Deciding what is core

This post continues my report on our R&D outsourcing event in Ottawa. The next question asked by the moderator was "What can be outsourced, and what not?" The question triggered a sidebar on one of my favorite topics - what is core to your business, and what is not.

The panel had great answers to help guide you in deciding if something is core:

• If it's something that you can articulate as a difference between you and your competitors, it is definitely core.
• If it's something that needs to have very high quality, or will be consumed in high volumes, it is core

I find the first rule to be the most useful - it's simple and bullet proof. Every business has something they concentrate 80% of their effort on improving, and something they do better than their competition. It may be a technology - for Google, it is their relevance engine; for a gaming company, it might be their 3D engine. In the case of the gaming company, they definitely don't want to outsource the design and engineering of their 3D engine. But, they could easily outsource all the context pieces: the software that lets users build levels in the game or customize the characters, the portal that links the community of players together, the network engine that enables multiplayer play, the VoIP software that lets players communicate by voice while they play, and the e-commerce engine that bills people for connecting to the gaming network. These pieces are all important - you can't release without them, and some of them are very complex, but they are context - you need them to be as good as the competition, but focusing your internal resources on making these pieces better than your competition is not what's going to propel you to the top of your market.

Generally speaking, I find it harder for ISVs to articulate what is core and context, and decide what pieces of product development could be outsourced. For a telecommunications company, or a medical device company, the lines are clearer - the package design could be outsourced, the software is context so we can outsource that. It could be because ISVs tend to have technical founders, and some see outsourcing in R&D as a failure of their engineering team. In other knowledge-instensive industries however, like pharma, telecommunications, and consumer electronics, over 90% of companies use outside firms in R&D, and rely on a supply-chain of co-developers and outsourcers to develop products. In software, at last count (2006) about 30% of ISVs leverage 3rd party capabilities in product development. But this is changing, at about 10% a year, and I have no doubt it will catch up as the industry gets more and more competitive. I'm even starting to see a few isolated cases of software companies that have decided that marketing and product design will be their core competency, and who outsource the entire product function end-to-end, but this is rare.

One of the key takeaways from the panel is you need to know what is core, and what is not, and that your outsourcing strategy has to tie in directly into your product strategy.

Next post I'll wrap up with my notes from our R&D Outsourcing panel, and reveal how technology executives go about choosing an outsourcing partner.