Aligning IT With Organizational Core Competencies

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One of the most important concepts in business strategy is the idea that organizations should aim to focus exclusively on their “core competencies”, and outsource or eliminate anything which is not part of their “core”.

Although this is a complicated topic that goes beyond the scope of this presentation, it’s useful to think of core competencies as any business activities or abilities that either 1) directly contributes to a businesses’ primary revenue-generating or value-creating activities or 2) differentiate a business from its competitors in the marketplace.

In theory, all activities that do not contribute directly to a company’s core should either be outsourced or eliminated. Outsourcing or eliminating non-core activities provides a number of important business benefits, such as making the company more competitive and eliminating potential risk.

For a simple example, let’s look at the business model of a restaurant. Does it make sense for a restaurant to own the building in which it’s operating?

By owning the building, the company is essentially operating 2 separate businesses: A food business and a real-estate business. And only one of these business units contribute to the core revenue-generating activities of the company.

If the restaurant has a few slow months, the bank might foreclose on their mortgage and shut down the restaurant. There’s also the possibility that the building might suddenly needs some expensive structural repairs.

And what happens if the restaurant is successful? If the company’s capital and credit are tied up in real-estate, the restaurant might not be able to expand their operations and build a second location to meet market demand.

In this context, the company’s non-core activities put the business at risk.

If the restaurant had decided to rent instead of owning, these liabilities would be passed onto the landlord instead of being absorbed by the business.

A similar principle comes into play when it comes to IT management and planning. All IT systems and process need to be classified into one of 2 categories:

  • Core to the Business: Systems and processes that differentiate the business, or contribute directly to the company’s primary revenue-generating activities. These should ideally be handled internally.
  • Non-Core: Everything else which is not core to the business should be eliminated, minimized or outsourced.

Does your company have a unique order-fulfillment process — for online orders — that provides a competitive advantage? Then it might make sense to manage your own order fulfillment and ecommerce systems in-house.

However, certain IT activities — including integration, maintenance, security, monitoring, networking, backup, etc… — are essential to the business, but do not contribute directly to the core revenue-generating activities or primary differentiators.

All such activities should be either eliminated, minimized or outsourced.

Eliminate or Minimize

For example, you can eliminate all non-core tasks through technology and standardization. Some time-consuming tasks must be done no matter what. And these tasks should be outsourced whenever possible.

Otherwise, it creates an “opportunity-cost” where IT staff must devote time to low-value work instead of spending this time on more strategic projects that help the company earn more money and remain competitive.

Excellent examples of such activities are backup and disaster recovery.

Data protection is a laborious, complex and time-consuming IT function that’s essential for ensuring that systems are protected from the threat of unplanned downtime, and to ensure that data can be recovered in the event of a major emergency. Once these tasks have been performed, they must be monitored for consistency and periodically tested. (These responsibilities are usually delegated to a junior IT person, with no formal disaster recovery experience or training)

However, these tasks do not contribute the company’s core in any meaningful way. By outsourcing these tasks to a team of external specialists, you would free up IT time to focus on core activities.
Outsourcing these tasks can help the company save money, since the work can be done more efficiently by a team of full-time specialists, at a fraction of the cost of hiring a full-time in-house backup and disaster recovery team.

There are other benefits to outsourcing as well.

As we saw in the restaurant example, outsourcing your backup, disaster recovery and high-availability to a third-party service will free up capital that would’ve otherwise been locked up with hardware, tape, licensing, off-site storage, datacenter space, and other costs. Now your company is free to invest in other areas that support the company’s core.

And if there’s ever a major change in your IT infrastructure, a pay-as-you-go service provider will adapt their services around your company’s changing requirements. This eliminates capital risk in the case of major events such as mergers or acquisitions, where your company might be locked into hardware investments that would no longer be appropriate for their needs. In this example, outsourcing keeps IT flexible and within budget.

Some management “experts” will advocate completely outsourcing IT altogether, whenever possible. However, they fail to realize that IT is the central hub for all information collection and communications across the organization. As such, they can be a tremendous repository of organizational knowledge that can help drive continuous improvement across all departments.

The truth is that IT is just as vital to corporate strategy as Finance, Marketing, Operations or any other function of the organization. The primary responsibility of this role should be to leverage technology to support corporate strategy and help all departments reach their objectives.

In order to accomplish this, you need to have a deep understanding of how the organization functions, the business requirements of other departments, and the priorities of company executives. But more than anything else, you need to have a firm understanding of the company’s core competencies. You need to understand — in great detail — what the company’s primary revenue-generating activities are, and how the organization differentiates itself in the marketplace.

This will help you ensure that IT is efficient, adaptable, and completely dedicated to supporting and enhancing the organization’s core competencies.

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