The Silver Lining: Vertical Integration  |  March 26, 2009  

It’s been a few weeks since I’ve posted an entry. I’ve been busy working with several large companies to think through the next source of value from their outsourcing and offshoring initiatives.

My line–of-sight can hardly be deemed a perfect indicator of broader trends, but I thought it worthwhile to share what I’m seeing.

Foremost, companies that have used offshoring as part of their cost-realignment programs over the past few years have driven the unit costs of “commodity” services to a fairly attractive price point. It’s worth noting, however, that one company’s commodity is another’s differentiation, or so they think.

I get great satisfaction from facilitating the debate on just what’s core to a business’s strategy in the context of today’s horrible market economics. I can tell you that the sacred cows of the recent past are not so sacred today.

But, many companies have a rather healthy attitude toward what can be bought versus what needs to be made/owned internally. So for them, where’s the next source of value-creation?

That’s the emerging silver lining from the economic morass. Up until now, very few companies have addressed the hardest, most complicated questions regarding their total cost equations. They haven’t asked why their operating environments are so complex, so burdened with fixed costs, or their front-to-back business processes so inefficient.

Finally, we’re seeing companies take up the age-old issue of vertically-driven costs. One of the greatest areas of opportunity relates to integration. Many first-generation adopters of outsourcing learned that driving down unit costs might not result in a reduction in total costs if they did not understand and manage the front-to-back linkage of business operations, applications, and infrastructure.

In 2009, I’m finally seeing some meaningful emphasis on vertical integration and associated sourcing. Maybe there’s a benefit from this economic mess?

Peter Allen, Partner & Managing Director, TPI
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