The options are clear. Do it yourself (DIY) in house if it’s a sustainable competitive advantage. Outsource if it’s not. Unfortunately, in making that simple choice, some miss the Goldilocks approach; the winning middle way blend of the two.
SciQuest started as an online marketplace for scientific lab equipment. It has evolved into a software service provider, enabling purchasing departments to:
- Direct spend across the organization to specific contracts and suppliers
- Bring more spend under management
- Drive higher compliance with contracts
- Leverage negotiating power with suppliers
The company’s original model failed. It took its business-to-business exchange public in 1998, hoping to become the Amazon.com of lab supplies. The trouble was its 2.5 percent margin on $40 million in sales didn’t generate enough cash to sustain a business – particularly because being public cost them $2.5 million per annum. When Stephen Wiehe applied for the CEO job, the board member he spoke with had one question, “Have you been drinking?”
When Wiehe joined, SciQuest had enough cash to continue operations for two quarters. He took the company private, reduced head count from 550 people to 85, and changed from a business exchange model to providing software as service. As Wiehe explained to me, the service is all about enabling strategic sourcing. Instead of completely outsourcing their purchasing, companies can use SciQuest to do part of it themselves – but more efficiently. SciQuest:
- Provides the electronic pipe – not something individual companies want to do themselves
- Serves as “traffic cop,” ensuring consistency and compliance
- Provides real, usable electronic invoices so organizations don’t have to
Some organizations keep procurement in house – because they see it as one of their competitive advantages. Some outsource all of it – because they see it as a cost and not a value creator. The ones that use software from SciQuest and other companies such as Global Healthcare Exchange, leverage the tools to outsource purchasing execution, but keep the strategic choices in house.
The Goldilocks Approach
The essence of the Goldilocks approach is breaking apart outsourcing decisions into their components. Of course, you will sometimes want to keep everything in house. Sometimes you will want to outsource entire processes. But other times you can cut costs and create value by outsourcing parts of a process, and keeping the value-creating pieces in house.
Those value-creating pieces may not be value-creating on their own. Instead, they may be integrally linked to other things you do that require them to create value. If, for example, you were franchising restaurants, you might have to research locations and negotiate real estate deals. On the one hand, you might decide to outsource the real estate negotiating to real estate specialists. But, you might not if you didn’t want to share your locational research. Even though you’re not specialists in real estate negotiating, the interdependencies might make this something you choose to keep doing.
This is a big part of “How win?” choices within the BRAVE leadership model. You must align your strategy, posture and culture into a coherent, winning attitude. Strategy is about the creation and allocation of resources to the right place in the right way at the right time over time. Be clear about what things you choose to do, choose not to do at all, and choose to do part of.
This is a good example of step 10 of The New Leader’s Playbook: Evolve People, Plans, and Practices to Capitalize on Changing Circumstances
By the end of your first 100-Days, you should have made significant steps toward aligning your people, plans, and practices around a shared purpose. Remember, this is not a one-time event but, instead, something that will require constant, ongoing management and Darwinian improvement.