Misinterpreted product management strategies are destroying more shareholder value than careless accounting or shady fiscal practices. Today, mergers are prevalent in almost every commoditized industry – financial services, automotive, airlines – it is easy to point to poor product management as a major cause of low growth, declining margins and overall lack of innovative ideas.
In the financial services industry, product management encompasses all the activities associated with hearing and responding to the customer – from market research to product development to customer management to advertising and public relations to sales. Product management discovers what customers want, drives the creation of products that meet customers’ needs, and ideally generates profitable relationships. When product management activities are bridged to corporate strategy, they drive growth. But in too many companies, product management is poorly linked with strategy. Product managers are rarely held accountable for ROI and rarely expected to explain, exactly, how what they do supports corporate strategy. This isn’t a case of dereliction; most companies are struggling from merger integrations to keep their clients content and product companies afloat. Rather, it’s a case of myopia. No one in the organization sees the holistic relationship between product management and strategy well enough to diagnose the problem and begin to fix it. Our research shows that product management issues are receiving less and less attention in the executive suite. In a survey of 40 large international financial institutions, more than one-third reported that their boards spend less than five per cent of their time discussing product management related issues. Today, few CEOs have product management experience, and few boards have customer management, product development and management or strategy committees. Only a handful of boards visit or receive presentations from major customers, and if companies have customer councils, few boards ever get to hear what they have to say – even fewer product managers get direct access to these meetings. In many boardrooms, discussions about customers are purely anecdotal. The failure of product management strategy is a crisis that requires attention at the highest levels of the organization – from the corporate board itself.
Outsourcing Product Development
Product development sourcing resolves this myopia. It is strategic, yet many executives don’t see it coming. Globalization aided by rapid technology innovation, is changing the basis of competition. It’s no longer a company’s ownership of intellectual capital that matters but rather its ability to seek out and make the most of critical intellect. To manage escalating merger related technology costs, the financial services industry faces a challenge to retain critical intellect within the company. Over the past few years, financial institutions have turned to sourcing a multiplicity of operations and technology functions – and rightly so. Today, product management is an array of tasks from high value creation to routine process activity. Forward-thinking companies are focusing on making their value chains more elastic and their organizations more agile. The question is no longer whether to source product development and management but rather how to source every single skill in the product management value chain. This is the new discipline of ‘product development and management sourcing’. It’s not always obvious which functions have the most potential for developing scale and intellectual capital.
However, companies need to rigorously assess each of their product functions to determine in which they have sufficient scale and differentiated skills and in which they don’t. Having a greater focus on product development sourcing could improve a company’s strategic position by reducing costs, streamlining the organization, and improving quality. Finding qualified partners to provide critical functions allows companies to enhance core capabilities that drive competitive advantage in their industries. Yet despite the enormous opportunities available through product development outsourcing, our research indicates that many executives remain unprepared for this transformation. A recent survey of large and medium-sized companies reports that 82 per cent of large firms in Europe, Asia, and North America have outsourcing arrangements of some kind, and 51 per cent use offshore outsourcers. But almost half say their outsourcing programs fall short of expectations, only 10 per cent are highly satisfied with the costs they’re saving, and a mere six per cent are highly satisfied with their offshore outsourcing overall. Less than one per cent considered sourcing product management. The reason these efforts often fail to meet expectations, even purely in terms of cost savings, is that most companies continue to make sourcing decisions on a piecemeal basis. They have not put hard numbers against potential value of product management sourcing, and because of this, have been slow to develop a comprehensive sourcing strategy that will keep them competitive in a global economy. To realize the full potential of sourcing product management, companies must forget the old peripheral and tactical view and make it a core strategic function.
In this article we’ll describe how and why the role of product development and management is changing in the 21st century economy and lay out a practical strategic framework to guide companies through the transition.
The Shifting Foundation of Competitive Advantage
In the past century, companies have competed on the basis of assets they owned. But in the 1980s, the basis of competition started to shift from hard assets to intangible capabilities. A small software manufacturer, for example, created the de facto standard in designing, writing and marketing software in the computing industry through its skill in writing and marketing software. A retail aggregator transformed retailing through its proprietary approach to supply chain management and its information-rich relationships with customers and suppliers. Elsewhere on the planet, a similar shift occurred in the auto industry. A US auto maker started losing market share to Japanese companies, they were forced to confront a growing gap in both cost and quality. Recognizing that upstream component quality was critical to their end product and seeing the success of the Japanese keiretsu model of networked suppliers, the big three began to move design, engineering, and manufacturing work to specialized partners. They hammered strategic sourcing relationships for complex subassemblies such as seats, steering columns, and braking systems. To win a significant share of business, chosen suppliers had to meet tough cost and quality specifications. More important, to ensure the long-term success of a partnership, both parties had to open their books, sharing detailed information that became the basis for continual quality and cost improvements over many years. Both parties shared in the savings generated from improved efficiency, which provided ongoing incentives to identify and remove unnecessary costs.
The same dynamic is true in the credit card industry, which restructured in response to a dramatic change in the basis of competition fuelled by technology innovation. In the 1970s, most banks that issued credit cards also processed their own transactions in a very labour-intensive manner. But as computers automated transaction processing, the economies of scale grew significantly, and individual issuers started to drive down costs. The industry began to separate into those companies that issued cards and managed customers, on the one hand, and those that processed transactions, on the other, as transaction-processing underwent rapid commoditization. Despite having enviable scale in its own transaction-processing operations, a major credit card issuer, in a prescient move, spun off its transaction-processing business in 1992. Then the company negotiated a long-term service contract with the newly independent entity. Although the credit card company’s executives considered transaction processing a strategic capability – without reliable and efficient processing, it was very difficult to make money in the credit card business – they also saw that commoditization was eliminating any proprietary advantage. As a spin-off, the new entity could aggregate the card issuer’s volume with that of other companies (issuing banks would have been reluctant to outsource processing to a competitor). In that way, the credit card issuer could gain additional scale advantages while ensuring long-term cost effectiveness. Going forward, the card issuer was able to focus on the issuing side of the credit card business and enhance the core capabilities in marketing and risk management.
The decisions the auto maker and the card issuer made required them to challenge one of the basic tenets of business strategy: that you should always keep strategic capabilities within your walls. As globalization and technology transform more industries, all companies will eventually have to let go of that comfortable but simplistic guideline. A series of geopolitical, macroeconomic, and technological trends has opened the world’s markets, made business capabilities more portable, and produced a level of discontinuity that has no precedent in modern economic history. These events include the fall of the Berlin wall, China’s embrace of capitalism, the advent of worldwide tariff reduction agreements, and the spread of cheap, accessible telecommunications infrastructure.
Conclusion
In the new era of product development and management sourcing, companies’ value chain decisions will increasingly shape their organizations and determine the kinds of managerial skills they need to acquire and develop in order to survive amid increasingly fluid industry boundaries. The success of strategy hinges on the creativity with which partnerships are organized and managed.