Let's first look at outsourcing trends. Outsourcing started with companies outsourcing physical parts. Now the big shift has been to outsource intellectually-based service activities like research, product development, logistics, human relations, accounting, legal work, marketing, logistics, market research. If you are not best-in-world in doing something, and are doing it in-house, you are giving up competitive edge. You could outsource to the best in the world, up the value and lower the cost.

With intellectually-based service activities, the job of coordination becomes more interesting. You are now dealing with best-in-world suppliers of intellect, as opposed to very good suppliers of a physical product. We had more skills inside the company who understood something about how to make a physical product, there were more guidelines for that and it was easier to outsource. It is much more difficult to outsource legal, financial, design activities.

That is why there is shift going on in the management of outsourcing. You actually need a higher quality management in order to outsource successfully.

Managing intellect is a combination of a human and software management process. Investment is not a hard investment in equipment or physical resources, but in training, knowledge generation, knowledge capture and knowledge leveraging.

The critical management differences are: you can't give orders when managing intellect. Giving orders is converse of what you are trying to accomplish. You want the person to be free to generate the idea. People, education and software are the critical resources, and the old measures of performance have become irrelevant. Return on investment doesn't mean a lot when you don't keep track of the “I” that you put into people, i.e. education and software.

And contrary to physical assets, one can leverage the intellectual ability almost indefinitely. The physical can only produce so much plastic or product or cars. Once you have an intellectual idea, it can be leveraged by everyone in the world: who uses it, who improves on it, who makes it better. The consequence is you benefit from their input.

Yes. You need someone who understands the management of intellect, as well as someone who understands the particular type of activity better than anyone used to understand it internally. It is actually harder to manage and outsource intelligently if the vendor is in the best-in-world class. This creates some complexity, but the leverages are huge.

This is why, at least in part, people have begun to move toward the chief resource officer (CRO)-type capability. As you outsource intellectual activities, as well as physical product, you need to have someone who can coordinate this strategically for the company. Someone to make sure the supplier is not in conflict with you, for example, to monitor whether they are supplying major competitors, or that they are sufficiently bound to you in the design world so your designs don't sneak out the door. You have to have methodologies and management capability to make sure the supplier is going to work on your behalf at all times. This takes a different set of skills.

Also, the outsourcing person has to be able to learn from the supplier at a prodigious rate, and learn from people in the business, to stay at the frontier of the field. This idea has been around for a long time. Scientists know perfectly well that they can't be at the frontier of everything in their field. They have their network of resources they chat with, correspond with and do papers with, to make sure they are at the frontier. That sort of mental output has become essential to outsourcing.