Business model question: Produce or provide?
In one of the more fascinating episodes in my long life as a volunteer, I was named to serve on a county task force charged with making recommendations about streamlining government. Having served as an elected official for a municipality, I was seen as a voice for local decision making and control. As my peers learned, however, even back then I was a strategic thinker who was not prone to accept the status quo if better options appeared.
Unfortunately, as is often the case in government, the status quo fought back and the consolidation of units of government that we recommended (eliminating township government in our quickly urbanizing Illinois county) did not occur. But our learnings did slowly worm their way into the units of government we represented and did result in change over time.
A Michigan professor of government who was a consultant to our task force educated us that in providing services to constituents government had a choice between production and provision. That is, it could use its own staff and resources to produce services for constituents - maintain roads, plow snow, provide health services, and much more - or it could contract with other entities, governmental and private, to produce the services that it provides to constituents.
This understanding resulted in a growing privatization of services and contracting between units of government for service production and delivery. Does every unit of government need its own dedicated road crews or bus service or street sweepers or whatever? In many cases, efficiencies were gained by purchasing the services from another entity or the private sector.
Relevant for all organizations
I have carried this understanding into my strategy work with businesses and other organizations. When designing (or redesigning) how the organization works, consider the question of production versus provision.
The organization’s underlying business model is designed to deliver products or services to customers, to create and capture value. But there is no reason that the starting assumption should be that the organization is the entity that creates the services that it delivers. If I can subcontract with a highly efficient manufacturer, why not use their economies of scale to make what my customers want? If the suite of HR services that I deliver to clients includes payroll processing, it might make economic sense to source the payroll services from a high-volume white label payroll processor.
Key considerations in choosing between production and provision are:
Cost and expertise. Consider the investment, people, and infrastructure required to effectively and efficiently produce the needed products or services. Often others’ expertise and economies of scale mean that they can deliver what’s needed at lower cost, even with their profit margin included, with higher quality, and on a more timely basis. Excellence in production demands a continual focus on productivity, yield, quality, safety, and more: If your organization does not excel on these dimensions, that’s a clue that being a provider rather than a producer may be the way to go. If you excel at cultivating strong customer relationships, maybe that should be what you focus on rather than production.
Control and risk. Consider the added risk of relying on a third party to produce and deliver products and services as contracted. You many not be their most important customer and in a crunch what’s being done for you may not get sufficient attention. Think bad service. They may run into labor issues or delivery bottlenecks that you otherwise might not confront. If product excellence is your primary basis for competing, the risk of contracting may be unwise to take on.
One way to address the production/provision choice is to do both. Two government examples: 1) The municipality has a streetsweeper for episodic use but it overlays contracted street sweeping to assure that all streets are cleaned on a regular basis. 2) The municipality has snow plows but for major snowstorms it brings on private plowing contractors to assure that all streets are cleared on a timely basis. A business example is offered by a CPA client who is contracted to handle tax preparation overload in the February - April crunch for a larger CPA firm.
Depends on form and expertise
How you do business and what you are good at will help lead you to answering the produce or provide question.
For example:
Brokers are intermediaries that connect buyers and sellers and typically are not producers.
Likewise, retailers are prone to be providers (even for the lines that their names are on, for example, Macy’s private label offerings). Yet, there are many exceptions. For example, Land’s End and Patagonia are producers.
Associations often provide members with benefits produced by third parties.
The greatest commitment to production is found in organizations that are vertically integrated, that is, that streamline their operations by owning the various stages of their production process rather than relying on external contractors or suppliers. Vertically integrated companies acquire or establish their own suppliers, manufacturers, distributors, or retail locations rather than outsourcing them. The benefits sought are greater efficiencies, reduced costs, and more control But vertical integration can be risky because of the large capital investment required, reducing future flexibility.
Produce or provide? It’s your choice. Make it wisely!
