The Case Against Outsourcing

According to a Fortune article (The Making of an Oil Empire, February 27, 2012), when Lucas Oil–the company whose name is on the stadium where this year’s Superbowl was played–built its second plant, it bought a nearby railroad with 13 miles of track to service the plant. Lucas Oil markets through motor racing. So, to produce and air motor sports programming, Lucas Oil bought a cable TV channel as well as the production company that had previously made Lucas Oil commercials. Lucas Oil also bought some speedways.

Thus, unlike the many companies that heavily embrace outsourcing, Lucas Oil is bringing more functions in-house. As I see it, what Lucas Oil is doing raises an important strategic question: wouldn’t it be more cost effective to outsource?

Like many strategic choices, this kind of business decision is not as obvious as conventional wisdom might make it seem. It’s true that outsourcing may reduce the cost of the outsourced function. But, on the other hand, outsourcing may weaken brand differentiation.

By bringing what seems non-core in-house, a company can have better control over those areas and use them to develop a differentiated brand. By not outsourcing, the cost of building a strong, differentiated brand may actually be reduced. Depending on the circumstances, those lower brand building costs may more than offset any cost advantage from outsourcing.

A glance at business history can remind us of the potential value in not outsourcing. Historically, many non-core functions were performed in-house by successful, growing companies.

How much to outsource can depend upon your business model. Some business models are based upon a bare bones organization where practically everything is outsourced, while other business models entail performing many more functions in house.

But, as with many aspects of business success, the key to successfully bringing more functions in-house is to do it selectively. A company should not try to assimilate so many non-core functions that it loses control, has great difficulty integrating them into the business and managing them, or spends so heavily on them that they essentially become unaffordable. And, unlike Lucas Oil, most companies need not buy a railroad, which Lucas did due to unique circumstances.

In some cases, seemingly non-core functions that are brought in-house may eventually become a specialized competency of the company. Depending upon how it ultimately develops, Lucas Oil’s motor sports programming may have some potential for this.

In summary, businesses should recognize that there can be advantages to not outsourcing certain functions. In selected areas that help differentiate the business, performing seemingly non-core functions in-house can be beneficial.

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