guarantee success. Competitive advantage depends on whether the competence helps deliver a product or service that customers value. It is a differentiation of products/services that 43
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gives the organization its advantage and also allows premium pricing of its services.
Advantages gained by using outsourcing services are derived from cost leadership and access to lower overheads, and differentiation through access to new technology and a supply of more competent people. As outsourced services are no longer managed within the organization, it follows that its services are most effective in a highly networked environment where information flows unhindered. Further, operational efficiencies are derived as organizations focus on core competence or main activities. Many non-core activities are reassigned or allocated to another party in an outsourcing arrangement. This enables the buyer organization to apply more attention, effort and resources to activities that contribute directly to its business. It is argued that the organization’s ability to make the decision either to have a capability to deliver the IT function or to use an external supplier is, in essence, its core competency.
Distinctive competency
When the core competence of an organization is sufficiently different or distinctive from those which other organizations possess, it allows that organization to command the market in terms of product price; this means that it has a control advantage. This difference or distinctive competency, in turn, allows the organization to earn a return above marginal costs plus cost of capital.
IT supports unique processes and the specialist role thereof reinforces this situation.
One of the arguments used to assess the level of technological specialization of an organization lies in the use of patent statistics. The concentration of patents indicates choices with regard to priority skills and concentrated innovative capabilities. Patents have been, arguably, an acceptable indicator of research output and technological competence. Patents could serve as an indicator of whether an organization has been able to turn its research and other innovative activities into inventions that are worth protecting. For the purposes of this argument however, many IT
functions could then be patented.
This discussion on the usefulness of patents, however, has relevance to our argument as it does generally show that a competence is worth protecting. The patenting of IT processes is, however, rare as a result of the speed of change and rapid growth in the industry. This does not allow for the possibility 44
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that there may be several organizations with above-average competencies in an industry constituted by a large number of organizations. Since, therefore, a particular competence is not unique, it is unlikely to attract a premium pricing strategy. The IT function hence is a mix of new ideas and knowledge as well as proven and used concepts. Following this argument, each part of the function should be investigated thoroughly in an outsourcing exercise. The next argument, however, indicates otherwise.
Assuming there is a set of distinctive competencies within an organization’s IT function, many would argue that the cumulative and tacit nature of technological knowledge in the IT function is very difficult to transfer from one organization to another. In an outsourcing situation, the identifiable elements of distinctive advantage can in any case be restricted via isolated scope of work, contracts and other instruments. So, more importantly, the intellectual property risks involved in an outsourcing exercise should be investigated.
Diversification and specialization
The degree of diversification is relevant for understanding the role of core competencies to the extent that it affects the performance of the organization. From a supplier perspective, the benefits of specialization are essential to deliver better service.
From the buyer perspective an outsourcing exercise enhances the degree of specialization. Both parties benefit from the outsourcing exercise. The degree of relatedness of lines of business, which comes closer to specialization in the light of core capabilities, is hence observed to be positively related to the economic performance of diversified organizations. This supports the outsourcing-of-IT argument that organizations should become focused and specialized.
There is, however, another view that the diversification of organizations increases economic performance through risk mitigation. It is difficult to establish a positive relationship between the degree of diversification of organizations and their profitability. In fact, there are many examples that indicate that the degree of organizations’ diversification is related negatively to their economic performance. Whether diversification or specialization, the risks involve relate directly to the ability of each party to benefit from the advantages inherent in these concepts. How then are the risks going to be measured and quantified in order to negotiate the best terms for either the buyer or supplier?