Make or Buy?

The McKinsey Quarterly, Autumn 2001 | Go to article overview

Make or Buy?


During the past 20 years, companies around the world have embraced sometimes wrenching operational-improvement programs, from total quality management and lean manufacturing to reengineering. While the press may have exaggerated their benefits, many such companies did succeed in boosting productivity.

But the harsh truth is that for all the recent gains in quality and productivity, the global economy demands operational improvement at an ever-accelerating pace. Best practices soon give way to better ones. So do best operations. Managers assume that a secondary activity outsourced to a specialist can realize not only higher performance levels but also significant savings. Furthermore, these managers view almost any savings at all as a reason to act--a serious error. Companies give away value when they outsource a slice of operations (manufacturing assets, accounting services, the information technology unit) without first improving those operations to the extent that they can. The new provider of the outsourced service will make the improvements instead and reap the rewards, as Stephen J. Doig, Ronald C. Ritter, Kurt Speckhals, and Daniel Woolson show in "Has outsourcing gone too far?" In only one respect is value likely to be spread out: eliminating those latent inefficiencies raises the performance bar fo r "competing" activities that other large companies have kept inside.

There is more to successful outsourcing, however, than retaining as much value as a company can. Outsourcing may be a sterile pursuit unless its benefits are distributed throughout the value chain--a reality that is evident in the auto industry, note Anjan Chatterjee, T. V. Kumaresh, and Aurobind Satpathy in "Biting the hand that feeds you," on page 28. The manufacture of automobiles, once the most vertically integrated of all businesses, is now among the most disaggregated. But if carmakers wield their disproportionate bargaining power to squeeze suppliers, the results may come back to haunt them. In the meantime, the only hope suppliers have for boosting their margins appears to lie in continually improving their operations. …

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