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Is Contracting Going Out Of Fashion?

September 28, 2009

In a recent article, The Economist asserted that ‘big is back’ when it comes to the creation of corporate giants. It cites a variety of trends that are resulting in the emergence – and increasing dominance – of corporate giants.

These new or recreated enterprises are different from those of the past. They are nimbler, more entrepreneurial and more focused.  The Economist suggests that a key reason why enterprises are back to growth is because they found the process of contracting too complex and too risky. It is easier to own resources than to contract for them.

So does this mean that the demand for contracting and sourcing skills is now on the decline? Are we about to enter an era of insourcing? Not necessarily – though perhaps our community of contract and sourcing specialists should pay attention to this perceived weakness and increase efforts to improve their contracting process and skills.

Firstly, ‘big’ can be seen in several contexts. It may mean a large number of employees, or could be in terms of revenues or assets. The real issue for many companies that want power is their ability to control and commit resources with the right competencies.  Some may decide that the complexities of regulation, reputation risk and the difficulty of overseeing the performance of external contractors  make reconstructing an integrated enterprise worthwhile. Others are being forced down this path because of the fiancial collapse of key suppliers (often driven to bankruptcy by the behavior of their major customers).

But for many, the benefits of flexibility, access to new ideas, avoiding the challenge of acquisition and divestiture will lead to redoubled efforts to build the right internal skills and processes to manage successful contracted relationships.

The Economist concludes that big and small companies need each other. Big is not necessarily ugly, small is not always beautiful But if their relationships are to succeed, both must become better at contracting and understand how to shape and manage their relationships more effectively.

Managers must ask themselves whether the real problem is that it is impossible to maange non-owned resources; or is the problem really that they lack the skills, systems and knowledge to do it well? Ronald Coase, the Nobel prize-winning economist, had no doubts: he forecast the breakdown of the integrated enterprise more than 70 years ago because of its economic inefficiency. His theories are even more valid today – it is the failure to develop our contracting competencies that is inhibiting their realization.

Far from going out of fashion, contracting needs a renaissance.

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